Investment funds that target companies with environmental, social and governance (ESG) policies have experienced record growth. Yet it is difficult for companies to know which ESG actions will affect their stock value. Although ESG rating providers focus on different ESG elements and the pricing of companies’ ESG actions is uneven, companies can take steps to influence how their ESG activity is rated.

ESG investing initially focused on excluding stocks of certain companies or industries from investment portfolios, and as the definition has shifted to focus on including stocks of companies with socially beneficial practices, the stock market has also evolved. Intangible assets such as intellectual property rights, customer data and software now account for 90% of the value of S&P 500 companies, up from 17% in 1975, according to companies that track this data. In the disconnect between market value and traditional business valuation models – which privilege tangible assets such as buildings, equipment and real estate – asset managers and rating agencies are looking for new ways to evaluate companies. As practices evolve, companies can take steps that give them “credit” for their ESG actions.

Before adopting an ESG policy, companies need to ensure that they are making a real commitment, as retail investors and pension plan intermediaries and investors increasingly scrutinize company actions. Many asset owners and investment managers are signatories to the United Nations Principles of Investment Management (UN PRI) and are therefore required to report on how ESG is integrated into their processes.

In the area of ​​governance, incorporating recognized best practices, including with respect to board composition and executive compensation policies, and expanding shareholder voting rights, can help companies improve their ESG rating. Asset managers often turn to leading proxy advisory and governance services organizations, Institutional Shareholder Services and Glass Lewis, for advice on assessing these issues. Companies can also use the shareholder voting mechanism to get feedback on whether and when to adopt ESG-focused policies.

Creating a separate report on the company’s commitment to ESG, instead of or in addition to adding ESG information to the 10-K, is another way to present the company’s commitment to ESG objectives to the investment community. Although not all analysts currently review these reports, due to limited resources and because they use the same data as other analysts, this practice is ripe for change. The widespread adoption of machine learning and artificial intelligence tools makes it easy for analysts to scrape the internet and collect more data.

In addition to changing policies, taking care to improve and protect a company’s reputation can also improve an organization’s ESG score. Although social media activity, sanctions and executive service on the boards of organizations that support ESG objectives, for example, are not assessed when analysts perform an assessment, they can be integrated into an overall ESG score. ESG data science companies aggregate information from public sources and stakeholders around the world to determine ESG risks.

The lack of standardization of ESG ratings makes it difficult to draw direct links between corporate actions, ESG ratings and shareholder value, but the growing attention to ESG in asset management and investment communities investors is likely to increase the value of ESG activity. Building an ESG infrastructure will help companies capture value as the investment community and market “catch up” to the mainstream adoption of ESG by the corporate world.