By Michael Haas and Alex Kotsopoulos
In today’s rapidly changing business climate, attention to environmental, social, and governance (ESG) initiatives is becoming increasingly critical to long-term competitive success. More companies are providing formal ESG reports to fortify company strategy, attract consumers and investors, and retain talent. It is a business dimension that offers a growth opportunity.
Since 2018, smaller publicly traded companies have increased their ESG reporting efforts. Most recently, ESG reporting by the bottom half of the Russel 1000 Index increased from 49% to 68% between 2020 and 2021. This growth demonstrates that stakeholders and investors are interested, and demanding in some instances, ESG-related disclosures to better assess the companies in which they are investing.
Thus, ESG reporting – driven in part by responsible investment practices – is increasing in the middle market in significant and measurable ways.
According to RSM’s latest U.S. Middle Market Business Index: Environmental, Social, and Governance Special Report, 70% of responding companies have formal plans or strategies regarding ESG initiatives, up from 66% for the comparable period a year ago. Furthermore, 88% of the companies provide external reporting on their ESG performance, a statistically significant increase from 77% the previous year. Add to that, 69% of companies now have a dedicated senior executive whose primary responsibilities include establishing and achieving a vision for ESG. It is becoming clearer that ESG reporting is gaining traction.
The mechanism by which middle market firms are compelled to integrate ESG into their organizations and report on ESG factors is somewhat different than larger public companies. Middle market firms, who are more likely to be suppliers of goods and services to larger companies, are increasingly being required by their customers to disclose ESG data to enable the larger, downstream companies to report on supply-chain-related impacts.
Millennial consumers now represent the largest segment of the labor force in the United Sates. They have been, and will likely continue to be, major proliferators of ESG data consumption. According to MSCI ESG Research LLC’s 2018 survey of high-net-worth millennials, 87% considered a company's ESG track record an important factor in making investment decisions, and a Morgan Stanley survey found that 95% of millennials were interested in ESG investing.
Preferences regarding sustainability and other ESG initiatives have expanded well beyond the investment and financial arenas. Consumers today are increasingly concerned about the sustainability aspects of the products and services they buy, which can be evidenced by the growth in sustainability product or service standard ecolabels across numerous industries and product categories. Businesses, including middle market firms, are increasingly elevating sustainability aspects to differentiate their products and services in a competitive marketplace.
Companies that integrate key ESG initiatives into core business strategies can achieve real value for the organization. In addition to addressing stakeholder concerns and helping surrounding communities with meaningful environmental and social initiatives, through ESG implementation and reporting, companies can glean stronger competitive positioning in the marketplace, stay ahead of disclosures and proposed regulations, attract investors, increase appeal to consumers, and attract much-needed talent. All these elements impact a company’s marketplace stature, profitability, future growth prospects, and long-term success.
While ESG efforts can deliver value to a company’s surrounding communities, organizations can also realize other key benefits:
Michael Haas is an industry senior analyst with RSM US LLP, and Alex Kotsopoulos is a partner, ESG advisory, with RSM Canada LLP.
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