ESG – Shedding Light on the Direction of Travel

A recent article following our ESG 2.0 panel event, courtesy of Sally Pilot and our friends at Black Sun.

ESG is firmly on the agenda. Environmental, social and governance issues matter not just to government – to businesses – to investors – but to all of us, both now and in the long-term. The challenge? Amidst all the uncertainty around legislation, data, and materiality – how do we harness ESG going forward more formally and take a long-term view? This was the question debated at a standing room only event hosted by Broome Yasar, Goldman Sachs, the IR Society and IR Magazine on 3 February 2020.

Government setting clear direction

Guy Opperman, Pensions Minister set up the debate with a very firm assertation that there are a number of recent key policy changes by government that are setting the direction of travel:

Government’s Green Finance Strategy 2019:  The Green Finance Strategy was launched by the Government in October 2019 as a key pillar to the UK’s Clean Growth Strategy and Industrial Strategy. The strategy has been designed to strengthen the competitiveness of the UK financial sector and drive progress towards the UK’s 2050 Net Zero target. This will be achieved through enhanced corporate disclosure, sustainable finance standards and investment in green projects; outlined in their three pillars: greening finance, financing green and capturing the opportunity. A key part of ‘greening finance’ pillar is enhanced corporate disclosure and investment in sustainable finance standards. To help drive this, the Government is now expecting all listed companies and large asset owners to be disclosing in line with the recommendations of TCFD (Task Force on Climate-related Financial Disclosure) by 2022.

In October 2019 letter to 50 of the UK’s largest pension schemes, the UK Pensions Minister himself requested that the pension schemes submit sections of their statement of investment principles (SIPs) that set out how they take account of financially material considerations arising from environmental, social and corporate governance (ESG) factors, including climate change. The aim was to monitor compliance with new regulations that “compel funds to pay greater attention to environmental, social and governance considerations”, as well as highlight best practice.

In January 2020, the Governor, Mark Carney, being appointed as the Prime Minister’s Finance Adviser for COP26 (UN Climate Change Conference) to help build a sustainable financial system to support the transition to a Net Zero economy.

The development and significant worldwide support of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) – voluntary, consistent, climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders.

The UK will be hosting the major UN climate change summit COP26 at the end of 2020. The eyes of the world will zero in on the UK as senior politicians from all the world’s countries convene in Glasgow to negotiate the acceleration of efforts to tackle climate change. This is the most important climate summit since the landmark Paris Agreement was agreed at COP21.

All this adds up to an opportunity for investors and corporates to make a difference. Investors can take a leading position, harnessing investment opportunities that move their organisation and the world forward while companies can become leaders in making profit in a responsible sustainable way that supports and maintains the UK’s leadership position on these key issues.

Opportunity from ESG

Claire Hedley, Executive Director, Goldman Sachs Asset Management then shared with us ‘Why ESG is important,’ picking up on two key themes that are changing the dynamics of the market – climate transition and inclusive growth, influenced by the changing preferences of consumers and increasing focus by regulators. Another salient point was that ‘this change is driving economic growth and innovation in investment’.

A key theme picked up on by Douglas Radcliffe, Director of Investor Relations at Lloyds Banking Group plc was that ‘ESG and sustainability needs to be seen as an opportunity rather than just a risk for businesses today’. Although every company will have a different approach and a different strategy, determining what works and is relevant for your individual business will be imperative. Businesses need ambition to see this as a real opportunity for their businesses, but this of course, will take time.

Finally Evan Tylenda, Head of SUSTAIN research, EMEA Goldman Sachs, shared ‘ESG is not just moving mainstream but being mandated’. It is what investors care most about at the moment. It’s a new phenomenon and investors are learning how to integrate into investment decisions, which isn’t without its challenges but also presents new opportunities.

Demonstrating sustainable benefits

It is undeniable that in transitioning towards an opportunity mind set instead of an obligation one, organisations will need to ensure that all their engagement with key stakeholders is clear, consistent and captivating. Positive corporate or sustainability actions are equally as important as transparent disclosure, especially in an age of increased corporate scrutiny and ongoing global demands to evidence accountability. This means that effective communications will be key for sharing an organisation’s ESG journey and credibly showing that material stakeholder considerations have been taken into account.

We believe that such disclosures can help to differentiate your company, shape your reputation and build confidence with employees, investors and wider society. The challenge now is for corporates to get this firmly on boardroom agenda and ensure they are able to articulate exactly what they mean by long-term value in an authentic way. This will require companies to look more holistically at their communications framework, to ensure that they are able to proactively demonstrate the value of a board’s long-term strategy, as one that benefits investors while also taking into consideration the needs of wider stakeholders.

Black Sun is a stakeholder communications company.