ESG & Sustainability: Risk awareness and increasing importance

ESG is a global buzzword now and every country whether small or large has started talking about it.

Regulators have made the disclosures mandatory in many countries for certain sets of companies.

ESG has become more important because we are experiencing the true impact of climate change now with reference to extreme weather conditions like heatwaves, droughts, floods etc.

Discussions in the board room w.r.t. ESG are increasing, however, as of now, there are very few companies who are actually working on ESG to ensure that company is complying with the regulator’s requirements.

As per the World Economic Forum (WEF), environmental issues i.e. issues pertaining to climate change covering climate action failure, extreme weather, natural and human made environmental disasters and biodiversity losses, water crises among others have got more importance and significance in last one decade.

As per recent report by EY, investors are focusing more on Environment, Social and Governance (ESG) risks.

As per that report, over 80% of investors surveyed agreed that businesses should “focus more on long-term value creation rather than short-term dividend pay-outs; be open and transparent about growth plans; and focus on environmental, social and governance factors because they have real and quantifiable financial impacts.”

Following were the questions asked (to what extent do you agree with the following statements) in the survey the results of which was positive and 'Yes' for over 80% of the cases:

?1.?????Over the long term, ESG issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable impacts.

2.?????Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors.

3.?????Environmental and social issues offer both risks and opportunities, but for too long, companies have not considered them core to their businesses.

4.?????Public company CEOs should lay out an explicit strategy each year for long-term value creation and directly affirm that the company’s board has reviewed it.

ESG and Investment professionals

Investment professionals apply ESG factors and sustainability related knowledge in their decision making while studying any company before making any investment.

However, doing this is not easy and there is a big gap of skills because these professionals need specific skills and mindset to make investment decisions based on ESG strategies and practices.

ESG practices are continuously becoming more and more useful and relevant for investment professionals and investors who apply ESG knowledge and skills in their day-to-day decision making and various other roles.

Upskilling is necessary for these professionals so that skills gap can be filled. Expectations of the firms which employs these investment professionals and analysts are increasing day by day due to increase of expectations of various stakeholders looking after the domain of impact investments. These professionals can then apply integrate ESG factors into their investment process.

Apart from investors and investment professionals, ESG issues and factors are also suitable to learn for people working in the domain of risk and financial consulting, sales & distribution, wealth management, product development, or anyone who want to improve his or her understanding about the subject, etc. Since this is an entirely new field of study there is no need to hesitate to ask from your colleagues in industry or checking with industry experts.

?ESG Rating Providers (ERPs)

There are more than 600 ESG ratings globally. However, we have produced the list of few rating companies:

1.??????MSCI ESG Ratings- This rating serves 8,500 companies (14,000 companies including subsidiaries) and more than 6,80,000 equity and fixed income securities globally. This is being used by 1400 investors globally.

2.?????Sustainalytics ESG Risk Ratings- This rating serves 11,000 companies.

3.??????CDP Climate Change 2020 Scoring Methodology- This rating serves 8,400 companies worldwide on climate change.?This is being used by 515 investors globally.

4.?????S&P Global ESG Score- This rating serves 7300 companies. This is basis for Dow Jones Sustainability Index (DJSI).

5.?????FTSE Russell ESG Ratings- This rating serves 7200 companies. Used by 1200 investors globally.

?We also need to study the topic sustainability which is getting huge momentum. Since there is no PLANET B option available to us, we have to make this planet sustainable.?Meaning thereby, there is only one planet and we have to save the planet.

Many efforts at global level are going on to save the planet.

Let’s study What is sustainability?

Sustainability means Ability to Sustain.

Sustainability is meeting today’s needs without compromising with ability of future generations to meet their needs.

Sustainability is a condition under which humans and nature can exist in productive harmony to support present and future generations.

Sustainability is based on the principle that everything we need for our survival and well-being depends, either directly or indirectly, on our natural environment.

Sustainability is a transition from short-term thinking to long term thinking.

Sustainability is a transition from standalone economy to integrated economy.

Sustainability is a transition from the idea of ‘conflicting with nature’ to ‘compatible with nature’.

Sustainability is a transition from ‘a linear flow of resources’ to ‘a circular flow of resources.’

Sustainability is a transition from ‘fossil fuels’ to ‘renewable fuels.

There is risk of climate change if sustainability is ignored.

Sustainability Vs CSR (Corporate Social Responsibility)

Sustainability is more than CSR.

CSR pertains to ‘What we do with profits but Sustainability pertains to ‘How we make profits.

We need to understand and agree that sustainability is not an upgrade of CSR rather it is beyond CSR i.e. thinking about how businesses should be run and how profits should be earned.

What are environmental and social impact of your actions while running your business will be covered under sustainability.

Impact investing

Impact investing refers to investments made into any company with the objective to generate a measurable positive impact on environment or society while getting a financial return.

Impact investing and ESG are not same because where ESG is set of criteria or factors, impact investing is a strategy which not necessarily may be focussed on financial gain rather there may be more focus on positive environmental and social impact.

Top Global Risks

As per the Global Risk Report by World Economic Forum (WEF), these are top global risks where climate now tops the risks agenda:

Environmental

·?????Biodiversity loss

·?????Climate action failure

·?????Extreme weather

·?????Human-made environmental disaster

·?????Natural disasters.

Geopolitical

·?????Global governance failure

·?????Interstate conflict

·?????National governance failure

·?????State collapse

·?????Terrorist attack

·?????Weapons of mass destruction.

Social

·?????Failure of urban planning

·?????Food crises

·?????Infectious diseases

·?????Involuntary migration

·?????Social instability

·?????Water crises.

Technological

·?????Adverse technological advances

·?????Cyberattacks

·?????Data fraud or theft

·?????Information infrastructure breakdown.

Economic

·?????Asset bubble

·?????Critical infrastructure failure

·?????Deflation

·?????Energy price shock

·?????Financial failure

·?????Fiscal crises

·?????Illicit trade

·?????Unemployment

·?????Unmanageable inflation.

Sustainable Products

Apart from companies and countries concerned about their reporting and ranking for sustainability, customers are also concerned about the planet and sustainability.

Customers are placing greater emphasis on sustainability and related products.

There is a significant growth in the market for sustainable products and consumers are becoming more educated about the environmental and social impacts of the products they buy or consume.

?65% of global respondents surveyed by Nielson are willing to pay more for products from companies that are committed to sustainable business practices.

?The Global Sustainability Study 2021, conducted by global strategy and pricing consultancy Simon-Kucher & Partners, reveals significant global paradigm shifts in how consumers view sustainability and their increased willingness to pay for sustainable products.

?85% of consumers have become ‘greener’ in their purchasing in recent years as per recent report by Business wire.

1/3 of 250 business executives surveyed by Accenture said that they could not keep up with consumer demand for sustainable products.

Companies must act accordingly as per these trends to avoid obsolescence in the near future.

Sustainable Development Goals (SDGs)

Whatever we have mentioned w.r.t. the sustainability is derived from the SDGs and it’s better to have a high level overview of these goals.

United Nations (UN) adopted in 2015 Sustainable Development Goals (SDGs) also known as Global Goals. These 17 goals are with 169 targets to tackle the world’s most pressing environmental, social, economic challenges after due deliberations and negotiations and these are relevant for businesses and to be achieved by year 2030.

Primary call to action was to end poverty and to save the planet and achieving overall global harmony, peace and prosperity in the entire world by the year 2030.

United Nations 17 Sustainable Development Goals are:

(1) No Poverty,

(2) Zero Hunger,

(3) Good Health and Well-being,

(4) Quality Education,

(5) Gender Equality,

(6) Clean Water and Sanitation,

(7) Affordable and Clean Energy,

(8) Decent Work and Economic Growth,

(9) Industry, Innovation and Infrastructure,

(10) Reducing Inequality,

(11) Sustainable Cities and Communities,

(12) Responsible Consumption and Production,

(13) Climate Action,

(14) Life Below Water,

(15) Life On Land,

(16) Peace, Justice, and Strong Institutions, and

(17) Partnerships for the Goals.

ESG and Sustainability is a huge subject which cannot be described or summarized in one article as there are large numbers of concepts which could not be discussed in this limited space. In future articles, we will try to cover more concepts related to sustainability and Sustainable Development Goals.