About 9 in 10 CIOs prioritise ESG in investment decisions

McKinsey survey highlights the need for clearer ESG-sustainability-performance links.

A dominating 85% of Chief Investment Officers surveyed by McKinsey & Company said that environmental, social, and governance (ESG) is a huge consideration for their company when investing.

However, these investors still want a clearer picture of the value of companies’ sustainability initiatives and equity stories.

The same survey revealed that 60% of the respondents look into ESG considerations in their companies’ portfolios, whilst 80% evaluate their individual company positions through the probable effect of ESG on their cash flows.

Given the huge role of ESG for investors, it is vital to provide a clear link between sustainability and strategy to understand the effects of a company’s efforts on its performance. This includes the provision of long-term value, certainty on regulatory requirements, and practice of ESG-related frameworks.

It’s about time companies do more than present figures and metrics on paper to be able to effectively correlate their ESG initiatives with their cash flows.

A majority of the investors are willing to pay a premium for companies that are able to clearly link their ESG-related efforts to an increase in their financial performance. Here’s how your company can do that.

Understand industry differences

Whilst the elements of ESG are usually taken as a whole, each individual element can be prioritised depending on individual industries.

For example, respondents from industrials and the energy sector are more focused on environment-related efforts, whilst those involved in technologies, pharmaceuticals, and infrastructure consider social efforts to be most vital. Governance concerns are ranked the highest for investors in the finance and insurance industries.

Focus on value of ESG

Numbers and figures on reports are compelling, but companies must also elaborate on how their ESG initiatives add value to their work.

Based on the study, investors are usually looking for elaborations of strategic impact and contextualised programs based on business models. ESG reports and formula are not just enough to do the job.

Know your audience

No company can satisfy every investor, so it is better to know your target shareholders. Segmenting can help in identifying your audience and choosing which initiatives to emphasise.

The study also revealed that long-term investors who consider ESG important in their analysis and decision-making screen companies to differentiate their success rate in ESG-related efforts. Specifically, for oil and gas companies, rates of carbon emission reduction are highly considered.

Investors also put a premium on the impact of ESG initiatives on the economy, particularly on cash flows. For example, they tend to avoid real estate developers whose properties are at great risk of being flooded based on their location and geography.

It is high time for companies to effectively integrate ESG in their equity story, as investors fully recognise that ESG is crucial when deciding which companies to invest in. To do this, McKinsey reminds companies to link ESG with the value it creates, learn more about the target, and make your company stand out by highlighting the initiatives’ impact.