The benefits of good governance

When FTSE Russell, London Stock Exchange Group's index and data business, launched its FTSE4Good index series in 2001, the environmental, social and governance (ESG) operations of companies were not usual investment considerations for institutional investors.
ESG has moved from an ethical consideration to an economic oneESG has moved from an ethical consideration to an economic one
ESG has moved from an ethical consideration to an economic one

This is no longer the case and by 2014, research from the Global Sustainability Investment Alliance showed that more than a third of professionally managed assets globally incorporate ESG approaches, representing more than US$20 trillion of assets under management. It is fair to say that ESG has moved from an ethical consideration to an economic one.

So why the big change in attitude? Companies are coming under increasing scrutiny on topics such as human rights, health and safety, corruption and transparency, with investors increasingly looking at these criteria to draw conclusions about the quality of companies’ management teams, allowing them to identify their exposure to business risks and assess their ability to leverage business opportunities.

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Benefits for companies (and their long-term investors) are manifold; from recruiting and retaining top talent, avoiding costly or brand impacting controversies, identifying energy and material operational resource efficiencies, or developing new sought after products solving environmental challenges.

As a result it is becoming more and more important for companies and other issuers to communicate with investors clearly and accurately on these aspects of their performance.

Despite this, there is still a lack of consistent reporting of ESG data and confusion among companies about how and what they should report in order to tap into this potential investment inflow. That is why last month, London Stock Exchange Group launched guidance to help companies navigate what can be a confusing landscape, providing working examples of how to report ESG data.

The need for issuers to respond to this demand for information is clear. By disclosing the information that investors want, issuers can provide reassurance that they are effectively managing business risks and identifying opportunities. There is growing evidence that issuers that publish high quality information on the longer-term implications of ESG for their business are more likely to attract and retain long-term investors. These issuers can also reduce the cost of capital and increase their ability to raise new capital to finance sustainable projects.

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While there is a compelling case for companies strengthening their reporting on ESG issues, research suggests that chief executives tend to overestimate their success in communicating with investors: in a recent study, over a third of companies believed they were able to quantify the business value of sustainability initiatives accurately, yet only 7 per cent of investors agreed.

The ESG dimension is not something only larger companies need to concern themselves with. When a small or mid-sized issuer understands the value of ESG data and reporting, investors’ ability to see the full picture of its performance and prospects is enhanced just as much.

London Stock Exchange Group is the global market of choice for such smaller companies. Over 1,000 of them are quoted on AIM in the UK and Italy; more than 460 belong to our ELITE programme for dynamic private companies; and we also enable the issuance of corporate bonds by smaller companies.

London Stock Exchange Group sits at a critical junction between issuers and investors, with an important role in supporting global sustainable economic growth.

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With more than 2,700 companies on our markets, we seek to recognise and encourage dynamic companies that will drive long-term economic prosperity: helping them improve the sustainability of their business and enhance their ability to raise capital for growth and employment creation.

At the same time, through FTSE Russell, we seek to support investors in making informed and sustainable decisions; providing them with the information and tools they need to assess issuers’ strategy, performance and governance.

We believe that it is time to move beyond the debate around mandatory versus voluntary reporting.

Issuers should now focus on innovation and relevance in the information they provide to investors – and ESG is a critical part of that picture.

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