Purpose & ESG: Transforming Corporations While Building Long-Term Profit
-
bookmark
-
print
It’s one thing to talk about sustainable finance, it’s another thing to put it into practice. Studies show that adopting environmental, social and governance (ESG) principles is good for business, but doing it right requires companies to develop a proper framework that communicates their purpose with sustainability as a prominent driver. If investors and businesses aren’t thinking about integrating ESG, they will need to start soon as sustainability is here to stay. This is the third in a three-part series on sustainable finance.
In August 2019, the 200 CEOs that make up the Business Roundtable released an updated Statement of Purpose. Since its formation in 1972, the roundtable was mostly focused on developing initiatives and promoting policies that support company shareholders, but it amended its purpose to say it’s committed to all stakeholders and “moving away from shareholder primacy.” Essentially, the CEOs explained customers, employees, suppliers and communities should be on the same footing as the shareholder.
More companies around the world are following the roundtable’s lead, seeking a connection between purpose and long-term profit and ESG becomes an accelerator for that path.
"Boldly Grow the Good in Business and Life"
In June of this year, BMO CEO Darryl White unveiled the bank’s commitments to support a thriving economy, sustainable future and inclusive society. "BMO is driven by a single Purpose to Boldly Grow the Good in Business and Life,” he said. “At our core, we are focused on driving positive change for our customers, employees and the communities where we do business. Our bank is mobilized and accelerating. And in every new opportunity we take on, we're driven by a clear purpose and a bold ambition – one that mirrors the aspirations of our customers."
A UNGC – Accenture Strategy CEO Study on Sustainability1 shared that a majority of CEOs think that businesses should be making a far greater contribution to achieving a sustainable global economy and society by 2030. To make this a reality, CEOs will need to shape their companies into becoming highly purpose-driven entities with the firm support of their Boards of Directors. This may redefine value creation, while creating new incentives and pricing structures.
A Statement of Purpose campaign has begun, taking the stand that the Board of Directors is the ultimate authority for representing the interests of the corporation. The goal is that by 2025, the board of every listed company, and others, will publish a Statement of Purpose aimed for providing sustainable returns to shareholders. Initial guidance from collaborators such as Hermes EOS, Said Business School, Berkeley Law School and others is that the board would publish a page articulating the company’s purpose and achieve a sustainable solution for society2.
People have come to expect that companies and investors link purpose and profit through careful application of material ESG factors. The idea that companies can benefit their communities or environment and, in turn, the planet, has been touted by socially responsible investment (SRI) experts for years. Research shows that by following various ESG tenets, company profits increase. Harvard Business School’s George Serafeim, Robert G. Eccles and Ioannis Ioannou found that companies able to measure, manage and communicate ESG performance outperformed a control group over the next 18 years3.
Further, strong ESG proposition links to value creation and cash flow by facilitating top-line growth, reducing costs, minimizing regulatory and legal interventions, increasing employee productivity and optimizing investment and capital expenditures.4
Creating and communicating purpose
Factors such as reputation and other intangible assets are responsible for over 80% of the perceived market value of the S&P 500 companies5. Therefore, it is increasingly important for corporations to fully understand the impact their ESG profile has among stakeholders and shareholders. Interviews of 70 executives at global investment firms revealed that “ESG was almost universally top of the mind”6.
As part of developing a Statement of Purpose, businesses will need to conduct a materiality analysis, identifying a few critical ESG-related actionable strategies that could significantly impact business performance. By identifying these, companies would gain more insight into what they’re doing right and what can be improved upon. Ultimately, it would allow businesses to define their purpose, which would then drive their environmental and socially beneficial products and services – and profit.
Sharing purpose is also important. Businesses and investment firms must make it clear to stakeholders how they plan to integrate ESG into their decision-making process and other corporate activities. In addition, they need to show how their ESG initiatives are aligned to their bottom line. Communicating these plans is critical – by owning the narrative and sharing social and environmental impact activities with the public, businesses can better manage risk and showcase the good work they’re doing.
Organizing a systematic, annualized approach to investor relations and communication is an influential step where active involvement from the Board of Directors benefits the company long-term. (see figure 1)
A systematic, annualized approach to shareholder relations and communication
Figure 1: Harvard Law School
While work still needs to be done, ESG is here to stay, which means executives should examine ESG considerations in all their key business decisions.
Onto New Dimensions
The 2019 Global Risks Report, published by the World Economic Forum identifies, for the first time, the top three global risks are related to climate change: extreme weather events, failure of climate change mitigation and adaptation, and natural disasters. (see figure 2) Climate change is a key ‘E’ issue for most companies and investors today. Applying systems thinking would allow companies to build impactful strategies for both mitigating this risk while embracing opportunities for a just transition to a low carbon future.
The Global Risks Interconnections Map 2019
Figure 2: WEF
Another significant trend is assessing ESG issues in the arena of mergers and acquisitions, which is already happening. A recent Responsible Investor article put it this way: “It is hard to think of any financial decision where managing ESG risks – and indeed identifying sustainable growth opportunities – would be more important than when acquiring an entire company, or a sizeable stake in a business.” Ninety percent of the corporate executives interviewed conducted ESG due diligence before making an acquisition7.
It’s not hard to understand why M&A leaders care about ESG: it encompasses climate change, cyber security, labour standards, board diversity, executive pay, supply chain sustainability and more. Ignoring these fundamental tenets of good corporate citizenship puts companies at risk.
Investors are also constructing portfolios that integrate ESG, including in fixed income as illustrated in figure 3. Companies need to see that ESG is both a risk and an opportunity – businesses that don’t adapt subject themselves to a host of problems, including reputational and operational, while the ones that do will be much more prepared for the future.
Diagram of ESG integration by investors in credit risk analysis.
Figure 3: PRI
Imagining a new normal
While ESG is becoming more mainstream, there’s still a long way to go before we see a large emergence of purpose-driven companies. We have ushered in a new start, but it will not drive the transformation over the long-term quickly. For that to happen, we need more innovation. As I discussed in my last article the world needs a more diverse set of sustainable investment offerings to help foster the development of new technologies, ground-breaking ideas and products that address at least some of the 17 United Nations SDGs that sustainable investors are seeking.
One such innovation is transition financing, which will provide funding to energy, transportation and other industrial companies that want to reduce their environmental footprint and demonstrate their commitment to move to a low carbon economy in the face of climate change. It can also help fill a gap in green financing, where certain investments may not meet a green standard, but can still help reduce emissions and mitigate climate change in the near-term.
Companies adopting ESG to drive their sustainability commitments will only grow from here. Meanwhile, investors examining a company’s commitments to sustainability through ESG analysis is a growing market trend.
Investors are also seeing the benefits of ESG investing. In one meta study, 88% of reviewed sources, companies with robust sustainability practices demonstrated better operational performance while 80% of the reviewed studies exhibit that prudent sustainability practices have a positive influence on investment performance.8 Sixty five percent of hedge fund managers are now planning to have ESG policy in place by end of 2019, according to Preqin9. Meanwhile, short-selling laggards in the sustainable investment universe or those exposed to climate risk has emerged as a new trend in the asset management landscape.
Due to the voluntary nature of reporting annually and the lack of standardization, much of the ESG data and disclosures of companies are incomplete today, and often lack insights that investors can directly use. One factor that would accelerate ESG adoption is artificial intelligence. As data collection becomes more advanced and as AI’s analytical capabilities become even more sophisticated, we can imagine a day when, along with the stock or bond prices, quantifiable ESG metrics and other insights will roll across our TV screens on a real-time basis. It will not only be easier for companies to report their own sustainability data monthly, but third-party research firms and sell and buy-side analysts will do more comprehensive analysis themselves.
A company’s purpose, material ESG factors, financial and ESG performance, together with its impact metrics, will be shared as a normal way of doing business. Performance attribution will no longer be limited to financial return; monthly statements from retail to institutional investors could include ESG insights. As well, we’ll hopefully see more companies measure their social and environmental impact in real time, with their ESG profile clearly linked to their purpose. The businesses that do this will be the new winners. It demonstrates transparency and will help their business by giving them access to lower cost of capital or easier access for funding their capex linked to sustainability. Their ability to move forward and transform with a triple bottom line approach will allow them to stay competitive against their peers.
As the sustainable finance industry develops, definitions around ESG and implementation of ESG-influenced business practices and metrics will evolve. If an energy company issues transition bonds, then their ESG impact will need to be re-examined. If oil and gas producers can create a net zero model, funds that exclude these companies will have to rethink labeling them as incompatible with a low-carbon future.
New innovations could make us rethink the way we invest or fund businesses. New entrepreneurs will make us re-imagine what’s possible. More people will see just how all-encompassing ESG can be.
Purpose, as many people are finding out, is becoming paramount. The rise of new corporate forms such as a Benefit LLC, Low Profit Liability Company, Public Benefit Corp and Sustainable Benefit Corp allow different ways for a business to demonstrate its purpose, which means we’ll only see more ESG-driven companies in the future. As Virgin’s Richard Branson says: "If the people who work for a business are proud of the business they work for, they'll work that much harder, and therefore, I think turning your business into a real force for good is good business sense as well."
Manju Seal is Head of Sustainable Finance Advisory, BMO Capital Markets. She is co-host of the BMO Sustainability Leaders podcast, spearheads thought leadership and leads efforts for sustainable finance within Capital Markets. Manju heads efforts at BMO for identifying impactful solutions around green/social bond underwriting, product development and other sustainable financing activities. She has over 20 years of diverse professional experience, including, investment banking, institutional asset management and nonprofit & board leadership.
The views and opinions expressed do not necessarily reflect the views or positions of BMO Financial Group and or its affiliates.
Cited materials
1 Accenture 2 Hermes EOS 3 Harvard Business School 4 McKinsey & Company 5 OCEAN TOMO 6 Harvard Business Review 7 Mergermarket 8 Arabesque 9 preqin
Manju Seal
Head of Sustainable Finance, Advisory at BMO Capital Markets. Leading efforts with corporate and institutional clients to incorporate environmental, social and governance (ESG) criteria into their investment considerations. She also spearheads broader Enterprise wide strategy and thought leadership around sustainable finance and ESG investment considerations.
View Full Profile
It’s one thing to talk about sustainable finance, it’s another thing to put it into practice. Studies show that adopting environmental, social and governance (ESG) principles is good for business, but doing it right requires companies to develop a proper framework that communicates their purpose with sustainability as a prominent driver. If investors and businesses aren’t thinking about integrating ESG, they will need to start soon as sustainability is here to stay. This is the third in a three-part series on sustainable finance.
In August 2019, the 200 CEOs that make up the Business Roundtable released an updated Statement of Purpose. Since its formation in 1972, the roundtable was mostly focused on developing initiatives and promoting policies that support company shareholders, but it amended its purpose to say it’s committed to all stakeholders and “moving away from shareholder primacy.” Essentially, the CEOs explained customers, employees, suppliers and communities should be on the same footing as the shareholder.
More companies around the world are following the roundtable’s lead, seeking a connection between purpose and long-term profit and ESG becomes an accelerator for that path.
"Boldly Grow the Good in Business and Life"
In June of this year, BMO CEO Darryl White unveiled the bank’s commitments to support a thriving economy, sustainable future and inclusive society. "BMO is driven by a single Purpose to Boldly Grow the Good in Business and Life,” he said. “At our core, we are focused on driving positive change for our customers, employees and the communities where we do business. Our bank is mobilized and accelerating. And in every new opportunity we take on, we're driven by a clear purpose and a bold ambition – one that mirrors the aspirations of our customers."
A UNGC – Accenture Strategy CEO Study on Sustainability1 shared that a majority of CEOs think that businesses should be making a far greater contribution to achieving a sustainable global economy and society by 2030. To make this a reality, CEOs will need to shape their companies into becoming highly purpose-driven entities with the firm support of their Boards of Directors. This may redefine value creation, while creating new incentives and pricing structures.
A Statement of Purpose campaign has begun, taking the stand that the Board of Directors is the ultimate authority for representing the interests of the corporation. The goal is that by 2025, the board of every listed company, and others, will publish a Statement of Purpose aimed for providing sustainable returns to shareholders. Initial guidance from collaborators such as Hermes EOS, Said Business School, Berkeley Law School and others is that the board would publish a page articulating the company’s purpose and achieve a sustainable solution for society2.
People have come to expect that companies and investors link purpose and profit through careful application of material ESG factors. The idea that companies can benefit their communities or environment and, in turn, the planet, has been touted by socially responsible investment (SRI) experts for years. Research shows that by following various ESG tenets, company profits increase. Harvard Business School’s George Serafeim, Robert G. Eccles and Ioannis Ioannou found that companies able to measure, manage and communicate ESG performance outperformed a control group over the next 18 years3.
Further, strong ESG proposition links to value creation and cash flow by facilitating top-line growth, reducing costs, minimizing regulatory and legal interventions, increasing employee productivity and optimizing investment and capital expenditures.4
Creating and communicating purpose
Factors such as reputation and other intangible assets are responsible for over 80% of the perceived market value of the S&P 500 companies5. Therefore, it is increasingly important for corporations to fully understand the impact their ESG profile has among stakeholders and shareholders. Interviews of 70 executives at global investment firms revealed that “ESG was almost universally top of the mind”6.
As part of developing a Statement of Purpose, businesses will need to conduct a materiality analysis, identifying a few critical ESG-related actionable strategies that could significantly impact business performance. By identifying these, companies would gain more insight into what they’re doing right and what can be improved upon. Ultimately, it would allow businesses to define their purpose, which would then drive their environmental and socially beneficial products and services – and profit.
Sharing purpose is also important. Businesses and investment firms must make it clear to stakeholders how they plan to integrate ESG into their decision-making process and other corporate activities. In addition, they need to show how their ESG initiatives are aligned to their bottom line. Communicating these plans is critical – by owning the narrative and sharing social and environmental impact activities with the public, businesses can better manage risk and showcase the good work they’re doing.
Organizing a systematic, annualized approach to investor relations and communication is an influential step where active involvement from the Board of Directors benefits the company long-term. (see figure 1)
A systematic, annualized approach to shareholder relations and communication
Figure 1: Harvard Law School
While work still needs to be done, ESG is here to stay, which means executives should examine ESG considerations in all their key business decisions.
Onto New Dimensions
The 2019 Global Risks Report, published by the World Economic Forum identifies, for the first time, the top three global risks are related to climate change: extreme weather events, failure of climate change mitigation and adaptation, and natural disasters. (see figure 2) Climate change is a key ‘E’ issue for most companies and investors today. Applying systems thinking would allow companies to build impactful strategies for both mitigating this risk while embracing opportunities for a just transition to a low carbon future.
The Global Risks Interconnections Map 2019
Figure 2: WEF
Another significant trend is assessing ESG issues in the arena of mergers and acquisitions, which is already happening. A recent Responsible Investor article put it this way: “It is hard to think of any financial decision where managing ESG risks – and indeed identifying sustainable growth opportunities – would be more important than when acquiring an entire company, or a sizeable stake in a business.” Ninety percent of the corporate executives interviewed conducted ESG due diligence before making an acquisition7.
It’s not hard to understand why M&A leaders care about ESG: it encompasses climate change, cyber security, labour standards, board diversity, executive pay, supply chain sustainability and more. Ignoring these fundamental tenets of good corporate citizenship puts companies at risk.
Investors are also constructing portfolios that integrate ESG, including in fixed income as illustrated in figure 3. Companies need to see that ESG is both a risk and an opportunity – businesses that don’t adapt subject themselves to a host of problems, including reputational and operational, while the ones that do will be much more prepared for the future.
Diagram of ESG integration by investors in credit risk analysis.
Figure 3: PRI
Imagining a new normal
While ESG is becoming more mainstream, there’s still a long way to go before we see a large emergence of purpose-driven companies. We have ushered in a new start, but it will not drive the transformation over the long-term quickly. For that to happen, we need more innovation. As I discussed in my last article the world needs a more diverse set of sustainable investment offerings to help foster the development of new technologies, ground-breaking ideas and products that address at least some of the 17 United Nations SDGs that sustainable investors are seeking.
One such innovation is transition financing, which will provide funding to energy, transportation and other industrial companies that want to reduce their environmental footprint and demonstrate their commitment to move to a low carbon economy in the face of climate change. It can also help fill a gap in green financing, where certain investments may not meet a green standard, but can still help reduce emissions and mitigate climate change in the near-term.
Companies adopting ESG to drive their sustainability commitments will only grow from here. Meanwhile, investors examining a company’s commitments to sustainability through ESG analysis is a growing market trend.
Investors are also seeing the benefits of ESG investing. In one meta study, 88% of reviewed sources, companies with robust sustainability practices demonstrated better operational performance while 80% of the reviewed studies exhibit that prudent sustainability practices have a positive influence on investment performance.8 Sixty five percent of hedge fund managers are now planning to have ESG policy in place by end of 2019, according to Preqin9. Meanwhile, short-selling laggards in the sustainable investment universe or those exposed to climate risk has emerged as a new trend in the asset management landscape.
Due to the voluntary nature of reporting annually and the lack of standardization, much of the ESG data and disclosures of companies are incomplete today, and often lack insights that investors can directly use. One factor that would accelerate ESG adoption is artificial intelligence. As data collection becomes more advanced and as AI’s analytical capabilities become even more sophisticated, we can imagine a day when, along with the stock or bond prices, quantifiable ESG metrics and other insights will roll across our TV screens on a real-time basis. It will not only be easier for companies to report their own sustainability data monthly, but third-party research firms and sell and buy-side analysts will do more comprehensive analysis themselves.
A company’s purpose, material ESG factors, financial and ESG performance, together with its impact metrics, will be shared as a normal way of doing business. Performance attribution will no longer be limited to financial return; monthly statements from retail to institutional investors could include ESG insights. As well, we’ll hopefully see more companies measure their social and environmental impact in real time, with their ESG profile clearly linked to their purpose. The businesses that do this will be the new winners. It demonstrates transparency and will help their business by giving them access to lower cost of capital or easier access for funding their capex linked to sustainability. Their ability to move forward and transform with a triple bottom line approach will allow them to stay competitive against their peers.
As the sustainable finance industry develops, definitions around ESG and implementation of ESG-influenced business practices and metrics will evolve. If an energy company issues transition bonds, then their ESG impact will need to be re-examined. If oil and gas producers can create a net zero model, funds that exclude these companies will have to rethink labeling them as incompatible with a low-carbon future.
New innovations could make us rethink the way we invest or fund businesses. New entrepreneurs will make us re-imagine what’s possible. More people will see just how all-encompassing ESG can be.
Purpose, as many people are finding out, is becoming paramount. The rise of new corporate forms such as a Benefit LLC, Low Profit Liability Company, Public Benefit Corp and Sustainable Benefit Corp allow different ways for a business to demonstrate its purpose, which means we’ll only see more ESG-driven companies in the future. As Virgin’s Richard Branson says: "If the people who work for a business are proud of the business they work for, they'll work that much harder, and therefore, I think turning your business into a real force for good is good business sense as well."
Manju Seal is Head of Sustainable Finance Advisory, BMO Capital Markets. She is co-host of the BMO Sustainability Leaders podcast, spearheads thought leadership and leads efforts for sustainable finance within Capital Markets. Manju heads efforts at BMO for identifying impactful solutions around green/social bond underwriting, product development and other sustainable financing activities. She has over 20 years of diverse professional experience, including, investment banking, institutional asset management and nonprofit & board leadership.
The views and opinions expressed do not necessarily reflect the views or positions of BMO Financial Group and or its affiliates.
Cited materials
1 Accenture 2 Hermes EOS 3 Harvard Business School 4 McKinsey & Company 5 OCEAN TOMO 6 Harvard Business Review 7 Mergermarket 8 Arabesque 9 preqin
More Insights
Tell us three simple things to
customize your experience.
Commercial
Commercial
-
Who We Are
-
Industry Expertise
- Agribusiness & Protein
- Agriculture
- Dealer Finance
- Commercial Real Estate
- Correspondent Banking
- Educational Institutions
- Engineering & Construction
- Food & Beverage
- Franchise Finance
- Futures & Securities
- Governments
- Healthcare
- Manufacturing
- Metals
- Not-for-Profit Organizations
- Private Equity Sponsors
- Professional Services
- Retail & Wholesale Distribution
- Specialty Finance
- Trucking
- Dental Practices
- Fuel Services & Convenience
- Logistics, Rail and Shipping
- Technology Banking
- Wine & Spirits
- Religious Institution Banking
-
We Can Help
- Asset Based Lending
- Business Strategy
- Doing Business Internationally
- Economic Insights
- Equipment Finance
- Finance Growth
- Manage Cash Flow
- Manage Risk
- Wealth Management
- Corporate Advisory
- Doing Business in Canada
- Minority-Owned Businesses
- Mergers & Acquisitions
- Pacific Rim
- Climate Smart
- Regional Investment Banking Expertise
-
Our Bankers
- Our Podcasts
Contact Us
Banking products are subject to approval and are provided in the United States by BMO Bank N.A. Member FDIC. BMO Commercial Bank is a trade name used in the United States by BMO Bank N.A. Member FDIC. BMO Sponsor Finance is a trade name used by BMO Financial Corp. and its affiliates.
Please note important disclosures for content produced by BMO Capital Markets. BMO Capital Markets Regulatory | BMOCMC Fixed Income Commentary Disclosure | BMOCMC FICC Macro Strategy Commentary Disclosure | Research Disclosure Statements.
BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c., and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S. , and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Canadian Investment Regulatory Organization and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia and carbon credit origination, sustainability advisory services and environmental solutions provided by Bank of Montreal, BMO Radicle Inc., and Carbon Farmers Australia Pty Ltd. (ACN 136 799 221 AFSL 430135) in Australia. "Nesbitt Burns" is a registered trademark of BMO Nesbitt Burns Inc, used under license. "BMO Capital Markets" is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.
® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.
™ Trademark of Bank of Montreal in the United States and Canada.
The material contained in articles posted on this website is intended as a general market commentary. The opinions, estimates and projections, if any, contained in these articles are those of the authors and may differ from those of other BMO Commercial Bank employees and affiliates. BMO Commercial Bank endeavors to ensure that the contents have been compiled or derived from sources that it believes to be reliable and which it believes contain information and opinions which are accurate and complete. However, the authors and BMO Commercial Bank take no responsibility for any errors or omissions and do not guarantee their accuracy or completeness. These articles are for informational purposes only.
This information is not intended to be tax or legal advice. This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. BMO Bank N.A. and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.
Third party web sites may have privacy and security policies different from BMO. Links to other web sites do not imply the endorsement or approval of such web sites. Please review the privacy and security policies of web sites reached through links from BMO web sites.
Notice to Customers
To help the government fight the funding of terrorism and money laundering activities, federal law (USA Patriot Act (Title III of Pub. L. 107 56 (signed into law October 26, 2001)) requires all financial organizations to obtain, verify and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth and other information that will allow us to identify you. We may also ask you to provide a copy of your driver's license or other identifying documents. For each business or entity that opens an account, we will ask for your name, address and other information that will allow us to identify the entity. We may also ask you to provide a copy of your certificate of incorporation (or similar document) or other identifying documents. The information you provide in this form may be used to perform a credit check and verify your identity by using internal sources and third-party vendors. If the requested information is not provided within 30 calendar days, the account will be subject to closure.