Access to Capital is Driving ESG Performance

Investor interest in ESG issues calls for focused reporting
Driving ESG Performance
Publ. date 22 Aug 2018
Increasingly sustainability frontrunners are leveraging their position as leaders by making deals with their banks. Philips, Barry Callebaut, and Generali are recent examples of companies that have successfully engaged with their capital providers to develop facilities with innovative sustainable and green features. By linking interest costs to ESG performance such as targets on green investments or progress made on sustainability initiatives, a strong business case for sustainability is created. Analyzing the different ESG benchmarks is a useful first step to further understanding ESG performance, as well as monitoring progress, and guiding decision-making to further accelerate sustainability performance.

Downloads

Although direct incentives from investors for positive ESG performance is not yet mainstream, access to capital has traditionally been a driver for sustainability. This has led to a boom of public non-financial information coming from companies disclosing environmental, social, and governance (ESG) information in their annual report and increasingly in benchmark questionnaires. Although there is no legal obligation to participate in any ESG benchmarks, companies choose to participate to showcase their sustainability efforts. However, due to the proliferation of these benchmarks, companies often feel overwhelmed and end up spending too much of their time on reporting at the expense of generating real impact.

Focusing on key ESG performance ratings

A useful way to determine which benchmarks to focus on is to compare the richness and reach of benchmarks, as well as their connectivity. First, it is important to understand the differences between the benchmarks in terms of background, rating scale, methodology, usage, and reputation, explained in the Davis Polk download. Next, companies should compare if they want to focus on richness or reach, explained in detail in the article “Balancing Richness and Reach for more focused reporting”  published in March and summarized as follows:

  • Richness: selecting benchmarks based on scope, the topics included and the scoring. For example, Sustainalytics and Vigeo focus on the broad scope of ESG topics, whereas CDP is centered around environmental topics.  
  • Reach: completing benchmarks based on how the rating agency communicates the results with customers and other stakeholders. For instance, does the rating agency collaborate with third parties (e.g. RobecoSAM and Bloomberg) or do they have their own stock indices (e.g. MSCI).    

Finally, connectivity is key to determining how the benchmarks are connected to each other in terms of major overlaps or gaps in terms of methodologies. To connect the dots, we propose the following steps:

  • Analyzing the methodologies of the different benchmarks to identify differences and overlapping topics.
  • Comparing how the different topics of the benchmark are weighted and translated into a score.
  • Reviewing your own performance for every benchmark by going into the details of your own report.
  • Determining which hotspots are material for your business considering your organization’s vision, strategy, and business principles.      

Internal and external drivers of ESG performance 

As more and more ESG information becomes public, companies are finding themselves lost in the data unable to accelerate sustainability performance. To overcome this challenge, companies should develop a more strategic approach to reporting ESG information that allows them to maximize the value of ESG efforts. To further encourage ESG performance, investors have an increasingly important role to play by, for example, connecting performance and access to capital. And taking it a step further, through engagement and active ownership with a mutual commitment from companies and their investors will accelerate sustainability performance when they are “putting money where the mouth is” into practice.    

Interested in increasing your focus through connectivity?

Finch & Beak has over 20 years of experience helping companies accelerate their sustainability performance by focusing on ESG topics that matter most. Please contact Bas Nuijten, Senior Consultant, at bas@finchandbeak.com to build a business case for sustainability by identifying your focus areas through our ESG connectivity analysis and materiality assessment.  

About Bas Nuijten

Sustainability professional with the aim to help organizations to continuously improve their sustainability strategies. | 
bas@finchandbeak.com

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