Founder’s Edition, by Joseph Neu
Reasons you can’t afford to leave ESG off your priority list.
ESG and related themes of sustainability and green finance are polarizing. Nearly everyone sits on a spectrum where one end thinks it’s all a bunch of hooey and the other argues it’s the key driver of finance for the next decade. Personally, I feel conflicted—one reason ESG didn’t make my initial list of key 2020 issues.
Mixed feelings aside, I’m convinced the decade ahead is a time to take ESG and all it brings with it seriously. As I noted in an earlier post on green finance, there’s a “tsunami” of sustainability-linked finance products coming, as a member treasurer at one company leading the way put it.
Skeptics coming around. A top M&A and activist advisor at a leading Wall Street firm confirms that even investment banking skeptics have come around to ESG and green finance being a key consideration. “We didn’t really take it that seriously until about six months ago,” he said. “Yet now it’s a strategic priority for the bank, with an executive level committee dedicated to ESG and related opportunities.”
M&A options. More specifically, ESG has opened up a lot of new thinking about what deals might win regulatory approval and political backing when presented through a sustainability lens. The advisor also said that the financing for an acquisition can be structured more favorably now if you look at sustainability finance options.
Activism. ESG was once viewed primarily as a tool for activists looking, for example, to pry open a seat on the board. Now it’s become a guiding strategy in and of itself. Look at Jeffrey Ubben’s ValueAct Spring Fund, which invests in companies aiming to address environmental and social problems. Mr. Ubben represents a new breed of ESG investors who, having made a fortune as activist investors, are now trying to make the world a better place by using their knowledge and experience—not to mention their activist aggressiveness.
Board focus. For these reasons and others, boards are also focused on ESG, so it makes sense for corporate leadership to focus on it, too. According to a recent Deloitte white paper on 2020 board agendas, “Perhaps the most dramatic development―or, rather, series of developments―that boards may need to consider in 2020 is the intense focus on the role of the corporation in society.” This includes “social purpose” but also “concerns about persistent economic inequality, climate change, and the availability and cost of healthcare, as well as concerns about the ability of governments to address these and other issues.”
Investors, workers. As a result, the paper says, ESG “has also garnered the attention of investors and others, who are increasingly asking whether and how companies are affecting and affected by environmental and social developments.” Employees are also asking. “The rise of employee activism during 2019, with actions such as work stoppages and shareholder proposals, has increased the stakes in these and other areas.”
Disclosures. Risks tend to be taken more seriously when they are disclosed prominently in public financial statements. As Deloitte notes, “Companies are being called upon by investors and others to provide disclosures concerning the ESG challenges they face and how they address those challenges.” One driver is “the rise of third parties―including so-called ‘rankers and raters’―who comment on companies’ efforts in this area, making it important for companies to tell their stories rather than let someone else do so.”
Storytelling. As more observers are noting, ESG-driven investing of corporate cash, 401(k) and pension plans, as well as corporate venture funds and M&A efforts by biz dev teams, are relatively cost effective ways to help companies tell this story. Sustainability-linked finance, given its embrace by key market participants, may be an even better way to do this. But whatever you do, put ESG on your 2020 priority list.