Detail ESG, climate actions to win positive market response: BCG

Shareholders expect listed companies need to give detailed statements on their planned actions on climate change and sustainability, Boston Consulting Group says.

A BCG study says companies need to show “material and measurable impact” of their sustainability and climate action plans to get a positive response from shareholders. Picture: Getty Images

ASX-listed companies need to give detailed statements about their planned actions on climate change and sustainability if they are to get a positive response from shareholders, Boston Consulting Group has warned.

In a study – to be released on Wednesday – BCG concluded the number of announcements by the 50 largest listed companies over the past four years on climate change and sustainability efforts had risen by 1000 per cent, from 18 in 2018 to 214 in 2021.

There has also been a rapid rise in announcements about specific actions taken by the companies – from 11 in 2018 to 149 last year.

But the report says that not all the announcements have generated favourable market reaction, with some followed by a fall in the company’s share price.

“Many were followed by immaterial or negative returns,” the report reads, adding that companies should not take any short cuts and recommending against announcements and actions that could be seen as greenwashing by sceptical investors.

If a company’s announcements are to receive a positive ­response from shareholders, the report says, they need to include tangible evidence of how the action will create strategic and competitive advantage for the firm.

They should show “material and measurable impact” of their plans “within well defined targets that have been verified by a credible, independent organisation”.

The report’s author, BCG partner Sam Farley, said the big jump in the number of ESG-related announcements by ASX-listed companies in recent years reflected “the rise in consumer, employee and investor expectations and urgency for climate and sustainability action”.

“It shows that corporate Australia is actively addressing climate change and the transition to net zero,” Mr Farley said. “But our research shows that these announcements are not always beneficial (to the share price) and some can result in a drop in shareholder return.”

Mr Farley said there was “no free lunch” for companies that thought that an ESG or climate announcement would automatically produce a positive reaction from shareholders.

“Companies have to demonstrate that their commitments and actions around climate change and sustainability improve their competitive advantage, or how it means they are going to win more market share or operate more efficiently,” he said. “You have to make it real and measurable.”

Mr Farley said some companies made broad sweeping announcements about their commitments on climate change but were “quite vague about how they were going to get there”.

He said companies needed to provide details on their plans to achieve their new carbon reduction or sustainability targets in their announcements. “No one is going to value something that doesn’t have a tangible pathway on how to get there,” he said.

Earlier this month, the Australian Securities & Investments Commission said it was scrutinising poor reporting practices it described as greenwashing.

Greenwashing is the portrayal of a product’s environmental or social credentials that creates a false impression to investors.

DWS, Deutsche Bank’s asset management subsidiary, replaced its chief executive, Asoka Woehrmann, this month – hours after a German police raid as it probed alleged greenwashing.

Assets tied to ESG investing strategies are expected to rise to about $US50 trillion ($70 trillion) by 2025, according to estimates by Bloomberg.

ASIC has also released an information sheet following a review of superannuation and in­vest­ment products that identified areas of improvement around disclosures. The regulator has said companies ought to use clear ­labels around ESG disclosures and define the sustainability terminology they use. The regulator has also called on fund mangers to clearly explain how they factor in considerations around ESG into investment strategy.

Mr Farley said companies also needed to be clear on how much the sustainability announcements or commitments would cost and how it would create value for shareholders.

Mr Farley said investors could be sceptical about broad announcements from companies on ESG issues and whether they were creating value. “To get valuation credit, listed companies need to connect their actions to strategy, ground them in genuine competitive advantage and provide a clear financial logic,” the ­report said. “No amount of communication can create value from superficial or hastily conceived actions which are often interpreted as greenwashing.”