Many of you will have read corporate sustainability reports or seen press releases from large companies who have set sustainability and climate change goals and published ESG-related data in 2021. Investors, regulators, and the broader public are exercising greater scrutiny of corporate sustainability efforts, calling out what they perceive as greenwashing. Much of this scepticism is founded on concerns that companies may be using disclosures and sustainability-related labels on products and services as a marketing tool to appear more proactive on those issues than they truly are. I strongly believe that the pressure on corporates and governments will increase to publicly disclose live data beyond long term goals such as “Net Zero” by 2032. The investing public and financial institutions want to see annual progress to achieving these realistic targets. They want to see the actual steps companies are taking to achieving these goals through consistent presenting of milestones towards these goals.
Investors are putting real pressure on their portfolio companies to not only provide ESG Sustainability Annual Reports but also to demonstrate real progress towards these goals and are making significant structural changes in their portfolios. For example, BlackRock anticipates that 75% of its corporate and sovereign assets will be in issuers with science-based net-zero aligned targets by 2030. Another example is that of 500 Start-ups, one of the largest Southeast Asia-based venture capital funds implements ESG screening & monitoring across their portfolio which includes unicorns like Grab, Carousell, Bukalapak & Carsome[1]. Investor adoption of ESG ratings for portfolio management has accelerated reporting globally. ESG investments represent a shift toward supporting companies that consider long-term sustainability as part of their operations, while also acknowledging the risks of unintended outcomes that could happen if an organization were to fail to take ESG factors into account.
Investors need to consider the following when evaluating the ESG strength of an investment:
Investors need to review the actions taken by companies surrounding current most pressing issues such as pollution (i.e. oil spills, release of toxic chemicals, greenhouse gas emissions), use of environmentally-friendly products, implement circular economy concepts for waste management, organic components in daily operations, land use and how operations contribute to land conversion, waste generation and disposal, and the exclusion of activities like fossil fuel extraction, animal testing, nuclear energy, genetically-modified organisms, palm oil and tobacco growing, among others.
Many companies already use technology to collect and report this data and most companies already report this data to regulators such as the Environmental Protection Agency (USA) and Environment Agency (UK). Much of this data is in quantitative formats and can be used to present the data for reporting frameworks as the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP). Selecting the appropriate framework is very much sector driven and the perceived maturity of the reporting organisation (see diagram above). ESG reporting frameworks are designed to meet the needs of their intended audience. This makes them weak at addressing the needs of the other groups. For example, governments cannot effectively use the ESG reporting frameworks designed for investors. Likewise, the ESG frameworks designed for governments cannot be used by management. Frameworks provide a structure for common reporting and benchmarking but require consolidation for them to become meaningful and useful for all stakeholders.
Data in this domain can be subjective and much of the data is qualitative. Social includes community outreach and support, labour conditions of employees and workers involved in the supply chain, diversity in the workplace and how that is encouraged during the employee selection process and retention/promotion efforts, community development, gender aspects, occupational and community health and safety management, and the exclusion of activities like gambling, controversial weapons, alcohol, and adult entertainment, among others. The use of sanctioned materials used by a company, for instance, illustrate the importance of supply chain working conditions. By and large this data set is open to subjective judgement and requires rigorous auditing and assurance.
Data collection and assurance includes aspects like the composition of boards of directors, the existence of potential conflicts of interest, transparency about policies in place, application of codes of ethics, anti-corruption provisions, grievance mechanisms, adherence to company values, reporting arrangements, norms-based screening, and cybersecurity risk management procedures, among others. The data sets are a mixture of quantitative and qualitative data and require companies to invest heavily to not only assess where they are in respect of their chosen reporting framework but ensure that they can report their progress annually.
Companies with a strong ESG track record instil a sense of confidence and belief in investors, employees, suppliers, and business partners. This trend is likely to intensify as the new generations that grew up with greater levels of social and environmental awareness, such as Gen Y (Millennials) and eventually Gen Z, become involved as investors in the stock market.
Competitors that fall behind in upholding the ESG factors that are increasingly important to investors, the government, and society, risk facing a critical business risk. With a growing gap between the values of those stakeholders and the business practices of such companies, could encourage many stakeholders to look for opportunities to work with and invest in companies with better ESG records.
Corporates are required by their stakeholders and customers to move beyond setting long term sustainability goals and to be able to demonstrate with ongoing regular evidence that they are moving to Net Zero. Our future generations need us to mitigate and repair the damage of 200 years of industrial development through developing technologies that provide insight into our impact and enable us to make sustainable decisions now and for the future.
Nadeem Shakoor, COO, ESG Disclose
[1] *Sources: Reuters, Deloitte, UNPRI research
