Focussing on ESG

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By Andrea Ratzenberger – VP of Sales & Marketing, Sherpany

 

 

 

For global organisations accustomed to focussing on financial performance, it has been interesting to see certain non-financial factors take front stage in the last few years.

ESG, which stands for environmental, social, and governance, can include anything from trying to reduce the carbon footprint of an oil manufacturer to making sure the organisation complies with child labour laws and avoiding major class action launched over executive decisions or behaviour. Regardless of the issue being addressed, it has become clear that organisations must report these non-financial factors to shareholders, employees and the general public as well as communicate how their organisation is confronting these global concerns. The challenge for these organisations will be in finding a method to report ESG data efficiently and effectively, across multiple stakeholders, internal and external parties, in a global economy with offices and employees located all over the world.

ESG focus equals greater financial performance

When discussing current ESG practices, it is vital to understand the link between ESG, its integration into the organisation’s overall strategy and how the practices affect the organisation’s financial performance.

Multiple studies have shown a positive correlation between an organisation’s financial performance and its commitment to ESG. In other words, those who invest more time and resources in ESG programmes see greater financial improvement. As increasing numbers of organisations understand the link between ESG and financial performance, they are investing more time and resources in incorporating it into their business strategy.

For example, a study of BofA (previously known as Bank of America Merrill Lynch) in 2018 found that companies with better ESG records showed higher three-year returns, were seen as higher quality stocks, and were less likely to have large price declines or to go bankrupt.[1] In another study, from Harvard University, researchers found similar results.[2]

Additionally, in a KPMG survey of 900 board members and business leaders from 41 countries worldwide, almost half of directors and executives believed that an organisation’s ability to focus on ESG not only contributes to the organisation’s financial performance but also gives them more of a competitive advantage in the industry.[3] They also felt that the expectations of customers, employees, and other stakeholders were a driving force for them to focus on these issues.

Overall, there is a general consensus that there is room for improvement in terms of organisational focus on ESG. Encouraging more organisations to make ESG a priority is probably the first step. Increasing numbers of organisations are finding that investing in greater transparency, reporting and collaboration between internal and external parties with stakes in the organisation are intrinsically linked to better long-term financial outlook.

Many experts estimate a global increase in the number of organisations looking to focus on ESG, and today the EU requires companies listed in its member states to include non-financial ESG data along with annual reports.[4] This is especially the case with consumer goods and manufacturing industries.[5] Since transparency with these types of data often requires transmitting sensitive documents across multiple regions, parties and platforms, many companies are discovering that non-digital methods of communicating data are neither the most transparent nor the most efficient. Thus, companies are trying to find alternative, digital solutions instead.

Integration of ESG into the long-term business strategy

Beyond performance, however, integration of ESG into the long-term strategy of an organisation was also found to play a key role in their success. This means incorporating ESG into the operations, risk management and business strategy of the organisation and, ultimately, viewing ESG as an integral part of the core business practice.[6]

“Integration is key,” Harvard Business School Professor George Serafeim told the AVI in an interview. “As sustainability issues are becoming core business issues affecting a company’s competitive positioning, they need to be integrated at the core of the organisation with board oversight.”[7]

But integration must be combined with an eye towards the long term and ESG issues’ impact on stakeholders. This is especially true for organisations that have a long-term and major impact on the global economy and many stakeholders with a highly vested interest, such as pension funds. And in order for these organisations to properly communicate information about ESG to their stakeholders, executives and boards must properly understand how ESG practices impact the entire organisation, from its operations to its business strategy, and be able to make decisions about these issues – at any given moment, in any region in the world. Digital tools can be a transparent, safe, and effective way for them to do so.

“One of the suggestions to improve integration is to ensure that ESG is made more of a strategic priority in organisations by delegating and clarifying specific roles to focus on these issues along with duties and a way to measure results”

Realising the importance of these issues, there has been a huge increase in demand for ESG investment options in the last few years. Take UBS Asset Management, the largest wealth management in the world at $2.4billion, where ESG investment options have more than tripled since December 2016, with $17billion in assets under management (AUM). These investment options include sustainable funding, which can focus on investing in options centred on a theme, such as global warming, forest restoration or impact investing. Impact investing in particular concentrates on funding organisations that have successfully contributed to an ESG issue while showing financial profit.

“Our wealthiest clients want to know their investments are making a difference to make the world a better place,” explained Rina Kupferschmid-Rojas, head of sustainable finance at UBS Group.[8]

One of the suggestions to improve integration is to ensure that ESG is made more of a strategic priority in organisations by delegating and clarifying specific roles to focus on these issues along with duties and a way to measure results. In addition, board oversight could be improved by finding a way to track these issues, especially through standardised KPIs and metrics.[9]Digital technology, such as board portal software, can be an effective method for executives and boards to track these metrics.

The high stakes of ESG for the board of directors

Since many investment companies are jumping on the ESG bandwagon, the stakes are high for not just the individual organisations, but for the entire global economic community. For example, in 2006, at the establishment of the UN-backed Principles for Responsible Investment (PRI), 63 investment companies with a net worth of $6.5trillion in assets pledged a commitment to include ESG in their investment decisions. In 2018, however, the number of companies had grown to 1,715 with a net worth of $81.7trillion.[10] Financial gain connected to ESG can have massive global benefits and chain reactions.

Sine they have a greater understanding now of its contribution to the bottom line, many investors demand to see a commitment to ESG, in addition to tangible reports and data to ensure that their investment decisions are based on the right information.[11] For this reason, more than half of the board members in the KPMG survey refer to stakeholder expectations as the biggest motivating factor for focussing on ESG.[12]

“ESG issues have become much more important for us as long-term investors,” Cyrus Taraporevala, president and CEO of State Street Global Advisors, the world’s fifth largest asset manager with $2.8trillion in assets as of 2017, explains. “We seek to analyse material issues such as climate risk, board quality, or cybersecurity in terms of how they impact financial value in a positive or a negative way. That’s the integrative approach we are increasingly taking for all of our investments.”[13]

Along with the understanding of the high stakes involved comes greater transparency demanded from stakeholders, investors and the board. It is in the interest of organisations to determine not only the type of data to report, but also to select a digital tool, such as an executive governance board software, that will assist them in presenting it to boards, shareholders and investors in the most efficient, unified and transparent way possible.

The role of the board in supporting ESG programmes

As new issues related to ESG continue to evolve, the role of the board of directors will continue to develop and expand. Experts suggest the role of the board consists of a formal ESG assessment, including identifying risks and opportunities to its long-term business strategy across all areas of the organisation. The board should then become a key player in the communication of issues related to ESG between the organisation and stakeholders, which may entail setting up a committee, a board review, or an individual role, such as a chief sustainability officer or another C-suite executive.[14]

The board also plays a key role in disseminating that information through ESG reporting, which includes both the type of public disclosure, such as, for example, the company website, as well as setting clear goals, metrics and KPIs to measure ESG progress over time.[15] For example, many organisations rely on third-parties for more rigorous measurements of both financial and non-financial data related to ESG, and the board must understand this process as part of its role in overseeing communication with stakeholders.

Deciding which information to disclose, as well as under what circumstances, presents both a challenge and an opportunity for boards.[16] The challenge is to ensure that management is using the ESG data correctly, and the opportunity is to position it along with the long-term integration into the business strategy.[17] One specific example was the case of Royal Dutch Shell, a company that this year had the largest market capitalisation on the FTSE100, whose board decided to link executive pay to the organisation’s ESG goal of lowering its carbon footprint.[18], [19]

Digitalisation can help alleviate the board’s challenges of which data to use when taking decisions regarding ESG programmes. It could also support the board in communicating this data in an easy, effective and secure manner, and demonstrate the link between ESG and financial performance whilst also focussing on why it would benefit the organisation for ESG to become an integral part of that organisation’s business strategy.[20]

With the trend towards greater transparency among stakeholders, employees and management, more automated tools, such as board governance software, are necessary, not only for collaboration between the different parties but also for the distribution and communication of metrics and KPIs across the organisation.[21] Board portal software can also support organisations in being fully compliant with regulations, such as the General Data Protection Regulation (GDPR), and in ensuring data privacy not only between various board members but between different geographic regions as well.

Since ESG information is often vague and delivered in the form of spreadsheets or digital platforms that are focussed on a specific topic, such as carbon emissions, supply chain or customer retention, it is not often in a digestible format for the organisation to understand and link to performance. If organisations put a priority on their executive and board software replacing these internal systems and including ESG data, it would put a force in motion to mainstream ESG in many organisations. These ESG metrics would also go hand in hand with third-party standardised metrics.[22] An organisation, such as Shell, would greatly benefit from being able to integrate internal metrics with ESG and communicate it to multiple parties to provide a baseline with which to pay their executives.

As these organisations and their internal, external and ESG data increase and become ever more complex, more automation will be necessary to standardise metrics and reporting, especially in a global economy with teams residing in different geographic regions. A reliable executive and board software for ESG metrics would be particularly useful as these increasingly complex data metrics are communicated to different parties across multiple geographic borders. When a reliable system is set in place to easily communicate such complex information, it can even provide early-warning systems and prevent or mitigate economic crisis, loss in profit and declining trust in the brand.[23]

Leveraging ESG as both a challenge and an opportunity

Organisational focus on ESG will only gain more attention in the years to come. Reasons for this include the enticement of improved financial performance, the opportunity to have a greater competitive advantage and the pressure from stakeholders for greater transparency related to ESG issues. Along with this focus on ESG will be a push towards increased standardisation of metrics and KPIs for communicating ESG data across the organisation and to the public sphere.

Boards will play a key role in the dissemination of information by deciding which information needs to be collected for ESG reporting and understanding howit impacts the organisation and contributes to its long-term business strategy. They will also ensure that the organisation has the digital tools it needs to make important decisions related to ESG among multiple parties and stakeholders, from anywhere in the world, at a moment’s notice. In a digital era of increasingly complex data, this presents both an immense challenge and opportunity to any organisation that desires to incorporate ESG into its long-term business strategy.

 

About the Author:

Andrea Ratzenberger is a bright strategist and a tech-savvy sales and marketing professional with a deep passion for innovative technology. In his role as a board member and co-founder of the Italian Association of Corporate Secretaries and VP of Sales & Marketing at SHERPANY, he inspires teams across different European cities to activate leaders’ “digital DNA”. Holding several MA’s in Economics (Free University of Brussels and Sapienza University of Rome), and an MA in Company Internationalization (Italian Agency for Foreign Trade), Andrea has a solid background in the field of economics and international trade as well as in corporate governance, meeting management, and digitalisation.

Footnotes:

1.https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID18_0970/abcs_of_esg.pdf 

2.https://aaajournals.org/doi/10.2308/accr-51383

3.https://assets.kpmg/content/dam/kpmg/be/pdf/2018/05/esg-risk-and-return.pdf 

4.Ibid

5.https://corpgov.law.harvard.edu/2019/02/25/the-board-and-esg/

6.https://assets.kpmg/content/dam/kpmg/be/pdf/2018/05/esg-risk-and-return.pdf 

7.ibid

8.https://hbr.org/2019/05/the-investor-revolution

9.https://corpgov.law.harvard.edu/2019/02/25/the-board-and-esg/ 

10.https://hbr.org/2019/05/the-investor-revolution/

11.https://corpgov.law.harvard.edu/2019/02/25/the-board-and-esg 

12.https://assets.kpmg/content/dam/kpmg/be/pdf/2018/05/esg-risk-and-return.pdf

13.https://hbr.org/2019/05/the-investor-revolution/

14.https://corpgov.law.harvard.edu/2019/02/25/the-board-and-esg

15.https://corpgov.law.harvard.edu/2018/06/29/esg-and-sustainability-the-boards-role/

16.Ibid

17.https://assets.kpmg/content/dam/kpmg/lu/pdf/lu-en-esg-strategy-framework-for-board-oversight.pdf

18.https://www.bbc.com/news/business-46424830

19.https://www.shell.com/investors/environmental-social-and-governance/corporate-governance-library/_jcr_content/par/expandablelist/expandablesection.stream/1552504091836/f1236b81b766a5209e3ec0aa952f431d36eb73a8/19-03-13-remco-shareholder-letter-final.pdf

20.https://assets.kpmg/content/dam/kpmg/lu/pdf/lu-en-esg-strategy-framework-for-board-oversight.pdf

21.Ibid

22.https://hbr.org/2019/05/the-investor-revolution

23.https://www.heidrick.com/Knowledge-Center/Publication/boards-and-sustainability-three-best-practices