For investors, the future for companies is paved with (ESG) signposts

Amid the social upheaval of 2020, “something more is expected” from companies and investors on health and safety, economic inequality, racial justice and the social-environmental issue nexus—but what does this mean in practice? According to institutional investors and S&P 100 companies interviewed by The Conference Board, the path forward is still uncharted but the signposts are there: it boils down to stakeholder primacy, meaningful efforts to act on social issues – as well as the intersection with environmental issues, real transparency and disclosure, and sensitivity to inequality and power imbalances when determining executive compensation.

About the report

The Conference Board’s Environmental Social & Governance (ESG) Center gathered perspectives on the “major health, economic and racial crises of 2020” from a group of institutional shareholders representing over $12 trillion in assets under management, and members of leadership from S&P 100 companies. The resulting report, Insights for Investors and Companies in Addressing Today’s Social Issues, shares trends and offers guidance for investors and companies in addressing significant social challenges.

Trends for 2020 and beyond

This year’s social “upheaval” will have repercussions for business extending beyond 2020

• Investors and companies agree that the events of 2020 have shifted focus to four key social issues (in addition to the prior focus on gender diversity and pay equity, human rights, supply chain, and political contributions):
• Health and safety of workers, customers, communities
• Economic security and inequality
• Racial equality and justice
• Intersection of social and environmental issues

Investors expect companies to proactively move on social issues

• Investors “are looking for boards and management to be in the driver’s seat when it comes to developing, implementing, and communicating their plans to address social issues,” but simultaneously expect companies to meet baseline expectations for disclosure of issues like racial diversity.
• Investors increasingly have stakeholder capitalism at front of mind: the report found that investors “will evaluate company actions through a lens of stakeholders, so boards should be particularly alert to decisions that may appear to advantage or disadvantage one stakeholder group over another.”
• Investors are also prepared to push companies on social issues beyond shareholder proposals, including in considerations for director elections and capital allocation.

Expectations are growing for corporate disclosure on social issues

• Beyond “heat of the moment” statements on COVID-19 and racial justice that many companies issued this year, stakeholders and investors alike will look for companies to publish more detailed, comprehensive reporting on their actions.

Executive compensation needs to account for the expectations of a company’s stakeholders

• While investors don’t expect “a major reset on executive compensation,” they expect compensation committees to account for broader stakeholder expectations. They also caution that outperformers can still be rewarded for performance, “as long as it’s not out of alignment with what happened with other stakeholders (e.g., employees).” Conversely, if a company’s workforce suffered the effects of layoffs, salary cuts and furloughs, bonuses should be adjusted accordingly.
• Companies should also consider “incorporating ESG goals into long-term incentive plans, not just annual bonus plans” while being careful about how ESG metrics are defined and how executive performance is measured.

Alignment between investors and boards on expectations of companies

• When framing their contribution to society, companies “should be prepared to break new ground in discussing issues of economic fairness” and will need to gather the data to back this up.
• “There is a consensus on the ten key questions both boards and investors alike should be asking with respect to social issues:
• How does the company’s business relate to the underlying social issue?
• What can the company do that has an impact on the long-term interests of its stakeholders and society?
• Does the company have a special role to play?
• What is the company’s overall strategy for addressing the social issue (and how are key social issues incorporated into the company’s long-term business strategy)?
• What are the company’s goals with respect to the social issue?
• How does the company intend to track and report progress?
• What is the board’s role?
• What, if anything, has changed in the company’s approach?        
• What has the company learned?
• How does the company intend to continue learning and responding?”

Here is the consensus among investors and companies of what the key current social issues are – identified by the Conference Board based on company reporting and inputs:

Source: The Conference Board, Insights for Investors and Companies in Addressing Today’s Social Issues (November 2020)

“Major institutional investors and companies understand that, in the words of one leading investment executive, ‘something more is expected’ of them when it comes to addressing the array of social issues that have been brought to the fore during 2020. But it’s not always clear what that ‘something’ is, especially given that some social issues are relatively unchartered territory for many companies or have evolved significantly in the past several months.”                        

“Companies should lean toward transparency: If companies don’t identify their own shortcomings, someone else will. Investors don’t expect perfection. But they do want companies to identify gaps and disclose plans for closing them.”                      

“Unlike prior crises of the past few decades, there is no group of ‘corporate bad actors’ who can be held responsible for the multiple crises of 2020. This provides the opportunity for a different playbook. Investors and corporations have an opportunity—perhaps even an obligation—to find common ground in addressing key social issues under the broad framework of serving the long-term interests of stakeholders and society.                          

  The Conference Board, Insights for Investors and Companies in Addressing Today’s Social Issues (November 2020)

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