For many companies, prioritizing environmental, social, and governance (ESG) issues is no longer optional — it’s necessary. ESG disclosures show signs of further becoming standardized and SEC-regulated, ESG-related shareholder activism continues to rise, and companies that are not prepared to act on ESG will likely face missed opportunities and greater risks than their ESG-savvy counterparts.
In a recent episode of the ICR podcast, Welcome to the Arena, we spoke with Lyndon Park, Head of ICR Governance Solutions, about ESG trends — now and in the future. As a former executive at BlackRock and a recognized thought leader in the field, Park has deep experience guiding management teams through complex ESG issues.
Get insight into how ESG plays into investment strategies, the convergence of ESG and shareholder activism, and a look into how soon-to-be public companies should approach ESG.
Shifting From Defense to Offense
According to Park, companies often start out with a defensive position toward ESG. They want to know how to avoid getting dinged by rating agencies and how to keep institutional investors from voting against their directors.
But according to Park, that’s not the most beneficial mindset. “In this era, ESG should be considered a tool for offense,” he explains. Recent letters from the CEOs of State Street and BlackRock illustrate that ESG is a good way of seeking profits by pursuing beneficial relationships between companies, customers, suppliers, and communities.
And, companies are often in a better position than they think. “They already have programs to monitor a lot of the factors,” Park explains. “It’s just a matter of putting it together and knowing how to disclose it in ways that resonate with their stakeholders and investors.” By thinking about ESG in incremental terms and achievable milestones, companies can shift their perspective and begin taking advantage of the benefits of ESG.
The Convergence of ESG and Shareholder Activism
While ESG is critical, companies today can’t think of it in a silo. “The fact of the matter is that ESG has combined with proxy voting and shareholder activism,” Park explains. For example, in its letter from the CEO, State Street explicitly stated that starting in 2023, they will vote against nominating governance chair if a company does not have at least 30% women on its board.
Issues like these aren’t exclusive to large companies like Exxon and Engine No. 1. Companies of all sizes and in all sectors are seeing shareholder activists prioritize — and in some cases, even weaponize — ESG.
Companies must acknowledge this new convergence and, in response, create a strategy for dealing with it. “The quickest way to increase your ratings is to set demonstrable targets and start hitting them, and evidence that progress with data,” Park explains.
Considerations for ESG During an IPO
What should companies be thinking about ESG during an IPO? According to Park, soon-to-be public companies tend to focus on business impact — for example, the impact a sustainable business may have on profit building and seeking. However, investors in the post-IPO stages tend to dig deeper into understanding the operational aspect of a company’s ESG, leveraging standards like SASB or TCFD. “That’s where companies get lost,” Park says.
That’s why his team’s work plugs into the entire process, enabling companies to determine the alignment they have with existing ESG frameworks and more effectively tell the story about some of the internal operational aspects of ESG as well as the business-material “impact side” of their ESG programs. And that relationship often continues once the company is public. “Once they’re public, they have an elevated need to disclose on these issues,” he explains. “We help them think through the process, produce ESG disclosures, and create a sticky relationship between them and top investors.”
Whether your company is public, private, or on the way to the public markets, ESG is increasingly important — and those that don’t acknowledge that will likely fall behind. When you stop playing defense against ESG, you can start using it as a tool with offensive potential.
To hear more about ESG trends and other related issues facing public and private companies, listen to the full podcast episode.
