Company readiness - ESG performance evaluation How ready is your company to genuinely assess ESG key performance indicators? A question asked by many. ESG factors have grown in importance to institutional investors, according to a survey of 100 UK-based institutional investors by Federated Hermes, a global leader in active, responsible investing. The inaugural ‘Responsible Capitalism’ survey, conducted in September 2021, found that for most institutional investors (88 per cent), ESG factors play a central role when making long-term investment decisions and are seen as more important than traditional financial metrics. The research also highlighted investors understand the positive impact investing in companies that embed ESG principles into their practices can have on business performance. Companies that focus on ESG issues will outperform their competitors (83 per cent), produce better long-term returns, and reduce investment risk (80 per cent), think most institutional investors. Furthermore, 79 per cent of institutional investors believe companies with ESG failings should be avoided – even if short-term returns look attractive. However, research has also shown that few investors find the ESG information currently provided by companies to be decision-useful for assessing materiality. In the current state, insights provided by the ESG market remain unreliable for most investors. In part, this is because rating firms cannot seem to agree what ‘good’ performance looks like, with substantial differences in their proprietary methodologies leading to ESG scores that correlate poorly and that companies can ‘game.’ But there are two other critical factors contributing to the unreliability of ESG insights, which the commercialization of artificial intelligence is promising to disrupt, and far sooner than you may think. The bulk of analysis work is still conducted by human analysts which is incredibly resource-intensive and means that only a limited amount of data can realistically be analysed. The result is that, although the importance of ESG is growing exponentially, the current systems seeking to provide accurate decision-useful information are falling short. Given the growing influence of ESG data in investment decisions,
countless data accumulation and analysis providers as well as tech start-ups are in a race to jump on this immense opportunity.
Conducting a companywide survey is critical to understanding internal and external factors influencing ESG performance factors. The advantages of identifying the ‘inside-out’ view of company performance with an ‘outside-in’ view from countless external sources, will enable insight into linking corporate strategy with risk management, and hopefully, leading to greater operational success. Enhanced and more democratic, holistic data aggregation processes, using higher volumes of data and broader data sets, will make for a more wellrounded and robust analysis of ESG performance. Many fundamental questions and concerns remain about the digitalization of ESG data analysis processes, including around AI ethics, coded bias, cybersecurity, and data privacy. Their use will need to be well-monitored given such risks. However, the trend is not slowing down and may well entirely reshape the field of ESG performance evaluation. As ESG tech continues to mature, smart leaders will move beyond annual sustainability reports to recognize and leverage the invaluable business intelligence that real-time well-rounded ESG data represents, to make ongoing business strategy and investment decisions.
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