The ‘Great Disconnect’ Breakfast Series: The view from Green Finance

The view from Green Finance

SEC Newgate’s research has identified a material disconnect between what the UK public wants to see from companies on ESG - and what companies are delivering. The first in our ‘Great Disconnect’ breakfast series focused on the view from Green Finance, bringing together senior business leaders to discuss the research findings and how to mitigate the reputational risk for businesses in the pursuit of their ESG agenda.

KEY INSIGHTS FROM SEC NEWGATE’S RESEARCH

The ‘Great Disconnect’ report fuses data from SEC Newgate’s annual ESG monitor, which surveys a nationally representative sample of 1000+ UK and focus groups with members of the public.

UK citizens are interested in corporates taking action on environmental, social and governance issues. There are high expectations, with 77% of people agreeing that companies have a responsibility to behave like a good citizen – and believing that they have the power to make a positive difference. Awareness of the term ‘ESG’ is low, with only 12% of people stating that they had a good understanding of the term ESG, feeling much more comfortable with language such as ‘doing the right thing’, ‘giving back’ and ‘CSR’. To put this into context, 38% of the same research population stated that they had a good understanding of the term ‘Net Zero’.

Environmental actions are of top-of-mind importance, but many (apart from retail investors) do not have a clear understanding of ‘governance’, even though some of the top reasons to avoid a company’s products and services demonstrate that people are evaluating business based on governance actions (corruption, 58%; tax evasion, 53%).

However, people a struggle to recall positive examples of ESG initiatives. When people are aware, they take mental shortcuts to reach quick judgements. The research demonstrated that the public tend to fall back on what they can remember in recent media stories; judge a company’s actions through the prism of its broader sector; and succumb to negativity bias, as it is the stories about ‘bad’ ESG performance that grab people’s attention and stick in their memories.

Compounding the issues of salience and judgement, people’s opinions are framed against a backdrop of cynicism. 43% do not trust what companies claim about their ESG activities and performance, and trust is further eroded by a lack of clarity on how performance is evaluated, with about 7 in 10 (71%) agreeing that there should be a consistent approach for companies to report their ESG performance.

Transparency is key, with 7 in 10 (70%) agreeing that companies should communicate the results of their ESG efforts more clearly for consumers and investors.

THE VIEW FROM GREEN FINANCE

Language matters.

Green Finance Business Leaders were unsurprised by low public awareness and understanding of the term ‘ESG’. With ESG firmly established within the Green Finance narrative, they acknowledge that business suffers from the ‘curse of knowledge’ and are also concerned that ‘ESG’ doesn’t mean anything to the public. There was a recognition that the term – and companies’ actions around the ‘E’, ‘S’ and ‘G’ require breaking down, so people can fully grasp what each area truly means. Only when people can get to this point then will they be equipped to make a fair judgement of a company’s performance.

An emerging narrative.

The issue of sector maturity was perceived to be the key driver of the public’s mistrust of companies’ motivations for pursuing an ESG agenda: “ESG is still an emerging conversation…will the public still be so cynical 5 years down the line when it has matured?”. It was felt that the Net Zero narrative was a useful comparison, as ‘ESG’ could follow a similar route into the public’s consciousness and priorities as they gain a greater understanding over time. This was brought to life by some of the some of the anonymised sector-based examples of ESG initiatives that were tested in the research. An oil company pledging to be net zero by 2050 was assessed less much less favourably than a reality TV show only using pre-loved clothes through a season partnership with an e-tail brand. Our attendees noted that the overall environmental impact of a net zero pledge from an oil company was far greater, but that negative perceptions of the energy sector’s reputation impact the public’s rational assessment of ESG initiatives.

Being honest about profit and purpose.

The public’s cynicism about companies’ motivations comes down to transparency. When people see companies trying to lead with their environmental or social agenda, it does not ring true. More transparency should be introduced into the conversation: ‘Transparency tends to be quite refreshing, if you are honest in your goal to include ESG initiatives – make clear it can be better for business as well as the environment’. And from the perspective of investors, performance will always be the priority. The public expect businesses to focus on profit, and hiding behind social purpose will continue to make them think ‘what’s in it for you?’.

The gap in measurement, reporting and communication.

Desire for greater clarity in ESG measurement, reporting and communication was echoed by Green Finance leaders. Currently, auditing of ESG performance can be like a ‘random number generator’, and there was acknowledgement that sustainability reports are not designed to be accessible by the public. However, it was felt that a key solution to the challenge of complexity was implementation of sector standardisation. Communication of ESG actions and performance also needs to chime more with the public’s media appetites, with doubt that companies’ sustainability representatives have the necessary reach. This gave rise to the need for alternative voices, and whether influencers could be used more effectively to get the message across.

Politicisation of the ESG agenda is less of a concern.

Looking to the U.S, the politicisation of ESG investing and the weaponisation by US conservatives who object to companies’ stance on progressive issues has triggered fears of a similar trajectory in the UK. However, the feeling from Green Finance leaders was that many are too quick to say that whatever is happening in the U.S. will cross over to the UK, and that as a less politically polarised society, and the strong Government backing of the Net Zero agenda, following in the footsteps of the U.S. is unlikely.

The way ahead.

To move forward it was agreed that the ESG needs to stop being treated as a silo by companies, becoming ‘business as usual’ with the moral compass driving the agenda rather than the need for compliance. The mindset shift required within companies is that ESG is integral to futureproof their business, with reputation very easily lost as ‘how you act across your whole business does matter to people…and will increase in importance’. Greater transparency, a focus on the metrics and how purpose is communicated are all crucial to solving the Great Disconnect.