Are ESG/CSR screens really mitigating investment risk for institutional investors and fund managers?
Companies are under intense pressure to prioritize environmental, social, and governance (ESG) and corporate social responsibility (CSR) but are working with fewer resources resulting in adverse consequences on both the function and ESG and CSR professionals, says a report by the Association of Corporate Citizenship Professionals (ACCP). This can impact institutional investors and money managers who apply ESG and/or CSR screens because the function that is used to mitigate risk can be adding risk.
“Ethical governance and ethical practices are material to business and mitigates risk, so that's why both investors and companies are interested in this work,” says Jeanne Metzger, vice-president, membership, marketing and communications, ACCP. “This study shows that most companies are not resourcing these functions appropriately, so the concern is that this creates risk.”
The ACCP survey of 149 mid- to large-size companies representing more than $1 billion in community investments found “an important corporate function under intense pressure to produce results in a charged environment, often with fewer resources and continuing post-pandemic challenges.” These results underscore a critical business function experiencing rapid instability and change, impeding a company’s ability to successfully meet critical stakeholder expectations, including those of investors, consumers, and employees.
Increased demands, coupled with a polarized political environment, are resulting in adverse consequences on both the function and ESG and CSR professionals. Eighty-six percent of these professionals are dealing with increased demands, with 61% working longer hours, 50% reporting burnout, and 19% (one in five) reporting mental health concerns.
“It's a big deal,” says Metzger. “Particularly as this work within companies continues to be more important. Corporate executives need to make sure that these functions are resourced appropriately.”
Good CSR and ESG practices are also a big issue for companies when it comes to retaining, recruiting, and retaining talent. “That's another reason why this has become so important to corporations. There's a lot of data that shows that the employees are more likely to be satisfied and stay with the company if they feel their company is making a positive social impact in the communities and on the issues they care about.”
Metzger says CSR is now viewed as a profit centre of a business. “Typically, a company’s profit centres include the sales team and manufacturing, as an example. They really focus on resourcing those profit centres appropriately. CSR and ESG have not traditionally been seen as a profit centres, and that's where we’re seeing a shift. CSR and ESG are important to the overall success of a business. And, just like any profit centre, it must be resourced appropriately in order to make sure that it operates effectively and mitigates risk.
The survey says the way CSR and ESG are incorporated into the corporate structure continues to evolve and no ‘one size fits all’ approach has been established.
The structural relationship between CSR and ESG is also varied. One-third (33%) of respondents indicate that the CSR and ESG functions reside within one department, and one-third (34%) indicate that their companies’ ESG and CSR functions are housed in separate departments. This variety in structure across companies makes benchmarking and measurement challenging. Notably, almost 20% of respondents worked in companies that do not have an ESG function, even though they have a CSR function. Only 4% of respondents reported they have an ESG function but are without a CSR function.
In addition, despite the increased importance of the work, corporate social impact staffing largely stayed flat in 2023, continuing a multi-year trend. Consistent with the last three years, corporate social impact team headcount most often stayed the same (77%). However, there was a rise in the percentage of decrease in headcount (10% this year compared to 6% last year) and a decrease in team growth (12% this year compared to 26% in 2022). The percentage of CSR teams experiencing a reduction in staff this year is comparable to the trend seen during the height of the pandemic. The industries most impacted by decreased headcount were technology (21%), MedTech and pharma (21%), insurance (14%), and energy (14%). The companies experiencing a decrease in headcount were also most often global companies (85%).
“Investors, as they evaluate companies, should ensure that the companies have a clear purpose. They need to make sure their actions in regard to social impact are aligned with the business,” says Metzger.