Navigating Sustainability: How to Engage Investors on ESG Amidst Backlash and Challenges

Engaging investors on ESG has become increasingly challenging amidst political backlash and regulatory complexity, highlighting the need for transparent communication, rigorous reporting, and tailored engagement strategies. Companies like Unilever exemplify the importance of balancing achievements and challenges while leveraging third-party verification and harmonized global standards to build investor trust.

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With global ESG assets predicted to reach $40 trillion by 2030 despite the current political change of winds, engaging with investors on the topic is becoming a strategic priority for companies worldwide. Institutional and retail investors increasingly seek assets that offer both strong returns and a reduced environmental footprint. Regulations, especially in Europe with the Corporate Sustainability Reporting Directive (CSRD) and the Green Taxonomy, are also fostering an environment where external ESG communications must comply with standardized methods. Meanwhile, debates are intensifying over the inclusion of ESG considerations within the fiduciary duties of executives and investors.

At the same time, a significant number of banks have been withdrawing from the Net Zero Banking Alliance following political shifts, such as Donald Trump’s re-election. BlackRock has recently decided to move away from using the term ESG, citing its “weaponization” amid rising backlash. As a result, engaging stakeholders on ESG has become highly challenging, presenting complex issues for public and investor relations.

Reporting on a Company’s Environmental Footprint Is Difficult

Consumer goods manufacturer Unilever’s ESG communication exemplifies the challenges of reporting. The company is based and primarily listed in the UK, but also in the Netherlands and the US. This requires the company to comply with three distinct extra-financial reporting frameworks, including the European Sustainability Reporting Standards (ESRS) from the Corporate Sustainability Reporting Directive (CSRD). 

Companies often address this complexity by developing centralized reporting systems that aggregate data from all subsidiaries, ensuring compliance with the strictest regulatory requirements while accommodating less demanding local reporting needs.

This approach is challenging enough, but Unilever also highlights in its annual report that its extra-financial data – especially scope 3 emissions – are subject to future revisions as estimation methodologies evolve. 

This issue is not unique to Unilever. Measuring emissions often involves approximations, particularly for scope 3 emissions upstream and downstream from company boundaries. For instance, around half of Unilever’s full greenhouse gas footprint stems from indirect consumer use of its products, such as water for showers when using shampoo. These emissions can only be estimated using standard levels.

Unilever has made significant strides in reducing its environmental footprint. However, its example underscores the difficulty of accurately communicating such progress to stakeholders and the potential for manipulation by less scrupulous actors through greenwashing. To mitigate this, Unilever employs third-party verification, with PWC providing limited assurance that its reporting meets regulatory standards. 

Even PWC acknowledges: “The absence of a significant body of established practice on which to draw to evaluate and measure non-financial information allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time.”

The European Corporate Sustainability Reporting Directive (CSRD – the leading EU initiative for environmental transparency) aims to address these challenges by offering templates and instructions for reporting. However, it stops short of detailing specific measurement methodologies. Companies must define their systems and methodologies independently. While some disclose calculation details, this is nearly impossible for a global company like Unilever, which sells thousands of different products across continents. Estimating scope 3 emissions, particularly from final consumer use, remains a persistent challenge. In line with the Greenhouse Gas Protocol, a voluntary standard for measuring carbon emissions, Unilever excludes these emissions from its carbon neutrality targets but remains transparent about their scale.

More on the topic: ESG Investing: A Rising Trend Amid Greenwashing Concerns

Key Considerations for Effective ESG Engagement

To engage investors effectively in this conflicted environment, companies must adopt a transparent and balanced approach. Communicating both achievements and challenges candidly is crucial. While greenwashing may offer short-term gains, it erodes long-term trust and exposes companies to reputational and regulatory risks.

Collaborating with third-party verifiers, as Unilever does with PWC, enhances the credibility of ESG reporting. Limited assurance, while not exhaustive, signals a commitment to scrutiny and builds investor confidence. Companies should aim to harmonize their reporting practices with global standards, even when navigating diverse regional requirements. Frameworks like the new sustainability accounting rules, edited by the International Sustainability Standards Board (ISSB), aim to provide consistency and comparability across markets. However, they may face compatibility challenges with local regulations like the CSRD. A key issue is double materiality, which considers both financial impacts on a company and its broader social and environmental impacts, adding complexity to alignment efforts. The CSRD makes double materiality reporting mandatory, creating potential conflicts with frameworks like the IFRS, which focus primarily on financial materiality.

Investors are increasingly demanding granular data on ESG metrics. Asset managers seek detailed insights into scope 1, 2, and 3 emissions to evaluate portfolio companies’ full environmental footprints. Clear methodologies, transparency about uncertainties, and actionable plans to address gaps can strengthen investor relations and foster trust.

Strategies for Engaging Investors on ESG

To effectively engage investors and analysts on ESG matters, companies can employ several strategies. 

Special events, such as dedicated ESG investor days, offer a platform for in-depth discussions about sustainability goals and progress. These events create opportunities for two-way dialogue, where companies can showcase initiatives and gather valuable feedback. 

Companies such as Sanofi, Seb or Maersk have organised such events. They notably feature comprehensive presentations on their progress toward carbon goals, explorations of supply chain sustainability initiatives, and interactive Q&A sessions. Investors benefit from the transparency and depth of information, which can significantly bolster confidence in a company’s long-term ESG commitments.

Providing dedicated ESG documentation, such as detailed sustainability reports or targeted whitepapers, also meets the analytical needs of investors. Regular calls or webinars focusing on ESG topics enable real-time interaction, allowing companies to address investor questions and build trust. Tailored presentations that highlight key metrics, challenges, and future plans further reinforce a company’s commitment to sustainability.

Addressing the Limitations of ESG Engagement

While these strategies are effective, they are not without limitations. Information overload poses a significant risk, as investors may struggle to process extensive datasets or overly detailed reports. Frequent updates, while necessary, can lead to declining attention and engagement, particularly if the information fails to demonstrate clear progress or relevance.

To mitigate these risks, companies should focus on concise, actionable insights aligned with investor priorities. Streamlined communication that balances transparency with clarity ensures that stakeholders remain engaged without feeling overwhelmed.

As ESG continues to shape the global business landscape, companies must refine their engagement practices to navigate this complex environment successfully. Transparent communication, rigorous reporting standards, and tailored strategies for investor engagement are essential. 

Companies like Unilever and Microsoft exemplify the potential of effective ESG practices to align business objectives with investor and societal expectations. By addressing challenges proactively and embracing innovative engagement methods, businesses can build trust and position themselves as leaders in sustainability.

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