The question to executives and entrepreneurs is not whether they can afford ESG at all. It is: how can ESG be an opportunity to communicate corporate performance for the future? Obermatt CEO Dr. Hermann J. Stern explains in his keynote speech at the May 18, 2022 Zurich Board of Directors Conference of the University Zürich Europa Institute how this can be done.
Practically all ESG reporting and ratings focus on non-financial indicators to determine how well the company will be positioned in the future. A positive rating ends up being more about doing well than it is about doing good.
Financial indicators themselves are highly problematic. Profit, the most important figure in financial reports, deducts investments for the future. Those who invest for the future are penalized with lower profits. What is rewarded is cost-cutting. However, a focus on cost-cutting harms companies in the long run, as we already proved in 2017 and published in the Swiss Neue Zürcher Zeitung NZZ on 22 April.
ESG is mainly about metrics for the future. It is, therefore, in the interest of the company to present these important facts as transparently as possible. What is the best way to do that?
The obvious solution is to use ESG ratings. However, they are unsuitable for this purpose, because they are based on values that do not correspond to those of the company itself. Even worse, each ESG rating agency has its own mission, so agencies will never agree on a company’s rating. Already today, ratings are completely different for the same company. Finally, ESG ratings are a black box, and the agencies do not disclose the calculations that form a rating, for commercial reasons. Supervisory and administrative boards can, thus, find themselves in the unpleasant situation of not being able to explain a deterioration in their ESG rating to their investors.
Obermatt recommends defining and disclosing your own corporate ESG rating. In other words, an ESG rating that reflects the values and goals of your company. After all, investors invest in the company if they share its mission and strategy. Shareholders need to know what is important to the company. The same goes for the employees and the customers. While a company specific rating is not comparable with those of other companies, it does reflect the strategic goals of the company and their achievement. It reflects the priorities, strategies and programmes of the company and how it is performing with respect to them.