Why Do We Need to Look Beyond What Companies Say and Focus Instead on What They Do?

ESG is significant for businesses because it has the potential to affect both their reputation and long-term financial success. Companies that successfully manage their ESG opportunities and risks may enhance operational effectiveness, draw in and keep employees and customers, and lower regulatory and legal concerns.            ESG may give investors a more thorough picture of the risk profile and possibilities for a company’s long-term growth. Investors may discover firms with excellent ESG performance and avoid those with high ESG risks by considering ESG aspects when making investment decisions. The benefits of ESG investing are numerous, including more powerful risk management, the possibility for higher returns, and alignment with personal beliefs and social obligations. ESG investing may also encourage businesses to be more open and accountable, eventually enhancing their ESG performance. This blog will discuss the significance of focusing on what businesses do to enhance their ESG performance rather than just what they claim about their ESG practices. We will discuss the gap between what businesses say and what they do, the advantages of concentrating on what companies do, and techniques for investors to evaluate ESG performance other than through corporate statements.

 The Gap Between What Companies Say and What They Do

The difference between what businesses say in their public statements about their environmental, social, and governance (ESG) policies and their actual actions and performance in these areas is known as the “Gap Between What Businesses Say and What They Do.” Investors who simply depend on what the company claims may be misleading about a firm’s underlying ESG performance due to this gap, which can be rather large. The following are the specifics of the points raised in this section:

• The Problem with Relying Solely on Company Statements:

Companies often have a solid incentive to represent themselves to all their stakeholders, including regulators, consumers, personnel, and investors, in the best possible way. Because of this, they could make sweeping statements about their ESG practices without necessarily having the processes, rules, or procedures to back them up. Due to the possibility that the company’s assertions might not accurately represent its ESG performance, relying only on them can be problematic.

• Examples of Greenwashing and Other Deceptive Practices:

Making erroneous or fraudulent statements about a company’s environmental policies to make it seem more environmentally friendly than it is known as “greenwashing.” This is but one illustration of the dishonest tactic’s businesses may employ to provide a favorable impression of their ESG performance. Other instances include:

• Unethical corporate activities.
• Selective reporting of ESG measures.
• Failure to disclose substantial ESG concerns.

• The Need for Transparency and Accountability:

There is a need for more accountability and transparency from businesses to resolve the discrepancy between what they say and what they do. Companies must provide accurate and comprehensive information about their ESG performance and must also be held responsible for their activities. Requesting and studying in-depth ESG reports and data from businesses, investors, regulators, and other stakeholders may play a significant role in fostering transparency and accountability.

• Incomplete or Inaccurate Reporting of ESG Metrics and Practices:

There is a chance that businesses won’t disclose all the details of their ESG policies, which can result in assumptions being made about their ESG performance that aren’t true or thorough.

For instance, a corporation could claim to have a high percentage of women in leadership roles, but this may not accurately represent the number of women in these positions or their level of influence.

• Conflicts of Interest That May Lead Companies to Prioritize Profit Over ESG Considerations:

When it comes to ESG standards, companies could have conflicts of interest. Even if it may not be in the best interest of its stakeholders or the environment, a firm could emphasize short-term financial performance above long-term sustainability.

• Lack of Standardization in ESG Reporting, Which Makes It Difficult to Compare Companies’ ESG Performance Accurately:

Investors may find it challenging to objectively assess firms’ ESG performance due to the lack of consistency in ESG reporting. Finding best practices in ESG management and comparing organizations’ performance on ESG aspects can be complex without defined measurements and reporting standards.

The Benefits of Focusing on What Companies Do:

 

The advantages of going beyond what firms say about their environmental, social, and governance (ESG) policies and instead concentrating on their actual activities and performance in these areas will ultimately lead us to the benefits of focusing on what companies do. The points stated in this section are described in further depth below:

1. Better Assessment of ESG Performance:

A more accurate and thorough evaluation of a company’s ESG performance may be obtained by concentrating on what it does. Investors may make wiser investment decisions by better understanding a company’s approach to managing ESG risks and opportunities by looking at its actions and performance.

2. More Accurate Identification of Potential Risks and Opportunities:

Investors can find potential ESG risks and possibilities that may not be obvious from business statements alone by looking at what firms do. A thorough examination of a company’s behavior may reveal, for instance, that it has a history of severe environmental harm or regulatory infractions despite claiming to have excellent environmental standards.

3. Improved Investment Decision-making:

Making better investment decisions can result from putting more emphasis on what businesses do. Investors may better manage risks, spot possibilities for long-term development, and connect their investments with their values and sense of social responsibility by evaluating a company’s ESG performance and considering ESG considerations when making investment decisions.

4. Increased Credibility and Trust from Stakeholders:

Companies are more likely to gain the confidence and trust of their stakeholders if they emphasize ESG performance and can show their efforts in this area. Companies may build enduring bonds with investors, clients, employees, and regulators by being transparent and accountable about their ESG policies.

5. Enhanced Ability to Measure and Track ESG Performance Over Time:

The capacity to monitor and follow a company’s ESG performance over time can be improved by concentrating on what the company does. Investors may spot patterns in a company’s ESG performance and evaluate whether it is moving closer to its ESG objectives by examining its operations and outcomes.

6. Improved Understanding of How ESG Factors Can Impact Long-term Financial Performance:

Investors can better understand how ESG variables affect a company’s long-term financial performance by concentrating on what firms do. Investors can identify the ESG aspects most important to a company’s financial success and evaluate the risks and opportunities these variables may present by examining the company’s operations and results. This may result in better-informed investing choices that are more in line with long-term financial objectives.

How to Look Beyond What Companies Say and Focus on What They Do

A more accurate and thorough evaluation of a company’s ESG performance may be obtained by looking beyond what the company says about its ESG practices and concentrating on its actions and performance in these areas. Here are a few methods to achieve this:

• Conduct Independent Research:

Independent research is one of the most used methods to go beyond what businesses claim. Investors may learn more about a company’s ESG practices and performance by consulting various sources, including industry publications, news stories, regulatory filings, and ESG data suppliers. Investors may cross-check data and get a full view of a company’s ESG performance by accessing several sources.

• Analyze Quantitative ESG Data:

ESG data providers give a plethora of quantitative information on the ESG performance of businesses. Using this information, investors may assess a company’s ESG performance relative to its competitors and pinpoint its strong and weak points. Investors may also find trends in a company’s ESG performance over time by using quantitative ESG data.

Investors seeking to focus on what firms do rather than just what they say might find essential resources in the ESG data solutions offered by companies like Inrate. Leading source of ESG data, Inrate provides various ESG data solutions, including ESG assessments, ratings, and analytics. Investors may use their data solutions to discover ESG risks and opportunities and to assist them in making wise investment decisions.

• Consider Qualitative Factors:

In addition to quantitative data, qualitative elements, including a company’s culture, leadership, and stakeholder involvement, are crucial for evaluating a company’s ESG performance. Investors can check a company’s sustainability reports, CSR programs, and stakeholder engagement

activities to prove its commitment to ESG concerns. By examining these aspects, investors may learn more about a company’s ESG strategy and commitment to sustainable business practices.

• Engage With Companies:

Investors can gain important information about a company’s ESG procedures and performance by interacting with them directly. Investors may urge businesses to strengthen their ESG policies and promote transparency by posing queries and voicing concerns about a company’s ESG performance. By engaging with companies, investors may learn more about the specific ESG risks and opportunities that are most pertinent to a certain company and sector.

• Seek Out Independent Third-Party Verification:

An unbiased evaluation of a company’s ESG performance can be obtained through independent third-party verification, such as certifications or ratings. Investors can employ third-party verification to validate statements made by a firm on its ESG performance and to pinpoint areas needing improvement. Investors must carefully consider the approach and reputation of the verification provider because not all third-party verification is created equal.

Conclusion

In conclusion, it is crucial to consider firms’ actions rather than trusting their statements, particularly in the context of ESG investment. It’s more crucial than ever to perform in-depth research and analysis to ensure that assets align with ESG values and principles as the demand for sustainable investment solutions increases.

Investors serious about ESG investment should look at the facts and activities that back up ESG claims rather than just the glitzy sustainability reports that businesses create. To validate the authenticity of the information presented, they should investigate a company’s past performance regarding ESG concerns, its commitments, and its long-term objectives.

Considering a company’s positive and negative impact, the ESG Impact Rating by Inrate provides a more nuanced assessment of a company’s ESG performance. It can help investors identify companies making a positive contribution to society and the environment.