The path to attracting investors is paved with the bricks of transparency. When companies report their progress all data should be transparent, and ESG reporting is no different. In fact, transparent ESG reporting should attract investors even more than usual, because that data shows how a company is generating sustainable long-term value.
We spoke with Lauri Rosendahl, where he gave us insight on the importance of ESG reporting, establishing a guideline for reporting and how it builds up company value.
Rosendahl is President of Nasdaq Nordic and Nasdaq Stockholm, and Senior Vice President of European Cash Equity and Equity Derivatives within Global Transaction and Market Services. Since joining Nasdaq in May 2009, and up until March 2016, Rosendahl was the President of Nasdaq Helsinki.
Prior to Nasdaq, Rosendahl has more than 20 years of experience in the financial markets, having held several senior management positions within securities trading, equity research and investment banking with several banks and brokerage firms, including Deutsche Bank, ABN Amro / Alfred Berg, Carnegie and Kaupthing.
Christopher P. Skroupa: Why is it important for exchanges to offer ESG reporting framework and guidance?
Lauri Rosendahl: We believe sustainability as part of investing will only grow in importance in the future. Hence three trends:
1) Sustainable capital flows – better-run, more future-focused sustainable companies will be properly rewarded by the market, moving capital in the right direction.
2) More long-termism – ESG attracts longer-term investors, for example pension funds, foundations, real long-term savings, because it returns real value over a longer holding period.
3) Creating IPOs – Perception of unnecessary or burdensome regulation is keeping some companies private. A smart ESG standard could alleviate some of that perception.
Based on these and other dynamics like feedback from investors and listed companies and the growing awareness of global regulators, it’s clear to us running many exchanges that a smart and strategic process of monitoring, managing and reporting ESG data is really important. This is our way to help and commit to create better companies – and better markets – for years to come.
Skroupa: How do companies benefit from reporting ESG performances, and making them available to investors?
Rosendahl: ESG reporting is an increasingly vital part of the Investor Relation function, especially when reaching out to investors. Companies are already besieged with requests for ESG information, especially in the supply chain and RFP processes.
ESG reporting helps companies manage these expectations, and efficiently prioritize information requests. We believe that companies, and boards, who want to fully understand their long-term risk profile simply cannot ignore ESG factors any longer.
Companies will also gain competitive advantage. Companies with the expertise and resources to gather and report ESG data are, and will be, disproportionately winning contracts, customers, investors and media praise.
In addition, companies with adequate ESG processes in place will not have trouble finding and keeping talent, and they tend to be able to pay more for it.
As a bonus, internal company processes also become more transparent and efficient: Successful integration and analysis of “non-financial” data, and related exercises, such as materiality analyses, often lead to cost savings, better risk handling, organizational efficiency and new product innovation.
Skroupa: Why do institutional investors want the information, and how does it benefit their due diligence on company performance?
Rosendahl: As described by the UN Principles for Responsible Investment, institutional investors have recognized that ESG factors play a material role in determining return and risk. Especially value-destroying reputational risks need to be properly managed – e.g. issues like climate change, pollution, working conditions, employee diversity, corruption and aggressive tax strategies in a world of globalization and social media.
At the Society for Sustainable Value Creation in Sweden that I chair, with the biggest Swedish institutional investors as members, these risk aspects are continuously discussed.
I would argue that professional big investors, at least in our region, have already understood that incorporating ESG factors is a part of the fiduciary duty from investors to their own clients and beneficiaries. They are also concerned about the impact of short-termism on company performance, investment returns and market behavior.
Skroupa: How does ESG transparency create markets that may not exist right now?
Rosendahl: If only we knew the answer to that. However, some silent signals have been getting stronger and stronger in the past few years.
One example is the new trend not to study the footprint left by companies, for example carbon or tax footprint, but their handprint. The point of view is changing from passive avoidance of wrongdoing to active work for the good and, for example, solving global problems such as climate change.
One direction of this development is, naturally, impact investing. It is an investment approach that intentionally seeks to create financial return, lower risk and positive social or environmental impacts that are actively measured.
Also measurement of ESG factors is one thing that needs to be developed. On the ‘E’ – Environment – we are making good progress, but on ‘S’ and ‘G’, there is still a lot to do.
We are generally good at measuring performance, how well we do what we do, but not impact, what actually follows from what we do – and determining if we are doing the right things. There is often enough information available, but concrete procedures are missing, or they are still emerging. I am sure this will change in the very near future.
Rosendahl will be giving the opening remarks at the ESG Integration Summit at Nasdaq in Stockholm, Sweden on Aug. 29.