Where are we heading with ESG?

Article extracted from: www.int-comp.org


We should all be aware of the impact of humankind on our planet: climate change is here, its effects are exponential, and it is causing – and will continue to cause – an existential human crisis. The evidence is plain. We cannot deny the situation exists.

But why is it only now that it is on the corporate agenda? Or has it been on the agenda for some time, but is only just coming to the attention of a wider audience?

The main reason is that climate change is no longer a niche interest. Individual and corporate investors are moving their focus to those enterprises, corporations and other organisations that promote or have adopted longer-term sustainability.

Is short-termism therefore a thing that will be consigned to ‘lessons we have learned’?

Probably not, but if the trend continues, longer-term views and ambitions will overtake short-term, ‘at any cost’ profitability, because appetites will change. Environment and social responsibilities will win out.

Let us not just focus on the ‘E’ of ESG. True ESG reflects upon environmental issues, social factors and holistic firm-wide governance, instead of siloed, separate management and control. Focus areas could include:

  • Environmental: waste production and handling, use of resources, carbon neutrality, sustainable impacts, etc.
  • Social: human rights, social justice, human capital management, anti-bribery and corruption, etc.
  • Governance: management by leaders, rights of stakeholders, impacts of broader board governance, political allegiances, etc.

Are there any ESG performance indicators?

Simple performance indicators can give a barometer check on the acceptance of ESG in your firm.

  • How engaged are our people? Can we measure this through employee satisfaction surveys? What questions could we ask?
  • What about local engagement? How do we support local causes, and how does this respond to our peoples’ interests and concerns?
  • How effective are training programmes in informing about bribery and corruption? Are they even in place?
  • Do we have our own corporate human rights policy? Do all stakeholders support and buy in to it?
  • Do our suppliers agree to and comply with our ESG goals and ethos?
  • Do we produce credible and auditable sustainability reports?
  • Do we monitor and amend our environmental and social performance if needed?
  • Do we have a true handle on the need for climate risk identification and disclosure?
  • Have we a target to aim for? For example, greenhouse gas emission reduction targets are achievable – but ongoing compliance monitoring must then be established.

Why now?

The simple answer is because of the move towards greater regulatory scrutiny. We have seen the inevitable acronyms emerge (CSRD, SFDR, TCFD, etc.) but these might just be the start.

Prior to COP26 in Glasgow, the UK HM Treasury proposed new rules aimed at financial firms and listed companies:

  • obliging them to produce net zero transition plans, and
  • requiring articulation of the ‘gold standard’ plan, mitigating the risk of greenwashing.

There has been criticism from activists, in that these targets are not legally binding, and the economics are that harmful enterprises are still being supported. The proposals are also focused entirely on the private sector, and to be truly successful the public sector needs to be included.

The reality is that about 40% of private finance is committed to these ‘carrot’ initiatives, but the regulatory ‘stick’ might follow in the future.

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