Financial instruments relating to environmental, social and governance (ESG) factors continue to draw interest from investors. In August 2022, Bloomberg reported that the share of new bond supply tied to ESG products in Sweden had doubled to 36%. In addition, a survey by the Chartered Financial Analysis institute found that 85% of its members take ESG factors into consideration in their investing. This is why you need to know how to set ESG goals that will resonate with sustainable investors.
Asset owners want to know the non-financial benefits of their investments, and issuers who can show clear and impactful ESG goals, along with a robust strategy to meet them, are attractive to these shareholders.
This article explores what ESG means to both issuers and investors, as well as providing steps toward setting goals to drive your non-financial performance.
Table of Contents
III) How to set ESG goals that drive great non-financial results
What does ESG mean for issuers?
There are opportunities and challenges for issuers relating to ESG:
|Business Wire reported that 60% of consumers would happily pay a premium for products from brands with green credentials. By measuring your performance relating to climate change and other environmental factors, you become more attractive to customers.||There is increased scrutiny of ESG issues, leading to a position in which actual or perceived failures in these areas can damage the reputation and prosperity of the organisation.|
|A majority of investors look at the sustainability of an organisation when making investment decisions.||There are growing regulatory requirements for issuers regarding ESG, which require careful consideration from compliance departments and will increase the reporting burden on organisations.|
What does ESG mean for investors?
Although ESG investing is experiencing a rapid increase in popularity, some investors are still swayed by outdated preconceptions. Financial advice firm Foster Denovo found that many investors did not invest in ESG products because they thought they received lower returns than traditional investment channels. This was despite the fact that 9 in 10 (89%) of the shareholders they questioned were concerned about the impact that corporate practices had on the environment. As the report concluded, “the majority of recent investment research…found that three-quarters of ESG-screened indices outperformed their broad market equivalents.”
The surge in ESG has been led by millennials who prize the ethics of an organisation enough to affect how they invest their money. A survey by Allianz found that 64% of millennials are likely to make investment decisions based on societal problems that are important to them.
For investors, the challenge is to recognise the authentically sustainable products from those that are simply greenwashing. The forthcoming Corporate Sustainability Reporting Directive (CSRD) and Sustainable Finance Disclosure Regulation (SFDR) will help with this task by making it easier to compare products and more difficult for issuers to mislabel them as sustainable.
How to set ESG goals that drive great non-financial results
1. Assess your current ESG performance
You need to understand what your baseline is before you can measure your ESG progress in any meaningful manner. Analyse your performance in the areas of ESG that you deem most important to your company and the industry in which you work.
You should look to your peers and see how you compare to them in areas of ESG relating to your sector. You should also uncover where you stand relating to compliance objectives. This helps you understand where you can make the most impact, where you have to improve according to legislation, and where you are performing well.
At this step, ESG Advisory from Euronext Corporate Services can give you a deep insight into your current performance. Our team completes a thorough analysis and audit of your business and also advises you on where you stand relating to compliance. In the end, you receive a map that includes risks and opportunities based on the ESG issues found and the market’s expectations.
2. Set clear goals
Based on the results of your analysis, you can better understand the goals with which you can make the most impact, attract your target investors and reach your compliance goals, all while following your existing business strategy.
As an example, an energy company would probably include reducing carbon output among its most important ESG goals, while a drinks company may consider reducing water leaks and increasing water efficiency as a priority.
It is important to consider SMART goals during this process. SMART stands for Specific, Measurable, Achievable, Relevant and Time-Bound. Applying these criteria to your ESG goals prevents you from setting vague and generic aims that might sound noble but don’t achieve much.
An example is the ESG goal to reduce paper use. That on its own is too broad to make a meaningful difference. However, setting a goal to reduce paper use by half in the next six months by using an online portal to run all meetings is a SMART goal because it is:
- Specific. You say exactly what you are going to achieve and how you are going to achieve it.
- Measurable. You can easily track how much paper your organisation orders.
- Achievable. Given the technology available, it is possible to meet this goal.
- Relevant. Companies waste a lot of paper, which is detrimental to the environment.
- Time-bound. You have set a limit of six months, and this deadline keeps you accountable.
3. Challenge your company
Embracing ESG is about value creation, so you have to challenge your organisation with your goals. If they are easy to achieve, you are being performative rather than making genuine changes for the betterment of the company, its people and the environment.
Set goals that require you to make tangible, measurable and worthwhile changes. By pursuing challenging goals, you can reduce operating costs, provide real value for investors and make a positive change to the world at the same time.
ESG is not about box ticking. It is about adjusting how corporations operate so that they can continue to make money but in a more ethical manner.
The caveat is that you do not want to make your goals too challenging. If they are not realistic, as specified in the SMART goals section above, you risk disappointing investors and inflicting a negative impact on employee morale.
4. Consider your available resources
Bold ESG goals often require complex frameworks in order for your organisation to deliver them. When setting up your goals, you must think about the teams you need in place, the reporting channels to keep the task on track and the training needed to ensure that you can make the necessary progress and achieve the desired impact.
If you do not have the expertise or structure in place, you should develop a plan to show how you will achieve it. For example, you might want to reduce the carbon footprint of your supply chain, but in complex industries, such as textiles, where much work goes on in developing countries, this is challenging.
Assessing your resources may involve inspection and reporting by members of your team. This may require long-haul travel and training to ensure they know what they are looking for when they take these trips.
If an ESG goal requires a significant allocation of resources, you must make sure you embed that in your planning.
5. Set appropriate ESG KPIs
Key performance indicators (KPIs) keep you on track to achieve your goals and give stakeholders confidence that you are heading in the right direction. You can use these KPIs as checkpoints to justify moving on to the next stage of the goal, investing in the necessary training and other expenditure that will help you achieve your aims.
Your KPIs are quantifiable data points along the journey to achieving your goal. For example, healthcare real estate company Ventas has an ESG goal to ensure all of its full-time employees earn a minimum wage of US$17 per hour by 2024. It also set a KPI of US$15 as an initial checkpoint, which it achieved in 2020.
It is important to gain buy-in from stakeholders on your KPI if you want the necessary support to achieve them. The goals you pursue must align with the values of your shareholders and other stakeholders, so seek engagement before you create KPIs to help all parties unite behind your aims.
6. Maintain communication with your stakeholders
With all parties in alignment, you are ready to announce and begin pursuing your ESG goals. However, you should maintain channels of communication with your stakeholders and request feedback from them on their commitment to your ESG goals.
You can report on your progress and discuss whether the goals should remain priorities for the business. You might need to adjust your goals based on the shifting market, which might make them unachievable or less relevant than they were previously. Your stakeholders might want to focus elsewhere. By maintaining communication, you prevent a situation in which you continue to dedicate resources to a goal that is no longer creating the value it once did.
How do you calculate an ESG score?
There are multiple agencies that calculate ESG ratings, and they all use different methodologies. The basis of a rating is usually data relating to an issuer’s performance in environmental, social and corporate governance matters, but one agency may include factors that others don’t, so there is no one formula to calculate an organisation’s ESG score.
What is a good ESG score?
What signifies a good ESG score depends on the rating system and methodology of a rating agency. Where an agency uses letters to designate the score, a rating of AAA would usually be better than CCC. When the agency rates companies out of 100, it is likely that the higher scores will be the good ratings.
What are some common ESG metrics?
Common environmental metrics include carbon footprint, biodiversity and water security. Social metrics include labour standards, diversity and inclusion, and health and safety. Governance metrics include risk management, corruption policies and tax transparency.
Knowing how to set ESG goals means that you can plot your company’s sustainable activities and help prove its credentials to investors. You need to understand where you are currently before you strive to make changes. Once you have this baseline, it is then possible to develop challenging SMART goals to drive your organisation forwards.
Euronext Corporate Services ESG Advisory evaluates your current performance, helps you set appropriate KPIs and engage with investors to develop the ESG pillar of your equity story. Request a free demo today to find out what our experts can do for your company.
References and further reading
The 5-Step Action Plan for Digital Transformation in Risk and ComplianceRead the article
What Is An ESG Story? (And Why You Should Invest In It Now)Read the article
5 Steps To Creating An ESG Strategy That Will Impress InvestorsRead the article
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