In our regular column for Wind Energy Network, we focus on ESG and why it is now important for businesses to show they are compliant.
Our last column focussed on the increasing legislative and investor attention currently being aimed at supply chains for the raw materials which are used in the offshore wind sector.
Supply chains are, of course, just one part of the equation that needs to be factored into a company’s measurement of its ESG metric.
But what is ESG?
ESG (Environmental, Social & Governance) is in many ways the successor to Corporate Social Responsibility (CSR), but although there are differences between the two (which go beyond the remit of this editorial), the terms are often used interchangeably.
The history of both starts in the 1970’s when the onus on companies was the pursuit of profit, normally without any regard to the environmental or social costs of doing so. There has now been a near 180 degree shift in thinking so that regard for the social and environmental costs of a way a company is run have become critical parts of its business planning – criteria that will directly impact a company’s profitability as much as its reputational capital.
Why is ESG important?
ESG involves managing risks in the Environment, Social and Governance arenas that could otherwise decrease financial returns.
This in turn has an impact on whether a company is assessed favourably by investors (particularly institutional investors) and providers of debt finance. Financial institutions now use ESG as a key component in their assessment of a company’s suitability for funding, not least because there is an increasing obligation on these institutions to formally report on the ESG credentials of the companies they have invested in. They don’t really have any choice.
Separate to the above there has recently been an enormous rise in public concerns surrounding both the environment and social equity: a high ESG scoring is now an important factor in generating good public relations, as well as attracting and keeping the best employees.
How do you measure ESG?
This is the tricky part. There are an increasing number of ways to demonstrate positive engagement with ESG compliance, and stock markets and regulators in the UK and further afield are currently working towards the creation of a reportable metric – but there is currently no standardisation.
The Financial Stability Board (an international body that monitors and makes recommendations about the global financial system), set up a ‘Taskforce on Climate-related Financial Disclosures’ (TCFD) which issued a report in 2017 setting out information that companies should be obliged to disclose to enable third parties to assess how they manage climate-related financial risks.
The UK Government announced in November 2020 that it will be mandatory for large companies to make climate-related disclosures that are aligned with the TCFD recommendations.
On the ‘Social’ side the Modern Slavery Act 2015 requires companies to prepare an annual statement to demonstrate the measures it has taken to ensure that modern slavery is not taking place in its business or supply chain.
Reporting is not, however, an exact science. These are only two of the elements that go into a company’s overall ESG performance. Companies wanting to demonstrate compliance need a well-defined action plan which incorporates different methods for measuring and reporting compliance. Which methods companies choose obviously needs very careful and detailed consideration: companies that have reported on a variety of voluntary initiatives have recently found themselves the subject of litigation, and parent companies need to be aware of liability arising from the reporting of their subsidiaries.
The offshore wind sector has a huge head start in, at least superficially, ticking the ‘Environment’ element of ESG. Full compliance is however, far wider than simply operating in the renewable energy space, positive as that is seen to be, and the overall quantity, quality and comparability of information used to demonstrate ESG compliance needs proper consideration.
Good ESG reporting requires deeply embedded good business practices starting with a review of all existing policies that cover the area. If a company is resolute about meeting ESG standards it should shine through in its performance. The rewards should show on the bottom line.
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