While corporate attention to Environmental, Social, and Governance (ESG) issues is growing across the globe, this domain is still considered a fringe one by the corporate world. ESG is often viewed as a box to be checked to satisfy investors and is seldom integrated into the core strategy, performance management, and operations of a business. It is time we move past the debate around whether the surge in ESG interest a fad is so that we can focus on the bigger challenges that lie ahead.
ESG is a business issue
ESG issues have a material bearing on the long-term performance of a company. One of the clearest examples of this is climate change. The risks borne by the planet through climate change equally affect the businesses that exist within it — and investors, a crucial corporate stakeholder, are heeding the call for alarm. For example, Larry Fink, the CEO of Blackrock, as someone with an extraordinary stake in the success of businesses at large, declared earlier this year that risks from Climate Change are bigger than the 2008 financial crisis. Following this, through its voting action recently, Blackrock penalized 53 of its portfolio companies over climate concerns. Blackrock is not just following a fad; the company is responding to material business risks associated with this ESG issue. After all, based on a Blackrock report released in 2019, climate inaction entails significant economic damage. While being particularly urgent, climate change is only one of many ESG issues that affect business performance. Hence, investors across the board are incorporating them into their capital allocation decisions as seen in Figure 1. Additionally, COVID has only accelerated the ask for ESG embeddedness into portfolios and corporate behaviour by serving as a reminder of the materiality of ESG issues, particularly the well-being of people and employees, to business success.
Figure 1: Firms with Responsible Investing policy| Source: Russell Investments
Acknowledging the business value of ESG is only the tip of the iceberg!
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Much like we have with climate change, the more time we waste perpetually debating the validity of the premise, the less time we have to deal with the issues it presents, or the solutions to those issues. Incorporating ESG is a crucial task for corporations, but one that is also riddled with challenges.
In an interview with AMNIe, Christie Stephenson, a UBC Social Finance instructor and professional with over 20 years of experience in the ESG domain, shared that there are various terminologies within the Sustainable Finance space; and that there is significant inconsistency, even amongst mainstream entities, in the understanding of these terminologies. She adds that the industry needs to shift its focus away from labels and toward actions. Furthermore, there are many standards and frameworks around the monitoring and evaluation of corporate ESG performance and measuring and communicating the right data to investors is imperative.
Know your “customer” so you can move to action
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As Christie adds, corporations cannot afford to wait for the harmonization of these frameworks and standards. They must decide which ones best reflect the issues most material to their respective businesses. This means that corporations must go the extra mile to know their investors and understand and align with their expectations. Corporations must do this in conjunction with making relevant ESG issues core to their strategy, performance metrics, and operations. ESG is not just a “phase” or a “movement.” It is the new paradigm based upon which the corporate world will be evaluated — and there is no time to be wasted.
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