With the focus on sustainability at the forefront of investors' and shareholders' minds around the world, it is no surprise that ESG performance indicators are playing an increasingly important role. Although companies publishing their ESG data in the form of a rating is a good start, as such it does not guarantee long-term success. Companies should invest first and foremost in sustainability strategies that focus on the long term.
ESG ratings are only one part of the whole picture
ESG ratings aim to measure a company's resilience to long-term, industry-specific ESG risks. Individual ratings differ from one another – each rating company focuses on a different area and has a different methodology, so companies often join two or three rating platforms to get a more comprehensive view.
Investors follow ESG ratings. But they use other data in addition to these to build a comprehensive view of a company's performance and resilience. This suggests that while ratings are a useful starting point and an excellent benchmarking tool, they are only one piece of the puzzle for investors. Indeed, the results of an ESG rating do not necessarily reflect the legal, moral or ethical standards of a company's management, which is problematic. "Exxon is ranked in the top 10 by the S&P 500 ESG index, while Tesla did not make the list," Elon Musk tweeted after Tesla was dropped from the index. ESG ratings don't give a complete picture of whether and how a company is actually benefiting the planet and society.
Once companies receive ESG ratings and start taking steps to improve their performance, they should also consider disclosures in line with global standards that investors are also working with. Engaging in global standards and initiatives is a sign that a business has joined the ranks of those who are aware of their impact and influence on the world and are working to be sustainable and mitigate their negative impacts.
An ethical and innovative approach is key
To satisfy investors and improve overall ESG performance, companies should work with their value chain and build a long-term strategy beyond ESG ratings and standards. This is essential to address all the core elements of sustainability, from the environment to diversity and inclusion, human rights, community work, business ethics, responsible supply chain, etc. Sustainable, ethical and innovative approaches are key elements for long-term success, but also for what is the overall long-term goal: a healthier society and environment.