EXCLUSIVE: In the face of pressing climate challenges, the business and finance sectors must now collaborate to ensure that environmental, social and governance (ESG) issues are embedded in all financial decisions to spur the creation of a zero-carbon economy.
That is according to the We Mean Business Coalition’s chief executive Nigel Topping, who, speaking at an event hosted by S&P Global Ratings in London late last week, warned delegates that large portions of the business and finance markets are failing to “harness” the rewards of the low-carbon transition by neglecting to embed ESG considerations in their financial processes.
Despite several recent pieces of research concluding that boards are moving to incorporate climate risks in their annual reporting, Topping argued that such moves are, for most companies, likely to be taken for compliance reasons, resulting in a lack of “embedded” sustainability.
“The truth is that every large sector is affected by ESG issues which are absolutely existential and, therefore, financial in the long-term – they are changing the competitive landscape across the board,” Topping, who also sits on the board for the London Pension Fund, told edie.
“If these challenges are tucked away and approached solely for compliance reasons, they are not being integrated, and if businesses aren’t incorporating them into financial decisions and long-term planning, then they are not being taken seriously – which leaves the business poorly prepared for the future.”
Potential causes of this trend, Topping claimed, are a lack of suitable tools for businesses and investors to track the impact of corporate ESG decisions on their financial performance – or to foresee “disruptive, non-linear” low-carbon sector revolutions such as those currently gripping the power, automotive and protein industries.
In order to get past this era of “framing ESG as niche” and therefore enabling business leaders to “view it as something that can be done on a voluntary or Friday-afternoon-only basis”, he called for business leaders to take a holistic approach to sustainability and listen to the green ideas of their staff, citing Ikea and Unilever as organisations where this model is proving successful.
The latter firm has notably asked its 172,000 staff to help co-create its long-term sustainability strategy and is experiencing an exponential period of growth driven by its ‘Sustainable Living’ portfolio of brands. Moreover, its former chief executive Paul Polman has continually argued that the term “CSR” is no longer holistic enough to remain relevant in a new era of purpose-led business.
“I don’t think there’s anything inherently wrong with having ESG as a discipline – it’s whether it’s integrated into strategic thinking that is the challenge,” Topping added.
Navigating the low-carbon transition
A further trend which will help the business and investment communities to remove ESG from its historical status as an “add-on”, Topping said, is the continued creation of tools and frameworks which link financial success and business growth to positive sustainability performance – and those which assess how prepared a business is for the low-carbon transition.
These include the likes of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations; SASB’s new green accounting and reporting standards; frameworks which measure natural capital impacts and S&P Global Ratings’ newly launched ESG Evaluation benchmark.
Unveiled at the S&P Global Ratings event last week, the tool combines qualitative data surrounding an organisation’s financial and ESG performance with qualitative analysis of its past, current and planned sustainability actions to assess its current risk exposure and its preparedness for the low-carbon, resource-efficient economy of the future. This information is conveyed in two scores out of 100, entitled Profile and Preparedness respectively.
The scores are calculated by the firm’s own credit analysts with support from bodies such as the UN Principles for Responsible Investment and CDP, following a string of face-to-face meetings with the assessed organisation’s senior management. At present, this system can be applied to companies within the global corporate, infrastructure, transport and power sectors, with S&P Global Ratings set to expand it to cover banks, asset managers, multilateral institutions, public healthcare and water and sewage firms shortly. In the longer-term, frameworks for assessing organisations across the insurance, education and social housing sectors will also be developed.
S&P Global Ratings’ head of services Yann Le Pallec told delegates at the event that the tool will “complement traditional finance analysis as we know it” with “future planetary scenarios that may be uncertain in terms of timing and magnitude”.
“Investors and companies still lack the unified benchmarks and quality data needed for ESG to be integrated into decision processes and there is a dearth of consistent insight into data,” Le Pallec said.
“This launch is a significant step in closing these market gaps and contributing to the improvement of disclosure.”
Although no governments will mandate companies to disclose information to S&P Global Ratings for analysis under the new tool, Topping argued that mounting demands for transparency from the global investment community, coupled by a market proliferation of similar benchmarks, will soon leave businesses with “nowhere to hide”.
“If you’re a big, FTSE500 company and you’ve got upwards of 1,000 investors asking you to disclose your ESG information through one of these tools, you’d be pretty bold to say no,” he told edie.
“No company will be able to avoid [ESG disclosure] if it wants to raise money in capital markets – this evaluation will be done to them with or without their say, and if they refuse to disclose to the rating agency, they’ll simply be given a lower rating. In this way, disclosure will become quasi-mandatory.”
Topping highlighted the ever-growing number of companies disclosing information on their direct environmental footprints – and those of their key suppliers – through CDP as evidence that investors are already creating this “quasi-mandatory” disclosure environment. Back in 2011, just 210 firms were disclosing information on their climate impact to CDP, which was then known as the Carbon Disclosure Project. In 2016, the number had grown more than tenfold to reach 2,488 businesses, and, in 2018, 7,035 disclosed some form of environmental information through CDP.
Information disclosed in this way, compounded by warnings that the next financial crash is likely to be climate-related and the exponential growth of green finance, is already spurring the global investment community to alter key decision-making processes. Banking and insurance giants are increasingly announcing plans to make their portfolios more sustainable by divesting from coal companies and those in other carbon-intensive sectors, while boosting their investments in initiatives which boost anti-deforestation efforts and the renewables sector.
Indeed, a recent study by the Global Sustainable Investment Alliance (GSIA) concluded that investments in sustainable assets – including those made through designated ESG and impact investment schemes – have increased by 34% since 2016, surpassing $30trn worldwide during 2018. Similarly, Legal & General Investment Management (LGIM) this week stated that it is more concerned about the climate approach of companies it invests in than any other factor, building on its decision to divest from a host of companies it believes are showing “persistent inaction” on addressing climate risks.