Our series ‘ESG and the Communications Imperative’ interviews leaders across a range of industries, exploring how ESG strategies are reshaping communications, and what companies can do to maximise the impact.

In part one of our fifth interview, Prof. Amin Rajan, CEO of CREATE-Research, shares his insights on the shifting priorities for investors relating to ESG and what they want to see from companies in their ESG communications.

In your role consulting institutional asset owners and investors, what are their priorities around ESG? Have these evolved or shifted?

Early journey

For early adopters, the ESG journey started with the exclusion of ‘sin’ stocks: shares in companies associated with activities deemed unethical – like tobacco, weapons and pornography. This process of negative screening narrowed the investment universe somewhat and reduced the scope for diversification. Thus, exclusion and diversification were not always compatible.

As a result, early adopters augmented this approach by integrating key ESG features into their investment processes to achieve a double bottom line: do well and do good. For the early adopters, over 80% of their sustainability assets are at this aspirational stage. A minority of investors have also ventured into private markets –private equity, infrastructure and private debt – to target measurable societal outcomes on top of financial ones.

Looking ahead, we can expect more stringent corporate laws on climate change in China, and the implementation of a carbon emissions trading scheme, which will put climate change further into the spotlight.

In all cases, progress is being driven by large institutional investors who are moving well beyond a green ‘do-gooder’ image, duly taking account of the multi-decade nature of their future liabilities. They are seeking to future-proof their portfolios against hard-to-model risks like global warming, governance lapses or raging inequalities – that can pose an existential threat to investee companies.

Current journey

Investors are now increasingly embedding ESG into the DNA of their own organisations and urging their asset managers to do the same. An example of this is encapsulated in Figure 1.  

Figure 1. Creating ESG DNA in business models 

Source: Sustainable investing: fast forwarding its evolution (2020)

This scenario treats capital markets as an essential foundation for a more purposeful form of capitalism that delivers businesses of enduring value for their four key stakeholder groups: shareholders, employees, customers and wider society.

ESG as a concept has been around for some time, but is only just reaching the mainstream. What has driven this or been the tipping point?

Two sets of events have caused the tipping point: a number of landmark developments and the policy responses these have invoked. 

Taking them in turn, 2015 was a watershed year for investors, when future-proofing their portfolios became a top priority.  

In his acclaimed speech “Breaking the tragedy of the horizon”, then Bank of England Governor Mark Carney argued that catastrophic long-term impacts from climate change were not being priced in by financial markets. The current generation of actors, he reasoned, had no direct incentive to address this. The buck was being passed to future generations. Hot on the heels of his September speech came two key developments. 

First, the UN General Assembly adopted 17 Sustainable Development Goals aimed at creating a more viable global economy and society by 2030. They expect asset owners and their managers, among others, to be part of the delivery of these goals. 

To cap it all, at the 2015 United Nations Climate Change Conference in Paris, some 200 nations signed a landmark agreement to combat climate change and to galvanise actions towards a low-carbon future. Environmental protection featured on the radar screens of investors and governments like never before.  

Second, governments worldwide have also since passed over 500 specific regulatory measures that have turbo-charged ESG investing, especially in the wake of various catastrophic natural disasters worldwide.

Similarly, on the governance front, four spectacular blue-chip disasters have shaken investor confidence in the existing status quo: BP’s Deep Horizon oil spill in the Gulf of Mexico in 2010, Volkswagen’s emissions scandal in 2014, the Petrobras bribery scandal in 2016, and the Wirecard fraud in 2020. 

When considering investment, what do the asset owners you work with want to see from companies regarding their ESG credentials?

First, they want their investee companies to compile data on the three foundational concepts in ESG: materiality, intentionality and additionality. They also want these data sets to be independently audited by external professional agencies. 

Second, they want their asset managers to complement these data sets with shareholder activism that targets real-world outcomes at scale. The principal tool for doing so is direct engagement between asset managers and their investee companies under the more muscular model of Activism 2.0.  

This approach rests on the belief that ESG investing only works if company boards are not just called to account, but also held accountable for their actions. It enjoins asset managers to: 

• Create an agenda for change and acceptable standards that are consistent with its delivery 

• Engage in proxy voting to ensure that investors’ voices are heard on board-level deliberations

• Foster year-round dialogue with investee companies beyond shareholder meetings. 

Asset managers are increasingly expected to act as agents of change by seeking progress in three related areas: communication, learning and internal politics. These approaches aim to promote new learning in the belief that ideas breed ideas and only improved collaboration can deliver the goals of all stakeholders. 

Indeed, some investors believe that engagement enables them to develop structural capital that offers an informational edge: the ever-deepening knowledge about how sustainability is actually being implemented on the ground via a positive feedback loop. 

Finally, investors also want business leaders at asset management firms to set the ‘tone at the top’ by:  

• Creating a culture and belief that ESG is not just another fad, but a sea-change in the way investing is to be done

• Harnessing the collective memory of the business via joined-up thinking between the investment team and the stewardship team

• Ensuring that their portfolio managers and research analysts develop the requisite expertise into the dynamics of ESG factors and are incentivised accordingly

• Encouraging regular engagement with investee companies, setting realistic expectations and monitoring progress regularly.

Stay tuned for Part 2 of our interview with Prof Rajan.