COVID-19, a recession, extreme weather events, and social unrest over the past year have all heightened the importance of earning shareholder and stakeholder trust, and placed renewed attention on how corporations are responding to pressing environmental and social issues.
In a Q&A with the KPMG Board Leadership Center (BLC), Lex Suvanto—global managing director of Financial Communications and Capital Markets at Edelman, a global communications firm—provided takeaways from Edelman’s fourth annual Investor Trust report and offered his views on what boards can do to help their companies earn and retain the trust of shareholders and other stakeholders in the current environment.
KPMG BLC: How have you seen investors’ priorities shift throughout the events of the past year? How are they reconciling their push for environmental, social, and governance (ESG) initiatives at a time when many companies are struggling, and in some cases unprofitable?
Suvanto: One interesting takeaway of the research is that investors admitted they deprioritized ESG as an investment criteria in the middle of the pandemic. There’s a fairly strong response on this front with 79 percent of investors in the United States stating this. But even more investors—93 percent—say that profitable companies do not get a pass on ESG during the pandemic, or otherwise during a crisis. What investors are implicitly saying is, ‘If you are financially struggling, we understand if you need to first focus on getting your house in order. But if you’re not financially struggling, ESG must continue to be a top priority for you.’
The research revealed that a strong majority of investors around the world are now using ESG strategies to fundamentally inform their investment decisions; ESG is not just an afterthought anymore. It’s also no surprise, given the trends and environment we’ve been living in, that the social criteria (S) in ESG has become the most important ESG element among U.S. investors, increasing 15 points in importance year over year. It’s fascinating to see investors being so responsive and attentive to social needs given the challenges that our country has been facing.
KPMG BLC: What does the survey data say about how investors view the connection between ESG and corporate performance?
Suvanto: Ninety-five percent of investors in the United States are saying that companies that have strong ESG performance are more resilient in a crisis. In fact, according to data from Refinitiv Eikon, Refinitiv Datastream, HSBC Climate Solutions Database, and FTSE, the top third of ESG stocks have considerably outperformed the FTSE All World Index.1
We recently spoke to the head of human rights for a major consumer brand company that has a dedicated human rights function. He explained that because they had such a deep and established strategy and program around human rights prior to the pandemic, it allowed them to more nimbly and effectively respond to the social issues that arose this past year, including topics related to human capital management (HCM), systemic racism, and general social unrest. The research reinforced the notion that strong ESG performers make stronger companies. Investors said they assess which companies have the best chance of weathering current and future storms by examining ESG practices and performance. Looking ahead, 96 percent of U.S. investors say their firms will increase prioritization of ESG as an investment criteria coming out of the crisis. Companies and boards should expect an increase in attention from their investors on these matters.
KPMG BLC: The survey also offered some insights into investor views of the state of ESG disclosures. Can you talk about that? And what do you think board members should take away from those findings?
Suvanto: Investors are broadly unsatisfied with companies’ E&S disclosures and they have high expectations for companies to do better. Eighty percent of U.S. investors agreed that they will not invest in companies that provide insufficient information or data on ESG performance. Investors are trying to get the right information so they can compare, assess, and analyze. Nearly all U.S. investors (92 percent) say a company with strong ESG performance deserves a premium valuation. Importantly, 7 in 10 investment firms screen for diversity and inclusion (D&I) metrics and 92 percent said that strong D&I metrics have a positive impact on a company’s share price. That is a clear message.
The implication for the board is to treat ESG commitments as you would financial commitments. This raises a number of questions for the board: Who is responsible for overseeing ESG commitments at the board level? Is it the audit committee? Is it a newly created sustainability committee? Is your audit firm going to certify your ESG commitments? Are you confident in the quality of your ESG data and disclosures?
Boards must be ready and equipped to engage with investors on ESG and related topics. Ninety-nine percent of investors expect the board to oversee at least one ESG topic. Moreover, investors plan to engage directly with the board on climate risk as well as workplace culture, HCM, and employee health and safety. Importantly, 77 percent of investors said they have more trust in a company that ‘maintains a healthy corporate culture.’
KPMG BLC: Nearly all of the investors surveyed (97 percent) agreed that a multistakeholder approach to governance—under which business leaders commit to balancing the interests of shareholders with the interests of customers, employees, suppliers, and local communities—delivers greater financial returns in the long term. What are investors looking for companies to do, and how should boards respond?
Suvanto: Boards must ensure they have the tools they need to succeed in the coming era of stakeholder capitalism. This includes appointing a CEO who is forward-thinking and forward-leaning on a full range of stakeholder concerns and how to address them in a constructive manner that builds value. This also includes refreshing the board’s capabilities and structure to ensure it can effectively steward the company through emerging issues such as climate change and diversity, equity, and inclusion.
Boards must gather intelligence from stakeholders beyond just investors. Does the board have a clear sense of employee sentiment, the health of the company’s culture, and the potential for employee activism? Does the board understand potential vulnerabilities the company faces from a social justice point of view? These questions must be built into the modern board playbook.
Boards must determine whether their management leaders—chief human resources officer; chief information officer; chief information security officer; and the heads of communications, government affairs, and supply chain operations—are cognizant of and equipped for emerging demands posed by stakeholder capitalism. And, the board should bring these leaders into the circle on governance discussions to ensure it has the information needed for effective oversight and action.
Simply put, boards must see the future and act, starting now, to steward their companies in the right direction, driven by the right strategy and purpose. Notably, this may entail less deference to the CEO.
1. Tie stakeholder concerns to ESG and strategy development. Importantly, leverage ESG to inform better decision-making and influence strategic direction.
2. Treat ESG commitments as you would financial commitments: help ensure quality data and disclosure that is comparable year over year, along with proper oversight and appropriate accountability.
3. Plan for multistakeholder engagement and activism. Think about a new activism playbook that anticipates activism from employees and social groups.
4. Assess investor communications’ readiness for elevated and new stakeholder expectations.
5. Prepare the board to play an active role in building trust with investors and stakeholders. Investors expect to engage directly with the board on the full range of ESG topics.
1 Ashim Paun, “Climate and ESG shares beat the market: They have outperformed long term—but did so during this year’s pandemic too,” HSBC Bank, May 4, 2020.
The views and opinions expressed herein are those of the interviewee and do not necessarily represent the views and opinions of KPMG LLP.