Who is advancing ESG onto corporate agendas, and who is putting on the brakes – CEOs, boards or investors?

If you believe that investors are demanding that companies take action on environmental, social and governance issues (ESG), while corporate executives are resisting it, you may be surprised by the findings of a McKinsey & Co. survey of CEOs at companies participating in the UN Global Compact. McKinsey describes its findings in Shaping the New Rules of Competition: UN Global Compact Participant Mirror as well as in an October article in McKinsey Quarterly online titled “CEOs on strategy and social issues.”

“Chief executives around the world increasingly believe that they have a strategic rationale for taking on environmental, social, and governance issues,” according to the MQ article. (That’s not surprising, given that these execs lead companies that have already signed on to the UN Global Compact. ) CEOs feel pressure from increasing societal expectations – especially from employees and consumers.

But where do investors and corporate boards fit in this picture?

Turns out, investor short-termism ranks as a big-time barrier. Companies need a long-term horizon to invest in ESG, but shareholders demand short-term financial performance. And that leads to competing strategic priorities, which the CEOs ranked as the top barrier. CEOs on Strategy explains:

Shareholder demands for strong short-term performance, for example, compete with environmental, social, and governance investments that are longer term by nature. The absence of clear and consistent metrics that could relate such investments to (or correlate them with) investor returns exacerbates this conflict. In fact, fewer than one-fifth of the CEOs we surveyed believe that financial markets account for the way a company approaches environmental, social, and governance issues when they value it.

The survey also revealed gaps between what CEOs thought companies should do and what they actually do. Two gaps jumped out at me:

• 69% of surveyed CEOs believe that companies should “have the board, as part of its risk-management and fiduciary responsibilities, discuss and act on these issues.” But only 45% say that boards actually do this.
• 51% of the CEOs believe that companies should “embed these issues into investor relations strategy by incorporating them into discussions with mainstream financial analysts.” But only 31% say that companies do so.

Nonetheless, McKinsey sees promise in investment initiatives underway to encourage ESG activity. These include investment firms that support the UN Principles for Responsible Investing, pension funds that base investments on those principles, and Goldman Sachs’ Global ESG Framework. Still, McKinsey observes:

These initiatives still have to gain further traction – sustainability reports rarely highlight the most financially relevant issues, and investment initiatives and frameworks have yet to become part of the capital market mainstream – but current activity is promising.

What do you think? What are your views on these three questions:

* By demanding short-term returns, are investors part of the problem? Or, by pressing companies to fulfill ESG responsibilities, are investors part of the solution?

*And what about boards? Are they doing their job to discuss and act on ESG as part of their oversight role? Are they a positive influence or a constraint on company actions on ESG?

* Last but not least, what can all parties do to enhance the role of both investors and boards in encouraging companies to address ESG issues?