ESG is here to stay. With mandatory reporting required for listed companies from April 2022, private businesses should consider keeping themselves one step ahead by becoming ESG compliant. Our Head of ESG, Dr Jacqueline Faridani shares why.

The Importance of ESG

In recent years, increasing awareness of the climate crisis and the depletion of natural resources, as well as increased scrutiny of social and governance policies, has brought the establishment of and compliance with Environmental, Governance and Social (ESG) guidelines to the forefront.

More recently, and particularly since the start of the COVID-19 pandemic, companies with a sustainable ESG-focussed business plan have benefited greatly from having their long-term and resilient strategies in place, while many other companies have been in survival mode, as a result of recession due to the pandemic.

There is increasing pressure on companies to follow ESG principles. 85% of investors considered ESG factors in their investments in 2020. 91% of banks monitor ESG along with 24 global credit rating agencies, 71% of fixed income investors and over 90% of insurers.

In June 2021, the US Securities and Exchanges Commission (SEC) announced its intention to make quarterly ESG reporting mandatory for publicly listed companies. It also created a new Climate and ESG Taskforce in March 2021, in its Division of Enforcement. The taskforce will be able to identify potential violations of its ESG guidelines using data analysis techniques. In addition, President Biden has revealed plans for making the entire power generation sector carbon-neutral by 2025 and to achieve net-zero emissions no later than 2050.

ESG compliance applies not only to energy and power companies but to all public companies. It is becoming increasingly clear that ESG-reporting and compliance is no longer just a "nice-to-have" feature, it is now becoming a highly desirable, if not essential feature of a forward thinking, successful company. According to a report published by Blackrock, companies with transparent ESG measures in place were more resilient, with less volatility, and outperformed others in 2020.

Advantages of Adopting ESG Principles

It is important to realise that ESG is a multi-faceted area and different companies will have different ESG monitoring and reporting needs. A proactive approach to ESG has several advantages and presents genuine opportunities. These advantages can be classified into four categories: financial, strategic, competitive and perception/reputation.

ESG awareness and compliance presents the following advantages and opportunities:

  1. It improves the bottom line as shown by Blackrock and other reports. There is evidence demonstrating flow of capital towards companies with strong ESG practices. This is partially due to the fact that ESG investments and ESG-compliant companies are considered safer and more stable by investors and consumers. Thanks to indices developed by MSCI and Sustainanalytics and others, it is becoming easier to measure and rank companies’ ESG compatibility
  2. It prepares the company for regulatory checks and avoids interventions
  3. It creates sustainable growth: ESG-aware investors are interested in long-term growth and will stay invested in sustainable, value-based businesses
  4. It improves the company’s reputation and business ethics
  5. It results in operational efficiencies, less waste, improved performance and contributes to the company’s overall competitive positioning
  6. It mitigates risk through training and creation of risk and performance measures and ensuring a reliable supply chain

A centralised ESG data and reporting system has the benefit of greatly facilitating ESG monitoring at company level, increasing reporting accuracy, transparency and efficiency. This in turn will reduce pressures from activists and develop better relationships with ESG-focused firms.

Transparency and Gender Diversity

Another interesting benefit is the effect of ESG transparency on acquiring the best new talent. As young millennials become employees, they are keen to work for companies that genuinely care about ESG compliance and are not perceived as carrying out greenwashing as a public relations exercise.

There is also some evidence showing that there is a link between having more female managers in decision-making roles in industrialised economies and a decrease in CO2 emissions. BIS has found that a 1% increase in the share of female managers leads to a 0.5% decrease in CO2 emissions. This evidence shows that lack of diversity can have an adverse effect on environmental ESG scores and the environment. This report shows that gender diversity at the managerial level has stronger mitigating effects on climate change if women are also well represented outside the organisation, for example in political institutions and civil society.

Updating ESG Metrics

Once the ESG metrics are established, they will need to be measured regularly and the results shared publicly. This will ensure long-term investor confidence in the company’s ESG policy. The metrics should be a top priority for senior management, whose compensation must be tied to these metrics, ESG goals and adhering to progress towards meeting them. An annual letter by the CEO, and periodic ESG reporting are essential, as is continual internal communications.

There is increasing awareness that ESG compliance will be enforced and regulated. Companies that are lagging behind, will eventually face struggles with regulatory, reputational as well as legal and ethical issues. The inevitable conclusion as to a sensible course of action is to follow a sustainable and ESG-compliant model, which positively impacts the business as well as the environment.

About the Author

Dr Jacqueline Faridani heads up Prospect Law’s fast growing ESG practice. She is an advisor in financial risk management with 20 years of experience in a variety of risk management, compliance and product control roles at Canadian, German, French and Russian banks and life insurance companies, as well as for the Canadian financial regulator (OSFI). Read More

Prospect Law is a multi-disciplinary practice with specialist expertise in the renewable energy, infrastructure and natural resources sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

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