With action from Extinction Rebellion recently occupying the area around the IoD's HQ at 116 Pall Mall, it seemed like an apt time to reflect on an event we held here earlier this year.
In September, we welcomed prominent investors and directors to the IoD to discuss many of the same global challenges that are exercising those climate protestors so recently encamped around Trafalgar Square. In a broad ranging conversation, organised by the IoD in collaboration with Mazars, participants grappled with the issues around embedding sustainability in corporate governance.
Investors and directors agreed that a major challenge was that ‘sustainability’ remains a stubbornly ambiguous term with no agreed definition. Some investors argued that with a lack of standardised mandatory reporting requirements around environmental, social and governance (ESG) issues, it remains far too easy for some companies attempting to ‘greenwash’ by issuing extensive reports replete with sustainability spin but lacking in substance.
Needles and haystacks
Investors and directors agreed that the volume of reporting presented an issue given that the level of disclosure can be overwhelming. Others highlighted the valuable role played by third-party data providers in drawing together research and ratings. Though it was acknowledged that there remain questions around the quality and reliability of data on ESG issues.
Walking the walk
Investors and directors shared their experiences of engagement with one another on ESG issues reflecting on the distinct challenges around bridging the gap between warm words and meaningful action. Directors aired concerns that whilst Heads of Corporate Governance within investment houses professed to care about ESG issues, those actually making investment decisions were often very narrowly focused on expected cash flows. Some investors highlighted that some of the bigger passive fund managers though holding swathes of UK equities lacked the necessary incentives and capabilities to actually engage meaningfully on any issues.
The long and the short of it
Some participants felt that there needed to be greater acknowledgment that more sustainable companies would deliver lower levels of returns in the short term. Some investors felt that this presented a distinct challenge given that they themselves were primarily judged by pension fund trustees and others on the basis of their performance over the short-term.
The way ahead
Happily, rather than being at cross purposes – investors and Directors increasingly recognise the need to work together to deliver truly sustainable companies. Ultimately, regular engagement between directors and investors on ESG issues has to take place in spite of the resource and time constraints and events like that held at 116 Pall Mall last month demonstrate the desire to do so.
The IoD is launching a Sustainable Business campaign, reflecting the increasing importance of the issue to businesses large and small. Visit our Sustainable Business hub for more content throughout the coming months, or email the policy team to offer your views on the topic.