It's Not Just a Matter of Financial Indicators

IN ORDER TO EXCEL, COMPANIES MUST BE ABLE TO MANAGE ESG (ENVIRONMENT, SOCIETY, GOVERNANCE) AS WELL AS SALES AND EARNINGS. IN FACT, NONECONOMIC COMPETITIVE ASSETS ARE BECOMING INCREASINGLY IMPORTANT FOR REPUTATION AND THE BOTTOM LINE

by Leonardo Etro
Translated by Alex Foti

What makes a company excellent? Until relatively recently, economic and financial results were enough to give an assessment. Times have changed. We live in a world where there is a constant drive to reduce market information asymmetries. We increasingly hear about market integration, in order to reduce barriers to investment. This is also the objective of the Capital Markets Union, which the EU is taking steps to implement. When we talk about deeper integration and the reduction of transaction costs, we are talking about reducing information asymmetries: all investors must have the same opportunity to access a deep and updated dataset, and, on the basis of the information found there, express an opinion on the performance of a company or any other economic entity operating in the market. This is why it is increasingly difficult to obtain above-average returns on the market. While this is beneficial for investors, who are able to approach investment more consciously and securely, the effect on companies cuts both ways, because information can influence investor perceptions in real time: think of what recently happened to Facebook.
 
Thus the variables for measuring a company's performance multiply themselves, and all are capable of affecting the company’s image and reputation, and consequently its economic results. So, rather than thinking about what the benefits are of implementing ESG (Environmental, Social & Governance) activities, companies need to reflect on the highly likely cost of not implementing them. Consumer judgment, also carried out through the media, has come to encompass all aspects of a company. Consumers have changed; they have become more educated and more sensitive to issues, and whether they like it or not, companies must change to manage and exploit the new trend. This is why ESG becomes the corporate tool of choice to provide adequate answers to an increasingly demanding public of consumers or investors. Companies who fail to do so are in danger of paying dearly for their inability to adapt to an already established market change.

In a world where companies are increasingly present in the lives of individuals and where individuals feel increasingly threatened, competition risks anything that can guarantee an additional sense of security: management of environmental issues, management of social issues, an enlightened corporate vision embracing a broader base of stakeholders. Italy has many companies that are economically competitive, but few know to manage an ESG strategy. The few that do are the best companies in their respective industries, both in terms of economic and financial performance, and in terms of corporate reputation as measured by the strength of the brand. This means that in order to excel, companies need to adapt to the requirements of the new market new dynamics. Lagging behind would force Italian companies to fight in a market arena that is beneath them, where they are very likely be defeated on price. We must steward our intangible competitive assets as much as possible, because their value is becoming increasingly tangible.