ESG, Sustainability & Climate
ESG is a company’s invisible balance sheet. It reflects the expectation from all business partners that the company will behave in a correct and fair way
Climate is part of ESG; but is a very big part. Climate is the biggest business issue for many decades, COVID included.
WHAT IS ESG? ENVIRONMENTAL, SOCIAL, GOVERNANCE
Environmental
Issues connected to the responsible use of natural resources, global warming, energy usage, pollution and the like.
key factors
- Climate change risks
- Carbon emissions
- Raw materials and water scarcity
- Pollution and waste
- Innovation, clean tech, renewable energy
Social
Factors such as how a company treats its workers, health and safety considerations, and community outreach.
key factors
- Labour policies/relations and talent management
- Inclusion and diversity
- Product liability, including cybersecurity
- Controversial sourcing
- Social-Impact reporting
Governance
Topics such as business ethics, board structure and independence, executive compensation policies and accounting practices.
key factors
- Shareholder rights
- Pay equity/fairness
- Business ethics and transparency
- Board integration
WHY IS ESG IMPORTANT?
- Environmental, Social and Governance (ESG) issues are at present a “hot topic”. Is this a “Fad”?
- Definitions vary. What is meant?
- Accounting – “goodwill”. Is a business worth more than the assets?
- Investment – “quality of earnings”. Will earnings be sustained?
- Institutional investors look at ESG as part of the investment criteria.
- UK companies have a company law duty.
- UK listed companies have TCFD climate disclosures.
- ESG – NOT a “nice to have”. It is here; and vitally important.
CLIMATE IS AN EXTINCTION ISSUE
“We are at a unique stage in our history. Never before have we had such an awareness of what we are doing to the planet, and never before have we had the power to do something about that. Surely we all have a responsibility to care for our Blue Planet. The future of humanity and indeed, all life on earth, now depends on us.”
David Attenborough
WHY IS CLIMATE AND ESG SO IMPORTANT?
UK target to cut emissions by 78% by 2035 is world leading – but to hit it action is needed now.
COP 26 – GLASGOW MAYBE EXPECT EVEN MORE
- ESG is a company’s invisible balance sheet. It reflects the expectation from all business partners that the company will behave in a correct and fair way.
- By the end of 2020, countries representing 73% of Global GDP had committed to Net Zero Carbon by 2050 (China: 2060).
- Climate is part of ESG; but is a very big part. Climate is the biggest business issue for many decades, COVID included.
- The Paris Agreement of 2015 set out the aim of reducing Emissions by 50% by 2030 – only nine years from now. So, the total reduction is strongly front-loaded.
- Climate, like ESG, has challenges of definition and measurement.
- Climate is of vital importance to business. This is a strong shareholder view – not woke, populist hubris.
UK COMPANY LAW AND ESG
- For UK companies, directors have a duty to attend to the long-term view and the wider scene (S172 CA 2006):
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- The desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly between members of the company.
- Schedule 7 paragraph 7, requires disclosures on environmental profile.
- In UK case law, Barings case (2000), each director, and the board overall, have a duty to inform themselves of matters material to the business.
- As ESG is important to most businesses, particularly climate and non-discrimination.
WAYS TO MANAGE ESG
- Culture
- Defining Corporate Purpose
- Behaviour and message consistency
- ESG within incentives
- Communication and disclosures
- Stakeholder engagement
- Measurement and management issues
People Issues – The 7 Cs
- Culture
- Communications
- Corporate Structure
- Corporate Governance
- Content of Jobs
- Compensation
- Change management
managing esg
- What metrics to select and why; how important is it to the business?
- Is it compliance, or a value driver?
- How do we define "acceptable/good/excellent"?
- Do we have the measurement systems in place?
- ESG issues are best first started by discussion; at board/management/both.
- ESG Governance and reporting, may need definition and reshaping too
TCFD DISCLOSURES AND TRANSITION PLAN
- UK premium listed companies must give “comply or explain” TCFD disclosures.
- TCFD headings:
- Governance
- Strategy
- Risk management
- Metrics and targets
- TCFD has 11 disclosures in all
- Assess PHYSICAL risk and TRANSITION risk (“Factors” and “Actors“)
- Expect shareholders to ask about the company to TRANSITION PLAN to net zero-carbon
WHY IS ESG IMPORTANT? TO GET BETTER BUSINESS OUTCOMES
In June 2020, Morningstar found that the majority of 745 European sustainable funds outperformed non-ESG funds over 1, 3, 5 and 10 years
McKinsey identifies five ways that ESG creates value: top-line growth, cost reductions, regulatory / legal interventions, productivity uplift, investment and asset optimisation.
A Harvard study of S&P 500 executives’ pay packages found a positive relationship between explicit incentive compensation for corporate social responsibility and firms’ social performance.
58% of employees consider a company’s social and environmental commitments when deciding where to work
Companies that voluntarily adopt ESG policies are significantly more likely to outperform their counterparts over the long-term, both in terms of stock market and accounting performance. These companies were also more likely to tie executive incentives to sustainability metrics.
92% of consumers will be more likely to trust a company that supports social or environmental issues
CLIMATE AND EXECUTIVE PAY
"Don’t let your company become climate road kill."
Mark Carney
UN Special Envoy for Climate Action and Finance
Former Governor of the Bank of England
Climate as a business issue
- Is climate a material issue for us?
- What are our shareholders saying/expecting?
- What is TCFD and its implications?
- Will impairment charges apply?
- What steps are best right now?
- Who is managing all this?
TCFD compliance and investors
- Detailed TCFD requirements are what?
- Explain choices, are they credible?
- Are our resources adequate for this?
- Shepherd’s warning! Investment Association amber top?
Climate pay
- What is the expectation right now?
- Will inserting a green metric into STI or LTIP meet the need?
- If so, how do we select the metric, targets, and weighting?
- But should this drive pay, or is it better as an underpin?
- How do we define our transition plan and our net zero business model?
- How do we frame climate pay to support our ‘Say on Climate’ vote?
