For decades, companies avoided taking positions on the most pressing issues of the day, such as global warming, race and gender equality, or state voting rights. Publicly traded firms were supposed to generate shareholder returns, not court controversy.

Today, companies are expected to address not only shareholders’ needs but also those of employees, customers, communities in which they operate, and the environment. Companies with strong values and robust environmental, social and governance (ESG) programs are more likely to attract and retain top talent, enhance their reputation with investors and customers, and boost shareholder returns.

2020 brought greater attention than ever before to ESG issues. Climate change, racial inequity, and social unrest became defining issues in the United States and Europe. More often than ever, investors recognize them as potentially material risks to a company’s ability to drive long-term value creation. Corporations also face tougher regulations on climate, data privacy, and social issues from the European Union and other governments.

Going mainstream

ESG has become a mainstream business issue. Data now moves across the globe in an instant. Corporate reputations rise and fall not just on quarterly earnings but also on what a company says or doesn’t say about pressing social and environmental issues.

Millennials and women account for a rising share of global investors. Research by MSCI shows millennials alone could place up to $20 trillion into ESG-focused investments in the United States over the next two to three decades, which would roughly double the size of the American equities market.

As ESG research and analytics improve, investors have greater insights into potential risks and opportunities. Blue chip institutional investors like Goldman Sachs and BlackRock have built ESG into their investment theses and valuation models.

ESG has become a mainstream business issue.

Socially responsible investing, which first emerged in the 1960s as a niche asset class, is now a fixture in the culture of finance. In June 2019, ESG funds held about $800 billion in assets under management, nearly triple the amount from a decade earlier, according to the BlackRock Investment Institute.

“As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further,” BlackRock CEO Larry Fink recently wrote in a letter to CEOs. “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.”

Action, not just words

Driving ESG performance and transparency presents challenges for companies. These range from keeping up with an ever growing set of reporting frameworks to managing sensitivity about sharing potentially unflattering information. To be successful, companies need to be transparent and perform well across a range of environmental, social, and governance issues relevant to their business.

To this end, investors, customers, and other stakeholders increasingly want companies to embed ESG into their strategies, core business operations, and supply chains. Most important, each of these cohorts expects companies to generate meaningful ESG impact over the long term. This includes committing to science-based targets for environmental impact and third-party validation of progress toward ESG goals.