Environmental, Social and Governance (ESG) has become a term of art within corporations, and a clear trend has emerged toward integrating ESG data into company value propositions. For example:
- The Sustainability Accounting Standard Board (SASB) is working on standard ESG disclosure guidelines for mandatory filings to the Securities and Exchange Commission (SEC), such as the Form 10-K and 20-F.
- The Global Initiative for Sustainability Ratings (GISR) seeks "to design and steward a global sustainability (ESG) ratings standard to expand and accelerate the contribution of business and other organizations worldwide to sustainable development."
Socially responsible investing (SRI) is not new; in fact this year marks the 24th annual SRI Conference on Sustainable, Responsible, Impact Investing (formerly SRI in the Rockies). However, it seems to be picking up momentum in recent years. A few indicators of this trend:
- The 2012 trends report from the Forum for Sustainable and Responsible Investment (US SIF) -- Sustainable and Responsible Investing Trends in the United States concluded total SRI assets -- those involved in ESG investing, shareholder resolutions or a combination of both -- are now at $3.74 trillion, a 22 percent increase since year-end 2009.
- Half of companies surveyed have seen an increase in investor and shareholder inquires about sustainability-related issues over the past 12 months (Ernst & Young 2013 Study).
- 82 percent of investors evaluate environment, social and governance criteria as part of their investment decision because they believe these actions impact share price (Thomson Reuters 2009 Study).
A few weeks ago, here at AMD, we held a webinar for financial investors and analysts covering a summary of our corporate responsibility programs. This event helped to educate our stakeholders on AMD's corporate responsibility programs and how they add value to our company.
Through events like this, awareness of ESG factors is growing. And ESG factors are beginning to have a bigger impact on company value propositions. For example, some multinationals have acquired "purpose-driven" companies (e.g., Coke's acquisition of Honest Tea, Clorox's acquisition of Burt's Bees, Unilever's acquisition of Ben & Jerry's) that attract socially and environmentally minded consumers and stakeholders. Other companies have implemented high visibility commitments and initiatives to address social or environmental challenges while driving business performance for shareholders (e.g., General Electric's Ecomagination, IBM's Smarter Planet). On the downside, the value propositions of companies that have experienced major ESG catastrophes -- like the BP oil spill or the Enron collapse -- can take a huge hit.
The Holy Grail for considering ESG is simplification. Even corporate responsibility professionals can be overwhelmed by the complexity and scope of ESG data. For example, the 2013 questionnaire for the Dow Jones Sustainability Index was nearly 100 pages long! The SASB and GISR (mentioned above) are both working towards narrowing the scope of ESG data to the indicators that can be easily utilized. (I have referred to this as keeping the "K" in KPI -- Key Performance Indicators.) This is easier said than done because there are strong stakeholders that advocate for each facet of ESG criteria.
Looking ahead, as the market for social investment grows and more companies experience material upsides and risks from ESG issues, the market will likely increasingly consider these factors in key investing decisions. Until then, our focus should be to continue to educate stakeholders on our company's ESG record and why it matters.
The case for integration of ESG factors into business was summed up well in the 2011 Harvard Business Review article "Creating Shared Value" by Michael Porter and Mark Kramer of Harvard Business School:
"Companies... remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?"
Ultimately, all businesses are a part of a larger system. How they affect the health of that system is a material issue.
Tim Mohin is Director of Corporate Responsibility for Advanced Micro Devices (AMD) and the author of the book, Changing Business from the Inside Out: A Treehugger's Guide to Working in Corporations (Greenleaf and Berrett-Kohler). His postings and comments made in his book are his own opinions and may not represent AMD's positions, strategies or opinions. Links to third party sites, and references to third party trademarks, are provided for convenience and illustrative purposes only. Unless explicitly stated, AMD is not responsible for the contents of such links, and no third party endorsement of AMD or any of its products is implied. Follow Tim @TimMohinAMD and check out AMD's latest Corporate Responsibility Report - the summary is available as a tablet app.