Why ESG Is a Crucial Component of Financial Communications Now More Than Ever

ESG remains Vital for Companies Active in Today’s Capital Markets

Taking environment, social and governance (ESG) considerations into account in making investment decisions in the capital markets has received sustained criticism in recent months. ESG has become politicised and the movement itself is coming under scrutiny.

“You would be forgiven for thinking that ESG is the bête noir of the financial world at the moment. But in reality, the rise of ESG is continuing apace.” – Frank Krikhaar, Head of ESG, Partner, Camarco, an APCO Worldwide company

First things first: companies are increasingly taking action on a range of environmental, social and governance issues. This is particularly noticeable on climate change, where one third of the largest global public and private companies have set net zero targets. This is being driven by consumer expectations, regulatory pressures and increasing energy and supply chain costs. In other words: it makes business sense.

In the capital markets, ESG came to prominence from 2020 onwards in response to the realizations that the green transition carries risks for companies. If a company is not identifying and addressing its key ESG issues, it is exposed to higher risks. In addition, investors realized they have an important role to play in facilitating the green transition, through channelling capital towards sustainable economy businesses or companies that are taking action on ESG issues.

This has led to a boom of ESG-related investment activity. By 2025, one third of global assets under management—$53 trillion—will be invested using at least one ESG criteria. In addition, banks, asset owners, asset managers, private equity firms and hedge funds—around 160 firms with $70 trillion assets under management—have set their own net zero targets for their portfolio.

Attracting (or not alienating) this weight of capital is important and embedding ESG in business practices thus remains vital for companies that are active in the capital markets. Camarco, an APCO Worldwide company, supports businesses in developing ambitious ESG strategies through the lens of their capital structure.

“Amidst an increasingly crowded and saturated market around ESG, integrating ESG into financial communication is a key differentiator.” – Frank Krikhaar, Head of ESG, Partner, Camarco, an APCO Worldwide company

And expectations of stakeholders in the capital markets are rising. Integrating ESG into financial communication is a key differentiator for companies that are deploying more and more action on the ESG front. This depends on the ability to use communications effectively to support the corporate strategy and tell its ESG story engagingly. Ultimately the upside of adopting this approach is a lower cost of capital.

Companies with strong ESG credentials are seen as lower risk, attracting investors and lenders who value sustainable practices. Moreover, a focus on ESG helps organisations avoid costly reputational damage by demonstrating an ability to be a trustworthy and reliable business counterparty. Investors are using ESG as a proxy for good and future-oriented leadership and this is particularly evident with younger enterprises.

For instance, when advising a listed fund in raising capital through an Initial Public Offering (IPO) on the London Stock Exchange, it was its commitment to ESG that enabled it to access funds that it would otherwise not have been able to reach. The Trust’s disclosures along frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) meant the book of new money raised was larger than what it would have been had those commitments not been in place.

Despite the current scrutiny the ESG world is coming under, its prominence and influence cannot be overstated in the context of an equity story. By embracing ESG factors, companies can position themselves for success. Increasingly, effective communication is the key to unlock that success.

This post was written by APCO/Camarco Alumna Tessa Gough-Allen