ESG is A Communications Opportunity and Nightmare

First coined in 2004, Environmental, Social and Corporate Governance is now a mainstay, albeit sometimes controversial element, in 21st Century investing, with numerous ratings agencies now scoring corporate ESG.

ESG ratings are intended to provide information to market participants (investors, analysts, and corporate managers) about the relationship between corporations’ and non-investor stakeholders’ interests. But customers or clients, employees, competitors, and, most seriously, advocacy groups and politicians of all stripes and colors are either pushing for higher or better ratings or criticizing companies for even participating in ESG

The seven or eight large ratings agencies like S&P Global, Morningstar’s Systainalytics, Bloomberg, MSCI, and FTSE Russell are intended to be providers of data that can be used by investors – professional and individual ­– to help better measure an organization’s positive or negative impact on the environment, society, and or governance to help investors better assess corporate risks and, theoretically, value.

Many investors, but certainly not all, rely on this information to make investment decisions, while corporations use ratings to gain third-party feedback on the quality of their sustainability initiatives. Forget being in the oil, coal, or other fossil fuel industries, serving them as drillers or pipeline companies, or being a company that makes tobacco products. Those companies are simply going to fail a number of the myriad of defining characteristics.

In today’s financial environment, companies do not want to invoke the wrath of activists and investors who insist on high scores. Low ESG scores can cause stock prices to plunge and incur consumer boycotts and it’s incumbent on all publicly-traded corporations to maintain satisfactory ESG scores.

And it’s not just investors who matter. Consumers also increasingly demand ESG accountability. In fact, ESG has become a driver of consumer buying decisions and gained a strong impact on their purchase experience. A negative ESG rating can easily lead to lower earnings revenue.

For publicly-traded companies, ESG controversies can be nightmares. For public relations and corporate communication professionals, it would be professional malpractice not to have a playbook to counter incorrect or skewed ratings. And the entire field has become a political quagmire as some deeply conservative state pension funds won’t even invest in companies that participate in ESG ratings. Other, more liberal state pension funds won’t consider investing in a company with a low ESG score. And state and municipal pension funds are some of the largest investors in the stock market, with the goal of ensuring their retirees receive their promised benefits.

But most of all, in the words of a management consulting professional, the ESG field is “The Wild West,” with yet-to-be-developed standards, explanations, and methodologies. So the communications professionals cannot afford not to know – and help manage – all stakeholder perceptions, as even employees and recruits often make decisions about their employer on those statistics.