ESG: A View from the US, Europe and Japan

ESG is a complex issue and how different stakeholders view and evaluate ESG-related themes varies from region to region – a reality that global companies need to understand and adapt to. As the momentum behind ESG has accelerated globally, investors increasingly consider a firm’s environmental, social and governance performance when allocating capital. New regulation will force companies to disclose more detail about their operations and increasingly define what counts as sustainable activity. Social issues are rising up shareholders’ agendas as customers, employees and politicians demand more from business. All of this requires companies to address ESG issues in a more sophisticated way, with the right strategy, communications and engagement approaches

Finsbury in partnership with the Japan Society (US) held a webinar with panelists providing views and insights from the US, Europe and Japan, featuring Kal Goldberg (Finsbury New York), Ruban Yogarajah (Finsbury London) and guest speaker Nicholas Benes from The Board Director Training Institute of Japan. Panelists discussed and concluded that business leaders that want to succeed, need to set a clear overall ESG strategy; define and accurately measure their targets; and communicate with all stakeholders, in a clear and consistent manner.

The US

In the US, the momentum behind ESG has greatly accelerated over the past year, fueled by an ongoing national dialogue around the purpose of the corporation. Shareholder primacy, which had been the guiding philosophy for decades, is giving way to the belief that a corporation must consider the interests of all stakeholders in order to build long-term value. This broader view has been endorsed both by The Business Roundtable on behalf of large American companies and by leading asset managers such as BlackRock. This focus on stakeholder capitalism is becoming a strong global trend.

Meanwhile, the COVID-19 pandemic has accelerated the focus on ‘S’ – social issues. Companies are increasingly being challenged on how their policies address labour standards, workplace and board diversity, pay equity, supply-chain management and a host of other human capital and social justice issues. Such issues already get a huge amount of media attention and they are moving up the agenda for shareholders as well.

Underpinning ESG investing in the US is a rapid inflow of ‘smart money’. At the end of Q2 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion and assets in sustainable index funds have quadrupled in the last three years and now represent 20% of total assets. The key to the value proposition of these ESG funds is that a focus on stakeholders more broadly, and on environmental and social issues will drive long-term returns – the old notion that there is a trade-off between purpose and profitability is rapidly disappearing.

Europe

In Europe too, good ESG performance is increasingly seen not as a bar but as a boost to profitability and long-term returns. However, more than in the US, regulation is a key driving force, with the commitments by the EU and the UK to achieve net zero greenhouse gas emissions by 2050 the clearest example. In fact, we think the EU’s environmental regulations could reshape markets globally, similarly to its GDPR data privacy rules.  While these regulations are complicated, the fact that they are comprehensive and have been developed first, and apply to all institutions operating in the EU, can force even non-European companies to adopt them.

Similarly to the US, social and governance issues are gaining traction, as investors and civil society ask companies to report on areas where it is hard to quantify performance.  Businesses that want to convey their ESG performance – and particularly the ‘S’ and the ‘G’ – effectively have to use a wider range of communications channels and touch points to show how sustainability is embedded into everything they do, as well as providing the right formal disclosure. Meanwhile, companies that do not communicate risk being discounted – the cost of silence has gone up.

Japan

In Japan, ESG investing has been more of a top-down phenomenon, driven by the government through the implementation of the Corporate Governance and Stewardship Codes. It fell on fertile ground, given Japan’s traditions of stakeholder capitalism and social responsibility, and led to an explosion of ESG books, articles, seminars and media coverage – followed rapidly by an increasing focus from investors, led by the Government Pension Investment Fund (GPIF).

For Japanese companies the focus has been on ‘G’ as the area most in need of improvement – and this makes sense since governance is the driver of other policies and at the heart of a firm’s ethical behaviour.

While there is room for improvement in areas such as diversity and inclusion, both on boards and among the workforce at large, progress on many ESG measures has been rapid in the past five years. The next step for many Japanese firms, taking note of international developments but also using the data they already have, is to better measure and communicate their ESG goals.