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Future Leaders Webinar Series: Do ESG-led business strategies boost financial performance?

A recent webinar hosted by Andrew Jack, the FT’s Global Education Editor, explored if ESG-led business strategies can boost financial performance and if there is a positive correlation between ESG and enhanced returns.

Throughout the webinar Gillian Tett, the Chair of Editorial Board, US Editor-at-Large and Co-Founder of Moral Money and Robert Armstrong, US Financial Commentator and Editor of Unhedged, discussed the future of ESG and its impact on financial business performance. The full webinar is available to watch on-demand now.

The driving force behind ESG

Gillian Tett suggests that ESG isn’t steered by an objective to save the world but more about saving companies and saving finances, investors, executives and businesses. Even so, ESG is best understood as a new form of risk management.

Companies need a lateral vision and shift away from focusing on the balance sheet and turn to the company’s success in a wider societal context. ESG encourages boards, investors and executives to not only focus on issues raised by shareholders but also matters such as their employees’ well-being and the environment.

At a macro level, the public no longer necessarily rely on governments to enact change as they can now obtain company information around profits and environmental footprints for themselves. Despite the positive forces driving ESG investing, the public now has a higher expectation of companies. This could cause risks to ESG investing that companies will need to mitigate, such as:

  • investor revolts
  • employee revolts
  • supply chain supplier problems
  • regulatory problems
  • reputational risks
  • the threat of stranded assets from things like fossil fuel assets on balance sheets, or in portfolios.

When companies prioritize ESG, it cannot guarantee success in solving societal problems or resulting in the company outperforming in their market. Standing alone, ESG will not save the world and instead companies should be inspired to look at what is to come in the future and think outside traditional frameworks to anticipate upcoming risks.

Can ESG help level the playing field for private and publicly held companies?

From the 1970s onwards, a very sharp distinction was kept between private and public sectors, and companies were allowed to compete furiously with each other. However, the private and public sectors are now engaging with each other in ways not seen in decades — much of this is due to the fallout of COVID-19 and competition with China.

As an example, Gillian suggests that we’re seeing shifts in this because of the rapid creation and distribution of the COVID-19 vaccine. The main driver behind this shift is technology competition and climate change issues.

If you look at what's happening, say around the competition with China, you're seeing a lot of public private partnerships and private private partnerships under the banner of national security.

Gillian TettChair of Editorial Board, US Editor-at-Large and Co-Founder of Moral Money

Another reason to level the field is that it is increasingly common in the mainstream fabric of debate and expectations to not only see public-private partnerships but also private-private partnerships.

Whilst it is clear that there is a huge mismatch between private companies alongside public ones, Gillian has seen how central bankers are increasingly pushing for a level playing field. For instance, when companies delist from the public sphere, there’s less pressure for accountability and openness — a worrying factor in a non-level playing field.

On the other hand, private companies are not necessarily less committed to ESG than public ones. For example, family-held firms and some financial partnerships are more determined to embrace ESG themes.

Investing and outperforming in ESG

Similarly to Gillian Tett, Robert Armstrong believes that ESG investing has the potential to make the world a better place but in the form of offering investors lower prospective returns on investments. When companies support and align their mission by investing in ESG efforts, they increase their stock or bond prices. In turn, this causes more money to flow towards them and other ESG-oriented companies.

Robert highlights that for ESG investors the preferred outcome is that their money goes into a company’s ESG initiative, company stock prices increase, their cost of capital debt goes down, and now they’re engaging in more and more ESG projects.

Robert explains that ESG companies can outperform non-ESG companies too — especially those that are already environmentally conscious. Even so, companies have been known to bet against the market by overestimating the public’s enthusiasm for ESG companies.

A great advantage of shareholder capitalism is that it’s traditionally interpreted with very clear rules and expectations. In turn, this encourages transparency in a broad and inclusive way. With this in mind, Robert stresses that the task of ESG is to make sure things happen. So if the cost of capital for firms that are doing ESG (green) projects is lowered, then they will end up implementing more green projects.

Regulatory surprises and ESG trade-offs

Many companies believe that they can capitalise on ESG now because they know future regulations will be tightened and they believe they can get ahead of it. However, there are current forces creating pressure around ESG regulations. This includes investor pressure on companies and goverment pressures — all ultimately asking who is responsible for deciding what the environmental, societal and governance goals are. Thus far a benchmark level of regulation hasn’t transpired.

The webinar also highlighted another concern about ESG investing is that regulations are a result of a democratic will as they are created by elected officials. However, CEOs and investors aren’t elected, this poses an issue around who actually has the authority to draw the line and determine these regulations.

Further to this, ESG investors are also accounting for the possibility of an ESG bubble. A green bubble could benefit the whole world, yet poses a threat to shareholders. From a global point of view, a green bubble means that money is directed to companies that make ESG a priority — such as making solar panels or turbines and creating green infrastructure that the world could use forever.

As an example, Robert highlights that the railway and US telecom infrastructure was built by bubbles that are still ongoing. Those infrastructures are still there and are a huge benefit to society today — but shareholders can get wiped out along the way if the bubble collapses.

Alongside infrastructure issues, a pernicious aspect of the way ESG is packaged up and explained to investors is that there would be tradeoffs. Robert explains that investors should be wary if they’re told they’ll do well by doing good.

A corporate value statement has to say one thing and not another, it has to say “if given a choice between A and B, we're choosing A or B.” If the corporate value statement says we're going to have A and we're going to have B and we're going to have a pony and everything else, then, you know you have no corporate value statement at all, and probably no corporate values at all.

Robert ArmstrongEditor of Unhedged & US Financial Commentator

Of course, there are times when companies do well but there are always hard and brutal choices to be made along the way. In the webinar, both Gillian and Robert highlighted that the best way a company can reduce the chance of surprising investors is to have a very clear statement of purpose. However, if the statement of purpose isn’t clear this is often a big red flag to investors.

Relive the full discussion and watch the webinar on demand via the button below.

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