Abstract/Summary

In the modern world there is little doubt that private enterprise – investors and firms – is at a turning point over how these actors can best define and deliver value. In short, maximising shareholder value and short-termism are gradually giving way to sustainable and stakeholder value, and longer-term considerations. The Covid-19 pandemic has brought into sharp focus how economic activity requires a well-functioning society and environment. ESG has derived a real-life meaning during 2020 through Covid-19 1. In terms of the impact on private enterprise, the ‘E’ for environmental has been evident in reduced pollution levels and lower carbon emissions from negligible road and air travel. This unexpected reprieve has been startling in its effect, not least of all by encouraging the temporary return of wildlife into conurbations. From a social perspective, there has been concern about employee wellbeing and productivity for home-based worker populations, a loss of customers and, for some, a ramping up of potential client demand and a reduction in emerging innovations reaching existing or new customers. The ‘S’ also represents the test of resilience to business supply chains, whether they be national, regional or global. The demand on board governance to be agile and supportive of executive teams has crystallised priorities to ensure operational resilience. Risk management and mitigations have proved to be either adequate or lacking. Notwithstanding the disruption to businesses and people’s lives, organisational learning has helped make the business case for ESG. A growing number of institutions across the globe are advocating for a paradigm shift that recognises the importance of more sustainable investment and business models that deliver value to all stakeholders in the long-term. In the UK, government-led initiatives are pushing this agenda by developing legislative and regulatory frameworks and incentives. In July 2019, the UK government published the UK Green Finance Strategy 2 to “align private sector financial flows with clean, environmentallysustainable and resilient growth” and to “strengthen the competitiveness of the UK financial sector”. UK asset owners and asset managers now need to “comply or explain” with a new version of the Stewardship Code 3, which attempts to remedy the low levels of institutional investor engagement revealed in the first 10 years of code implementation. The new version has a much greater emphasis on ESG factors. For example, principle 4 requires systemic risks – including climate change – to be addressed by institutional investors. Principle 7 requires “the systematic integration of ESG factors into institutional investors acquisition, monitoring and exit decisions.” Consequently, there is growing pressure for private enterprise to not only take notice, but to act. So, what about small and mid-cap companies? Is ESG something they should be considering, given their size, resource-base and rate of growth? Is the London Stock Exchange 4 correct when it states that companies “don’t need to be big to report on ESG?” Do mid-caps consider ESG as more of a tool for managing risk and competitive advantage? Ultimately, how can small and mid-cap companies be best supported in advancing their ESG agenda? To answer the issues raised by these and other questions, the QCA and Henley Business School joined forces to examine the state of affairs on the Environmental, Social, and Governance (ESG) agenda for both small and medium-sized quoted companies, and a sample of investors. The study began by conducting 30 exploratory, in-depth interviews with companies and investors, and was followed by a survey developed, tested and distributed online to QCA associate companies and to investors through the data company YouGov. The survey returned 100 completed responses from companies and 50 from investors. Some 53% of companies had over 250 employees, and 47% had less than 250 employees. Among these, 47% had market capitalisations of £100 million or more, with 6% having over a billion pounds in market capitalisation. Just over half (52%) of the companies are located in London/the South East, and the remaining 48% in other UK regions. Some 17% traded on the London Main Market and 83% on the Alternative Investment Market (AIM). The companies surveyed cover a wide range of sectors and respondents held various roles: 30% were Chairs/non-executives; 54% were CEOs, CFOs or other executives, and 16% were company secretaries. In terms of investors, 92% invest in European (including UK) markets, 66% on London AIM, 60% in North America, and 50% on the London Main Market. Finally, 46% of investor respondents were fund or asset directors/managers/assistants, 16% were Chief Investment Officers, and 34% had other roles. These demographics and other sample information can be found in detail in Appendices 1 to 3. The remainder of this report is structured in seven sections examining, comparing and contrasting company and investor views on: organisation’s ESG awareness and knowledge (Part 1); internal accountability and external ESG drivers (Part 2); and ESG integration, purpose, strategy and constraints (Part 3); ESG disclosure, including communication, standards and information quality (Part 4), and the role of the QCA (Part 5). The report concludes and makes a series of recommendations (Part 6), and provides an extensive list of appendices with background data (Part 7).