The real ESG talk – A challenging path from pure profit to wide benefit

By Anna Alex, Co- founder, Planetly

When talking about ESG, there is a tendency to minimize the “E” to only carbon emissions and the “S” only to Gender Equality and Inclusion. These two topics seem to have the strongest supporters. But actually, it’s a much bigger conversation we need to have.

ESG is a mindset. And even though I am approaching it from the climate perspective – which is pretty understandable since I am a climate tech founder – I always look at the bigger picture. Especially now that my company Planetly has become part of the OneTrust family. And whenever I speak to other entrepreneurs, managers or anyone in a business context, I make sure to emphasize this.

Investing time and resources into solving the most pressing issue in our lifetime means investing in the most precious home we have – our planet. Rethinking the way we approach and solve climate change heavily determines our future. And again, climate is just one piece in the large ESG puzzle.

Put simply, ESG (Environmental, Social, and Governance) signifies the act of funding businesses that positively impact the environment, support their many stakeholders, and demonstrate ethical leadership and governance practices. But is this action as easy as it sounds in theory or there is more (or less) to it when it comes to practice?

THE CURRENT STATE OF ESG

Going back to the basics, the ESG framework, otherwise known as Environmental, Social, and Governance, aims to identify and measure the impact of an organization’s policies and procedures related to environmental sustainability and social standards. This is why ESG needs to be taken seriously if we want to save our planet from climate change. It is the new desirable guideline for investment.

And it should be even more than that. As I see it, ESG needs to become a mindset for entrepreneurs as well as corporate managers – anyone who is in charge of a company’s steering wheel should be focussing on implementing ESG measures into their corporate goals.

Imagine a board meeting where the focus is not just on financial KPIs anymore but focussing on environmental, social and governance KPIs. I can clearly see the chairman of the board standing up in the middle of a board meeting vehemently asking his board members: “Why have we not reduced more carbon this year?”

The good news: the numbers are clearly in favor of ESG, as in the times of urgent climate action this framework attracts a lot of interest and capital. Global sustainable fund assets reached $3.9 trillion at the end of September 2021 while, at the same time, there were 270 new sustainable fund launches worldwide just in the third quarter of last year. ​​According to a recent survey by the CFA Institute, 85% of investment managers across countries are increasingly incorporating ESG criteria into investment decisions.

THE IMPORTANCE OF ESG – SHIFT FROM PURE PROFIT TO MORE BENEFIT

Long gone are the days when investing for most business people meant purely diversifying your portfolio to preserve and maximize value. Investors are now increasingly eager to align their investments with ESG-related companies and fund providers. This puts them in a really good position to orientate the economy towards more sustainability.

At the same time, this position gives the investors the possibility, as well as the responsibility, to educate portfolio companies on ESG from day one. Essentially, they invest in the companies so they can direct them to a better path. As they grow, companies then easily incorporate ESG in their processes, policies, goals, employees program from the very beginning and therefore become more sustainable. Consequently, sustainable companies have a higher chance to succeed, as well as limit their risks around ESG.

This all coincides with the climate neutral efforts. Companies are a part of the problem, but can also be a part of the solution. The race for net zero, or UN sustainable goals by 2030, is also a business opportunity, as our future depends on businesses which solve climate change issues.

A record $649 billion poured into ESG-focused funds worldwide in the first ten months of last year. ESG funds now account for 10% of worldwide fund assets. According to Statista, 82% of professional investors worldwide plan to increase their allocation of socially responsible investments over the course of 2022.

That means the appeal of ESG is not only moral but also, business-wise, a smart financial move as more funds will be pouring in those sectors.

CHALLENGES ON THE WAY FORWARD

ESG issues cover a variety of topics that are applicable to all industries and organizations. At the same time, ESG investing supports solutions to major issues through business initiatives.

It covers a broad scope of issues, from climate change, greenhouse gas (GHG) emissions, biodiversity, water and waste (environmental), to working conditions, equal opportunities or perhaps human rights (social) to board diversity and structure, bribery and corruption or tax strategy (governance).

The practice of engaging in ESG clearly requires a mindset shift. But, this all comes with its own challenges and there are certain problems that need addressing.

• Climate risks and opportunities should be front and center as organizations plan their future growth strategies and report progress. But putting this on the agenda and creating the ideal of tomorrow might be a bit overwhelming for an early stage company, as they have other priorities.
• Monitoring issues also need to be taken into consideration. Data quality is of the utmost importance, and it is crucial to see how t o reflect that quality in the outputs. Taken alone, quality tells us nothing about a company’s ESG strategy. On the other hand, quality and ESG, taken together, can best be understood as two dimensions of the same underlying theme: sustainability.
• Disclosure of data is an important factor as it is still unclear how/if ESG disclosures for financial products are going to be audited. Reporting is not yet mandatory. From 2023 onwards, more companies will actually be obliged to publish sustainability information. In April 2021, the EU Commission presented a new proposal for a Corporate Sustainability Reporting Directive (CSRD).

That the challenges are real, has been recently also shown in a study: Many of the world’s biggest companies are failing to meet their own targets on tackling climate change, according to the New Climate Institute report.

WHEN AMBITIOUS CLAIMS DON’T DO THE WORK

The study conducted on 25 corporations alleges that Google, Amazon, Ikea, Apple and Nestle are among those failing to change quickly enough. The Corporate Climate Responsibility Monitor was conducted by non-profit organizations New Climate Institute and Carbon Market Watch. The study looked at the publicly stated strategies to reduce greenhouse-gas emissions, created by anything from transporting goods, to energy used in factories or shops, or cutting down trees, in order to reach net zero. Companies set their own targets. Google promises to be carbon-free by 2030, while Ikea pledges to be “climate-positive” by 2030. Amazon wants to reach net-zero carbon by 2040, and is on a path to powering operations with 100% renewable energy by 2025.

Assessing factors like annually disclosing emissions, giving a breakdown of emission sources, and disclosing information in an understandable way, the study put these above-mentioned companies on the low integrity spectrum. At the same time, the report says 70% of Apple’s climate footprint is created by upstream emissions, one of the most controversial areas, including the consumption of electricity by consumers using Apple phones, laptops and other products. As reported, many companies did not include these emissions in their climate plans.

The study concluded that overall, the strategies in place – if implemented – would reduce emissions by 40% at most, not the 100% implied in the term “net zero”. Out of 25 companies encompassed in the study, just Maersk, Vodafone and Deutsche Telekom are clearly committed to removing 90% of carbon emissions from their production and supply chains.

Put simply, companies’ ambitious-sounding headline claims often lack real substance. Because it is not that easy to change a running system. But we have to. When it comes to ESG, integrity is of the utmost importance, as well as making informed decisions. The relationship between Environmental, Social and Governance aspects is so intertwined, that it is important to emphasize: Actions speak louder than words.