We’ve got bigger fish to fry…

For the last two years, rising inflation, the war in Ukraine, and higher wage growth have put many businesses in a bind. While they were working towards improving the sustainability of their business and adopting new ESG regulations, they suddenly had to face much more immediate pressures on their profitability. To me, it seems as if ESG topics have taken a bit of a backseat while companies have bigger fish to fry. This is not just an understandable development; it is also something that can be observed more broadly. But it is something that allows investors to differentiate between short-term and long-term oriented management.

A team of researchers from Bath, UK, and St. Gallen, Switzerland, examined the efforts of company management on advancing their ESG credentials while facing competitive pressures. The basic result was that companies that operate in an environment where their domestic markets face higher competitive pressures and lower margins tend to spend fewer resources on ESG.

In making the trade-off between focusing on their operational challenges in the short-term and investing in ESG measures that may improve performance in the long-term, they prefer short-term operational measures and those ESG measures that require less investment of time, money, and other resources. Similarly, if competitive pressures in a market increase because of the entrance of new competitors (in the study, they looked at Chinese companies entering a market) the focus of management shifted away from ESG toward managing these competitive pressures.

That might seem reasonable at first because resources are limited, and management has to set priorities. But what is interesting is that companies that operate in areas that consider climate action more important are less sensitive to these competitive pressures. And companies that have more longer-term shareholders do not shift their focus away from ESG that much. Instead, these companies are less sensitive to short-term competitive pressures and instead continue to invest in more sustainable business practices with the aim of creating long-term value for their shareholders.

This behavioural pattern allows investors to assess how long-term oriented company management really is. We know that companies run by more long-term-oriented management outperform in the long run. But every CEO will claim that she and her team are working towards long-term value creation. Looking at how they reacted to the rising pressures of the last two years and what they did in the ESG space provides an indication if they really are long-term oriented or if they just claim to be.