A recent survey commissioned by HSBC with a thousand companies and institutional investors globally showed that 68% of global investors intended to increase their low-carbon related investments to accelerate their transition to a clean energy economy.
Companies are under pressure from institutional investors to improve their levels of climate-related disclosure. They are responding to this demand but very slowly, with 56% of the investors surveyed describing the current disclosure levels as “highly inadequate”.
From reviewing reports of companies listed on the London Stock Exchange, we have also noticed a lack of important disclosure on CSR generally. There are very few reports with a CSR strategy with clear objectives and KPIs. Metrics other than ones required by compliance are rarely seen in the CSR section of Annual Reports.
What is the reason for this disconnect between investor interest and company disclosure?
A reason frequently suggested is the concept of the Catch 22 of CSR. Companies are encouraged to engage in CSR, but by disclosing information on CSR, they could damage the company’s reputation. Therefore, companies engage in CSR activities but do not report on them, to avoid reputational damage.
We think that this situation is more likely to be a result of lack of internal resource for CSR, rather than a reticence to disclose. In our experience, if a company hasn’t disclosed something, it is because they don’t have reliable data on those metrics. The real question should not be “Why don’t businesses disclose enough on CSR?”, but “Why don’t businesses invest in CSR programmes?”
There are broadly two reasons why businesses should invest in CSR programmes: moral obligation and contribution to competitive advantage.
On the first point of businesses having a moral obligation to engage in CSR, society confers to businesses a number of advantages; this creates a need for businesses to not act solely in their own interest.
There are three broad privileges given to companies by the law:
Businesses also benefit from work done by the rest of society. For example, businesses are able to hire educated employees, due to the existence of educational infrastructure.
On the second point of contribution to competitive advantage, if companies can see clear economic benefits to engaging in CSR, they will be far more likely to do so.
A company that takes its obligations to wider stakeholder groups seriously should be more successful over the long term than companies solely interested in satisfying shareholders’ short-term interests. Engagement with CSR should also lower certain risks over the long term, such as the risk of reputational damage, risk of lack of compliance with regulations and the risk of losing talented employees.
Ethical investing has frequently been thought of as giving back a lower rate of return than investing that is solely economically focused. MSCI have published research that indicates that companies with a strong ESG profile have stocks that are less susceptible to systemic market shocks. This prevents these stocks from being devalued at times when other stocks will be affected. Companies that are more energy-efficient will be less affected by changes in energy prices. Companies with a strong brand and deep customer relationships are more likely to be able to survive changes in their market. This suggests that investment in CSR programmes would make a company more attractive to investors.
With investor interest in CSR increasing, we believe that companies should invest in CSR initiatives and be transparent in their reporting on it. We believe that all stakeholders should have good information to make good decisions. Talk to us about how we can help you to tell your story in a powerful way.