Does a clear ESG roadmap add value for investors?

When the COVID-19 outbreak began, the fear was that environmental, social, and governance (ESG) considerations would take a backseat to more pressing issues, diminishing the trend toward ESG investing. Fortunately, what we’ve seen is precisely the opposite.

Surveys show that investors have been aligning their portfolios toward better ESG performance in the wake of the pandemic. In addition, most investors who account for ESG factors perform rigorous reviews of companies’ sustainability strategies. An enterprise that excels at ESG, they believe, is better positioned for the long term, better prepared to handle uncertainty, and therefore a lower risk investment.

In other words, they are investing through an ESG lens.

But just how clear is that lens? What challenges do investors and analysts face when assessing non-financial performance?

No two ESG strategies are alike

Many analysts expect ESG to translate into stronger performance and lower volatility of returns, but the concrete value drivers are difficult to predict. Assessing a company’s non-financial performance and how this translates into business success still requires a heavy lift.

The current lack of an ESG reporting standard doesn’t make things any easier. With everyone reporting on sustainability differently, investors find it hard to compare – even within a single sector. Not only that, but companies are equally inconsistent in how they report the opportunities and risks of doing business sustainably.

Sustainability ratings attempt to fill the void, but how reliable are they? Unfortunately, we have not yet seen enough evidence that ESG scores truly help investors derive an accurate picture of enterprise value.

Many listed companies, including Deutsche Post DHL Group, base their ESG reporting on the Global Reporting Initiative. However, such non-financial disclosures are not precise roadmaps for investors to follow but rather treasure maps requiring them to hunt for valuable information.

It’s time for a gold standard. Thankfully, help is on the way with the newly founded International Sustainability Standards Board (ISSB). However, until the ISSB achieves its goal of a comprehensive global baseline of sustainability-related disclosure standards, IR teams like mine will need to help analysts safely navigate the sea of sustainability disclosures.

Providing a clear ESG lens

For value-adding ESG reporting, you must understand the level of transparency the capital markets need. Investors want to see coherent explanations for how well ESG performance will translate into profits so they can adequately assess ROI.

It was with this in mind that we drew up our ESG Roadmap. Our goal was not only to paint a clear picture of our Group’s actions to develop green logistics. Overall, we intended to present precisely what we are doing to make every dimension of our business sustainable and how much those actions would cost. For example, we openly stated that we’re investing €7 billion through 2030 to reach our emissions target.

Did that price tag shock the financial markets? No. Quite the contrary. The markets welcomed our transparency and assessed that amount as reasonable (a purpose-driven investment in the future that adds value) and manageable (based on our earnings).

Furthermore, the fact that our strategy includes all stakeholders was also well received by the markets. Our balanced aspirations to be a sustainable employer, provider, and investment of choice send a clear message of continuous value creation and long-term business success.

ESG investing is here to stay. To qualify as a sustainable company, you must have an ambitious yet plausible ESG roadmap and clearly communicate your competitive advantages. This is not an easy undertaking, but it’s well worth it. After all, we can only continue doing business on our planet in the future if our planet has a future in which to do business.