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The listed companies' ESG strategy has become an important part of the investment process when asset managers and analysts value a company. But does the ESG strategy really live up to investors' expectations, and which factors should a well-developed ESG strategy consider?

For many years, I have worked with stock analysis and advising institutional investors. In the area of ESG, most investors have for a long time worked with screenings and exclusions, with the aim of steering clear of unethical investments or specific industries. Today, it is mostly about gaining an understanding of the companies' biggest ESG risks and opportunities, as well as how this can potentially affect the future earnings and valuation of the share.

It’s all about materiality and risks

The strategy should always start with a materiality analysis to identify the elements within the ESG area that are of greatest importance to the company and its key stakeholders. The investors expect the companies to inform about and deal with the biggest risk factors with an assessment of how they expect to be able to mitigate these risks. The investors focus on the entire value chain, so the risk assessment should include suppliers, customers, business partners and so on.

Risks and the materiality assessment vary from industry to industry. Typical examples of risks are effects of climate change, access to resources, e.g. energy and water, IT security, waste management, new regulation and changed consumer behavior driven by the ESG agenda.

How are the opportunities utilized?

The investors also focus on how the ESG strategy can create value for the company, i.e. through the creation of more sustainable products and innovative solutions, as well as the reduction of energy and resource consumption. Finally, they also look for conditions that show that the company is at the forefront of future regulation and legislation driven by the ESG agenda, and that it strives towards high ethical standards.

These are all areas that are undergoing rapid development with a changing focus. A good ESG strategy must therefore be dynamic, so it can be constantly adapted to new conditions and focus areas.

In addition, if companies are to be successful with their ESG strategy, it is essential that it is an integral part of the overall strategy and that it contains measurable KPIs with a link to the management's incentive programs.

Present concrete initiatives and document the effects

It is a clear advantage to be able to present concrete strategic initiatives that show what you are doing to achieve your objectives and that can document a real effect. Investors can quickly discern if the strategy mainly consists of symbolic measures without real meaning.

The insurance company Tryg is a good example of a company that makes its strategy credible by presenting concrete measurable actions. The company, among others, highlights an initiative where they are recycling and repairing damaged bumpers. This saved the environment more than 45 tons of plastic waste in 2021, corresponding to a total CO2 saving of more than 80 tons.

A weak ESG strategy can increase the cost of capital

If companies do not have a well-developed ESG strategy, it can affect the valuation of the company's shares through a higher risk premium and/or less confidence in future growth. Ultimately, this will affect access to and the price of capital. Most investors face a lot of ​​investment options and can often find alternative companies within the same industry that provide the same exposure. It can therefore be expensive to fail in your ESG strategy, especially in relation to your most important peers.

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