21 Sep ESG is Fast Becoming the New Normal
ESG is Fast Becoming the New Normal
By James Byrne – Sustainable Business & ESG Consultant, CvCC
With movements like Black Lives Matter, and the Covid-19 crisis directly impacting people’s lives and livelihoods, the agenda around how companies are governed has never been hotter according to KPMG. Perhaps as a reaction to the realisation that ESG risks really do impact the bottom line, investors large and small are moving money from dirty or controversial industries such as coal and oil and into companies and sectors that have an active grasp on how ESG considerations actually future proof returns. 2020 which has been short on good news could in hindsight be a real turning point for sustainable business and investing practices. This year has seen inflows to ESG focussed funds of $71.1bn between April and June according to the Financial Times. In Europe, ESG funds represented nearly a third of all fund sales in Q2, with sustainable funds attracting 63% more new money than traditional funds within the same period. Even if we exclude the recent effects of Covid-19, sustainable funds still outperformed the wider market due to their reduced exposure to volatile oil and coal markets.
An interesting and important benefit of doing business the ESG way is that it protects companies and their employees from economic downturns regardless of their exposure to oil as “ESG is one of the most reliable ways to measure resilience from bankruptcy”, according to a study cited in BusinessWire by Brandometry, a consultancy that helps corporations understand and brand leverage of intangible value. ESG is seen by Brandometry as one of the ultimate intangible value drivers, which makes it pretty important in an investment world governed increasingly by populist and social trading/investing (think TESLA and its devoted shareholders regardless of profit, or Apple’s dominance despite great competition!). To reinforce this point, a recent study by deVere group found that 77% of millennial investors consider ESG concerns as even more important than actual returns, marking a real shift in how workers perceive businesses and capitalism generally.
At the sharp end, the numerous ways businesses and organisations are tackling social and environmental issues have become front page news, as workers increasingly demand a fairer share of economic output and a more equitable place in society. Perhaps for the first time, issues like equal pay, gender pay gap reporting and diversity reporting have hit the mainstream, with ESG metrics becoming mandatory in many instances. ESG metrics have been around a while, yet only recently have companies, and the public, started to really talk about them with the same gusto as they do about simply reducing carbon emissions or using renewable energy. The social aspects of ESG have therefore been side-lined for many years by environmental targets, driven by the Paris Agreement and other treaties. Yet social tensions and a greater public awareness of governance issues, and their effects on real workers, have now evolved the debate, in part thanks to Covid-19, to a more comprehensive narrative on what makes a business or indeed a society, actually sustainable. In terms of measuring a company’s ESG performance, there are currently over 600 ESG rating systems globally, with 72% of corporations using some form of ESG metrics in 2018, according to SustainAbility’s ‘Rate the Raters report 2019’. In January, the World Economic Forum hosted at Davos, the topic of sustainability was hailed as “the star” of the summit, with ESG the major buzzword mentioned in almost every interview with Institutional Investors and Fund managers. 140 of the world’s largest companies expressed an interest in helping create an international ESG metrics framework at the summit, with the WEF forum insisting that companies’ ESG strategies “must stand up to modern scrutiny”. As Klaus Schwab, Founder and Executive Chairman of the World Economic Forum said at Davos, “For stakeholder capitalism to become a reality, we must be able to measure companies’ performance on environmental, social and governance metrics”. This corporate ESG focus, is “just getting started” according to Julian Birkenshaw from London Business School, who spoke at the summit, and this will inevitably have an effect further down the investment chain as investors seek to invest in companies that have ESG metrics and sustainability principles at their core. Julian told Forbes Business Strategy Review in January that “Human capital is at least as important as financial and technological capital”. This assertion presents a positive challenge to all companies wanting to hold on to capital in an increasingly demanding and discerning investment environment. Many smaller companies still don’t think that ESG is relevant to their operations, however the increasing use of the UN sustainable development goal (SDGs) to guide development of all scales, both public and private, means that even smaller businesses that don’t tackle their own environmental, social and governance challenges, will be left behind sooner rather than later. They will be deserted from both sides, the investors/banks seeking more predictable future proof returns, and by the consumer, who is shifting ever faster to products and services from greener, more socially aware brands. In the next post, we will look at some of the top performers in the Sustainalytics ESG rank, as highlighted by Brandometry to look at what makes them successful at integrating ESG into their organizations and how other brands can emulate them.
KPMG Media Pres Release Sept 2020-
FT ESG Investing News-
Business Wire- 2018 – Study – ESG White Paper (Brandometry)
sustainability Consultancy 2019 Report-
Forbes – Business Strategy Review Jan 2020
WEF Forum 2020 (Davos)