ESG: No place to hide

We’re already through the first quarter of the year, and our highlight of ‘Actions not Words’ in our 2021 Key Trends is proving true. As the lens of ESG clarifies and intensifies business behaviour, the big commitments and rhetoric are starting to be delivered with bold moves. Be warned. There will be no place to hide. Here’s why ESG has to be central to operating practices.

Appetite for change. Coming in to 2021 there was much talk about the accelerated appetite of investors and consumers for those products and services supporting a cleaner, fairer and more inclusive build back. ESG investing has outperformed the market and shows no slow down.

• Global inflows exceeded US$71bn from April-June 2020 and reaching US$1tr overall (Morningstar).
• In the UK 47.5% of all net money was placed into responsible investment funds in the UK [1].
• The forecast is for continued growth with investors planning to double their allocations to sustainable products over the next five years according to a Blackrock Nov 2020.

This appetite for change is matched by public sentiment and move to ‘belief driven buying’, with 63% of consumers stating they would choose, switch, avoid or boycott a brand based on its stand on societal issues. Whilst how a brand responds to racial injustice now has the ability to increase trust by 3.5-6x, according to the Edelman Trust Barometer [2].

Early intent. The Davos Manifesto’s outline for stakeholder capitalism [3]; UK’s commitment to net zero carbon emissions by 2050 and the embracing of the Task Force on Climate Related Financial Disclosures (TCFD) all reflect the headwinds for financial services taking widened responsibility alongside greater disclosure and transparency. Pre-pandemic it led to a flurry of public statements from businesses to achieving net zero by 2050. Some statements had teeth, such as Goldman Sachs vowing not to help companies go public without at least one “diverse” board member, and BlackRock now expecting at least two female directors on the companies in its portfolio.

Seismic shifts. Now the build back is kicking in, what the first quarter of 2021 has already witnessed are more of the bold moves required to make the shift to net zero and deliver against stakeholder sentiment. Such as:

• Aviva warning that it will fully divest from 30 oil, gas, mining and utility companies, unless they up their efforts to tackle climate change over the next few years [4]
• Bank of America pledging to reach net-zero emissions across the projects it finances and its supply chain by 2050 [5] after being accused by investors and green groups of continuing to finance high-carbon projects.
• S&P raising its risk rating for the entire oil and gas sector in January, and warning 13 oil & gas companies of likely credit downgrading for failing to move fast enough to a low-carbon economy [6].

These bolder and more significant moves are going to increase and will make ‘greenwashing’ all the more glaring. Such is the accusation by environmental groups of the EU’s leaked intent to classify gas as part of its sustainable finance taxonomy, the essence of which is to support the transition to a zero-carbon economy and to prevent greenwashing from firms making false environmental claims [7].

Legislation squeeze. Going in to Q2, legislation is only going to intensify the pressure and expectations. Last week the UK Government published its intent to speed up its mandatory TCFD disclosure requirements by 2022, ahead of the earlier 2025 schedule [8]. The week also saw the EU’s Sustainable Finance Disclosure Regulation (SFDR) kick in with Level 1 of the MiFIDII legislation coming into effect, where advisors are required to assess client attitude to ESG investment and have a system in place for clients wishing to invest in sustainable products. The more onerous Level 2 technical and reporting requirements have been postponed till early next year, where all banks and wealth managers will have to take into account a client’s ESG preferences when deciding suitable investments [9]. But make no mistake, game changing preparation must be completed this year.

Common framework. One of the major stumbling blocks, the hinderance of a common ESG framework adhered to by all, is also starting to be addressed with the likes of Blackrock throwing their weight of support behind both the TCFD and SASB frameworks [10]. Those who have hidden behind self-interpreted frameworks which obfuscated the screening methodology will be seen to be increasingly out of touch with the swell towards a clearer, transparent and common framework. Building on and delivering against what already exists should be encouraged. And there will be no hiding place, as demonstrated by last month’s report by ClientEarth who have called out that the majority of FTSE 100 and the largest companies on the FTSE 250 are failing to adequately report on climate change, and are actually in breach of UK law [11].

Licence to Operate. The next two quarters will have a snowball effect of bold actions as we build towards COP26 [12] in Glasgow where the eyes of the world are expecting world’s leading financial centres, such as the City of London, to lead the way to achieve a zero-carbon future. As Mark Carney, financial advisor for COP26 has said, “To identify the largest opportunities and to manage the associated risks, disclosures of climate risk must become comprehensive, climate risk management must be transformed, and investing for a net-zero world must go mainstream.”

A coherent narrative. Laddering up what audience expectations, legislation and framework adhereance mean, leads to the need for of a consistent, differentiated and evidenced narrative that a business can operate by, and be recognised for.

ESG is not a nice to have. It is the lens through which business needs to focus, act and evidence. It’s why as an agency we’re including, on every brief, a box that specifically asks what the ESG opportunity or risk is to the client’s challenge. Society and the planet need all of us – every business and every employee - to make genuine change. The race to zero can be a win-win.

References

• [1] https://portfolio-adviser.com/whats-on-the-horizon-for-esg-investing-in-2021/
• [2] Edelman Trust Barometer Special Report ‘Brands Amidst [3] Crisis’ launched Nov 2020 based on research in India, UK, US with 8000 nationally representative sample base.
• [3] https://www.weforum.org/the-davos-manifesto
• [4] Aviva will use its ‘ultimate sanction’ to force action on global warming FT
• [5] Bank of America targets net-zero financed emissions and supply chains by 2050 Edie
• [6] https://www.theguardian.com/business/2021/jan/27/rating-agency-sp-warns-13-oil-and-gas-companies-they-risk-downgrades-as-renewables-pick-up-steam
• [7] https://www.euractiv.com/section/energy-environment/news/leak-eu-considers-expanding-role-of-gas-in-green-finance/
• [8] www.edie.net/news/7/Government-ponders-mandatory-TCFD-requirements-for-businesses-in-2022/
• [9] https://portfolio-adviser.com/whats-on-the-horizon-for-esg-investing-in-2021/
• [10] https://www.blackrock.com/corporate/literature/publication/blk-commentary-sustainability-reporting-convergence.pdf
• [11] https://www.clientearth.org/latest/latest-updates/news/clientearth-reveals-uk-companies-not-adequately-reporting-on-climate-change/
• [12] https://ukcop26.org