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Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact. Ella Narain Consultant

Addressing the S in ESG

The ‘S’ within an ESG (Environmental, Social and Governance) framework referring to a company’s relationships with its stakeholders, including employees, customers, suppliers, and local communities is not a novel concept. It has developed from the principles of Corporate Social Responsibility (CSR), where the emphasis was traditionally placed on the social aspect. The social pillar is often perceived as complex, broad, and challenging due to its breadth and continuous evolution. The ‘S’ encompasses a wide range of topics, such as diversity and inclusion, health and safety, human rights, and employee wellbeing. This complexity might explain why businesses often focus on addressing the Environmental and Governance pillars within their ESG strategy. However, the ‘S’ has become pivotal for companies in recent years, as well as pressure from new European legislation (The Corporate Sustainability Due Diligence Directive (CSDDD)) currently being negotiated for 2025, which will address business social values. 

Why the S has become so important

In the 21st century, significant social movements, a global pandemic, and political movements have increased the importance of companies addressing the S pillar more seriously. In 2017, the #MeTooMovement helped workforces put greater pressure on their companies to address gender inequality and sexual harassment.1 COVID-19 increased customers‘, investors’, and employees’ attention to the inequalities existing in the world and the important role businesses can play. Furthermore, the Black Lives Movement accelerated in support in 2020 after the unjust shooting of African American George Floyd. The movement placed greater emphasis on the historic discrimination existing against Black people and the under-representation prevalent in the workplace.2  

The ‘Sis a critical driver of stakeholder satisfaction and success

Customers have long since been a significant stakeholder group that has driven the importance of companies addressing the social pillar. In recent years, consumers have become more socially conscious of a company’s social impacts. Customers are requesting more transparency from businesses, particularly around labour practices, employee health and safety, diversity and inclusion, and the company’s external social impact.3  

Investors are a further critical stakeholder with increased concern regarding companies addressing their social issues. BNP Paribas surveyed 96 investors and found that 70 percent said social factors are now a focal point for their investment, compared to 50 percent before COVID-19.4 In turn, impact-oriented investors are looking more closely at companies’ published objectives and tracking mechanisms around social impact. Published objectives and tracking mechanisms ensure that they protect their investments by investing in business resilience in this topical area. 

The changing regulatory landscape also puts social value factors on the radar for many stakeholders. The increasing awareness and scrutiny of social impact within workplaces have heightened the responsibility of governments and businesses to critically examine and enhance their practices. In Europe, the Women on Boards Directive stands as a key component of the 2020-2025 EU Gender Equality Strategy stating that by 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors. This Directive not only aims to secure a gender-balanced composition within corporate boards but also strives to narrow the gender pay gap. The initiative seeks to create more equitable and inclusive work environments by implementing such measures, ultimately contributing to a broader societal shift towards gender parity. Europe’s directive is now seen as the gold standard for gender equality within the workplace, with investors now expecting 33% achievement or target for the underrepresented sex. 

The social regulatory landscape also extends beyond the business itself. The Corporate Sustainability Due Diligence Directive (CSDDD) is a newly proposed European legislative framework currently being negotiated.5 If the CSDDD is passed, it will likely come into force in 2025. The legislation will require companies to identify their potential and actual environmental and human rights impacts within their operations. Preventive action plans will need to be developed to demonstrate progression has been made by businesses. If CSDDD is enforced, stakeholders will look more closely at how companies plan to scope and address their value chains. 

Putting the ‘S‘ into Action

There are numerous ways a company can strengthen its social impact strategy. Below are key approaches to address and improve a company’s social impact. 

  1. Prioritisation of social impact factors 

Businesses often find it tricky to know which social impact factors to prioritise due to the broadness of the area. A materiality assessment is a valuable tool used by companies that can support the prioritisation of social topics. Complimentary of this, aligning to the Global Reporting Initiative (GRI) can help to understand data points and reporting on the social aspect. GRI can also make tracking and measuring targets in these areas easier and more specific to your industry. In addition, being selective in a few topic areas to prioritise determined by the importance of stakeholders and any upcoming legislation on a topic area is also considered an efficient approach rather than attempting to set numerous short and long-term targets across all social impact areas. 

  1. Engage with your stakeholders  

To understand how to prioritise social impact, you must first understand where the business is currently at with its social impact by gathering existing data. Social impact is a people-orientated topic, making stakeholders your best asset in collecting this data. The Corporate Sustainability Reporting Directive (CSRD) double materiality assessment also advises that stakeholder mapping is necessary for companies to understand how the organisation may impact people.6 Investors, customers, employees, and local communities hold valuable insight into revealing the gaps in a company’s social impact strategy. Furthermore, a company initiating an open dialogue with its stakeholders can also help maintain a positive relationship as the stakeholders feel heard and know their opinions are important. This insight can help shape what a company needs to prioritise and the key issues to address first.  

  1. Having clear social objectives 

Businesses with clear social objectives and a strategy can communicate to their stakeholders about how they plan to address and improve their social impact. This can be difficult to implement for most companies due to the complexities associated with the ‘S’ pillar. The objectives can start small and straightforward, such as implementing initiatives and running pilots within an organisation. If the initiatives and pilots appear to be successful, they can help provide a business case to move forward with those social objectives. For example, implementing an employee volunteering programme can allow employees to use their skill set for a positive purpose, such as helping at a charity or a school in the local area. Not only does this help strengthen community relationships, but studies suggest it helps improve employee wellbeing as it gives them a greater sense of purpose than just their day-to-day role.7 This can be trialled on a small cohort of employees. If well-received with positive feedback, it can be rolled out on a much larger scale with a target of volunteering hours or monitoring employee wellbeing. 

Addressing the ‘S’ is a blueprint for future success and business resilience

Companies placing equal importance on the ‘S’ pillar within their ESG strategy experience positive brand reputations and higher employee wellbeing and maintain positive stakeholder relationships. Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact and the risks this poses to their businesses.8 In the future, we can expect greater legislation around this topical issue and companies already analysing, addressing and improving their social impact will continue to have a competitive advantage. 

Author: Ella Narain, Consultant, Simply Sustainable

  1. Kenaninstitute.unc
  2. Unglobalimpact.org
  3. Linkedin.com/pulse
  4. Mediaroom-en.bnbparibas
  5. Commission.europa.eu
  6. Finance.ec.europa.eu/capital-markets-union-and-financial-markets
  7. Journals.lww.com/joem/abstract/2022/
  8. bracknellnews.co.uk/news
As regulatory pressures, consumer preferences, and environmental challenges intensify, businesses that place the ‘E’ at the heart of their ESG strategy will be better equipped to thrive in a sustainable and responsible future. Lauren Hyatt Senior Consultant

Beyond the Acronym: What is the ‘E’ in an ESG Strategy

The ‘E’ within an ESG (Environmental, Social and Governance) strategy represents the natural environment and is arguably one of the most important pillars. This ‘E’ encompasses all elements of the physical world not created by humans, such as landforms, climate, ecosystems, air, water and soil. Businesses rely on the natural environment and the ecosystem services it provides for their business to operate.1 Ecosystem services can often feel invisible; however, they range from culturally valued landscapes, clean air and filtered water, timber and food. Ecosystem services generate $44 trillion of economic value (over half the world’s GDP).2 In this context, it is vital to both preserve and actively restore the natural environment.

Ecosystems are under threat due to human activity and indirect drivers such as climate change. As nature loses its capacity to provide services and is continually degraded, the impacts on business operations and the global economy will be unfathomable. The World Economic Forum’s Global Risks Report analyses global risks by severity over the short and long term. The 2023 report emphasises environmental risks such as natural disasters and extreme weather, failure to mitigate climate change, biodiversity loss and natural resource crisis.3  The construction, agriculture, food and beverage industries are the three largest industries highly dependent on nature and its services. The impact of excluding the environment from their ESG strategies and decision-making threatens their ability to operate effectively.

The ‘E’ as a critical driver of stakeholder satisfaction and success

By embracing the ‘E’ in business practices, companies can make meaningful contributions towards reducing environmental degradation while safeguarding themselves against financial risks and leveraging opportunities. Its win win. Driving environmental considerations within an ESG strategy also reflects a commitment to shared values and stakeholder expectations. Today’s consumers, investors and governments are increasingly conscious of environmental issues and expect businesses to do their part.

For investors, ESG ratings have also become a crucial aspect of investment decisions. Platforms such as Sustainalytics, MSCI and FTSE ESG assess companies globally on their ESG performance and make this data available to their clients. These ESG ratings are designed to help investors identify and understand financially material ESG risks to a business. Companies are evaluated based on publicly available information such as annual reports and earning results, with scores for each material ‘E’, ‘S’ and ‘G’ topic, alongside an overall score.4 Investors use these unique scores as a proxy of ESG performance and a way to compare like for like.

Companies that score well on ESG metrics anticipate future risks and opportunities better, are more disposed to longer-term strategic thinking, and focus on long-term value creation. In this vein, stakeholders are more inclined to support businesses that demonstrate responsible environmental practices, creating a competitive advantage for eco-conscious companies.

For governments, they all have duties under international law to safeguard the environment for future generations. To this end, governments worldwide are tightening environmental regulations to address the growing environmental challenges we are facing. With this comes a plethora of reporting requirements for businesses, which are used not just by investors but also by consumers. In Europe, a notable development in this regard is the European Union’s Corporate Sustainability Reporting Directive (EU CSRD). The EU CSRD requires businesses to report on their environmental and social impact.5 By focusing on the ‘E’ in an ESG strategy and prioritising environmental responsibility, businesses operating in the EU can position themselves to comply with the EU CSRD’s stringent reporting requirements effectively. The UK is following a similar trajectory and will implement Sustainability Disclosure Standards (SDS) in July 2024.6

Putting the ‘E’ into Action

The initial step in safeguarding the natural environment is to identify the pertinent ‘E’ topics influenced by a business. This entails conducting a materiality assessment to gauge the financial consequences of environmental issues and the extent of a business’s impact on them. Depending on the assessment’s findings, the company can then formulate appropriate action plans. It’s worth emphasising that these ‘E’ topics can serve as the cornerstone for implementing frameworks designed to discern, quantify, and address environmental-related risks. Below are the three most prevalent ‘E’ topics that businesses can incorporate into their ESG strategy and convey progress.

1. Acting on climate change

The urgency of addressing climate change cannot be overstated. The 2023 synthesis report from the Intergovernmental Panel on Climate Change (IPCC) warns of dire consequences if global temperatures continue to rise.7 Businesses that incorporate climate and carbon elements within their ESG strategy can align themselves with international climate targets, contribute to reducing carbon emissions, and mitigate risks. More importantly, focusing efforts on climate change can encourage businesses to understand and report their climate-related risks as well as opportunities. The Task Force on Climate-related Financial Disclosures (TCFD) plays a crucial role in enhancing the sustainability and resilience of businesses in the face of climate change while also encouraging businesses to disclose physical and transition risks related to climate change. These risks can disrupt supply chains, impact operational continuity, and increase costs. Integrating environmental considerations into risk management strategies is crucial for building resilience. Investors want to know that businesses are preparing for the future now.

2. Protecting and restoring biodiversity

Businesses that incorporate biodiversity conservation into their ESG strategy align themselves with the International Biodiversity Framework 30% by 2030 target, support the protection of ecosystems, and mitigate risks associated with biodiversity loss.8 By prioritising biodiversity, businesses can contribute to sustaining ecosystem services and reduce the negative impacts of ecosystem degradation. Moreover, focusing on biodiversity can encourage businesses to understand and report their nature-related dependencies, risks and opportunities, much like climate change reporting through initiatives such as the Task Force on Nature-related Financial Disclosures (TNFD). TNFD provides a framework for businesses to assess and disclose their nature-related risks, offering a standardised approach to understanding the financial implications of biodiversity loss.9

3. Managing water and waste

Half of the world’s population could be living in areas facing water scarcity by as early as 2025; this will place considerable pressure on the stability of the world economy.10 This poses substantial financial risks for businesses, but it also presents notable opportunities. Taking proactive steps to address water-related challenges can lead to developing innovative business models, products, and services with potential for future commercial value. Businesses can begin by conducting a comprehensive assessment of water consumption across operations. This involves tracking usage, identifying inefficiencies, and implementing measures to reduce water consumption. This should be complemented with transparent reporting to showcase a dedication to better water management. This involves not only sharing reduction targets and progress but also revealing the strategies used and their positive outcomes. The Carbon Disclosure Project (CDP) is a prominent platform for water reporting, assisting companies globally in disclosing and addressing water-related risks and opportunities.11

By 2050, worldwide municipal solid waste generation is expected to have increased by roughly 70 per cent to 3.4 billion metric tons up from 2.01 billion tonnes in 2016.12 This is due to several factors, such as population growth and continued urbanisation, as well as consumer shopping habits. Plastic waste is currently of particular concern and governments worldwide are seeking solutions to tackle the crisis. For businesses, waste management should be considered as equally important as water management. Companies can support global reduction targets by conducting comprehensive assessments of waste generation across their operations and like water sharing, better understand and identify targets and report progress.

The ‘E’ is a blueprint for future success

In a world grappling with environmental challenges, businesses cannot afford to overlook the ‘E’ within their ESG strategy. An unwavering commitment to environmental responsibility is not only a moral obligation but also a strategic necessity for long-term success. By addressing the ‘E’ pillar, businesses can reduce their carbon footprint, conserve resources, mitigate risks, and position themselves for growth and innovation. In doing so, they contribute to a more sustainable and resilient future for themselves and the planet. As regulatory pressures, consumer preferences, and environmental challenges intensify, businesses that place the ‘E’ at the heart of their ESG strategy will be better equipped to thrive in a sustainable and responsible future.

Author: Lauren Hyatt, Senior Consultant, Simply Sustainable

  1. https://tnfd.global/publication/recommendations-of-the-taskforce-on-nature-related-financial-disclosures/#publication-content

  2. https://www.weforum.org/press/2020/01/

  3. https://www.weforum.org/publications/global-risks-report-2023/

  4. https://simplysustainable.com/insights/why-esg-ratings-matter-and-how-companies-use-them

  5. https://finance.ec.europa.eu/capital-markets-union-and-financial-markets

  6. https://www.gov.uk/guidance/uk-sustainability-disclosure-standards

  7. https://www.ipcc.ch/report/sixth-assessment-report-cycle/

  8. https://www.cbd.int/gbf/targets/

  9. https://tnfd.global/publication/recommendations-of-the-taskforce-on-nature-related-financial-disclosures

  10. https://www.unicef.org/wash/water-scarcity

  11. https://www.cdp.net/en/water

  12. https://www.statista.com/topics/4983/waste-generation-worldwide/#topicOverview

The rise of environmental claims

As more and more consumers become aware of climate risks and try to adopt more sustainable practices, businesses are sensing an opportunity to tap into the green market. With this comes the danger of unsubstantiated claims about products and services, leading to consumers believing that a company’s products and services are ‘environmentally friendly’. In the UK alone, 72% of consumers consider sustainability in purchasing decisions.1 However, as environmental claims by businesses become more prevalent, so do instances of greenwashing. The good news is that governments are becoming increasingly aware of this trend and beginning to crack down. But, we may be seeing a shift from one extreme to the other; some businesses are beginning to practice a new phenomenon known as green-hushing.  

Greenwashing vs green-hushing

Greenwashing occurs when businesses provide consumers or investors with misleading information about the environmental impact of their operations.2 By exploiting consumers’ genuine ethical concerns, greenwashing impact a consumer’s ability to make a sound, environmentally friendly decision – generating confusion, scepticism and increased perceived risks around ‘green products’. Due to public and regulatory backlash against greenwashing, instances of green-hushing have become more frequent. Green-hushing occurs when businesses do not publish details of their climate targets to avoid scrutiny and allegations of greenwashing.3 

In order to avoid greenwashing or green-hushing, businesses must ensure that the claims they make are accurate, unbiased, and supported by robust evidence. Legislation in both the United Kingdom and the European Union can guide businesses aiming to take the necessary precautions.  

Greenwashing and the regulatory landscape

UK Green Claims Code

In September 2021, the UK government launched the Green Claims Code (GCC). The principles of the GCC are designed to highlight the standards businesses must adhere to when making claims about their environmental impacts.  

The code enforces new guidance on misleading and socially irresponsible environmental claims. By delivering clear and explicit instructions, the code covers the entire lifecycle of a product, service, process, or brand. Beyond the legal penalties for failing to comply, neglecting these six principles risks separating a company from its customer base. As public opinion and expectations rapidly evolve, a company’s reputation is increasingly exposed to this danger. Over 12 months, for example, the Advertising Standards Authority (ASA) found 16 advertising campaigns had either exaggerated their company’s green credentials or made unsubstantiated environmental claims.4 These breaches were widely publicised, severely impacting the businesses’ reputations.  

As trust in green claims is fragile, the Green Claims Code is a welcomed intervention that will play a vital role in levelling the playing field. Businesses that have been working to mitigate their social and environmental impact – with data to support – will see the code as a golden opportunity to gain commercial advantage and improved performance.  

EU Green Claims Directive

The EU is following a similar approach to the UK. In March 2023, the Commission adopted a proposal for a Directive on Green Claims. The proposal on green claims aims to:5 

  • Make green claims reliable  
  • Protect consumers from greenwashing  
  • Contribute to creating a circular and green EU economy by enabling consumers to make informed purchasing decisions  
  • Help establish a level playing field regarding the environmental performance of products.   

To ensure that aims are met, the Directive will set out criteria on how companies should prove their environmental claims, requirements for claims to be verified and enhanced governance on labelling schemes. Although the Directive still needs to be approved by the European Parliament, its significance is paramount and emphasises the need for increased transparency. It is recommended that businesses keep a watching brief on the proposal as it will likely significantly impact current practices.  

How does Simply Sustainable support businesses in getting their environmental claims right?

Simply Sustainable recognises the increasing complexity of abiding by environmental rules and regulations. These are particularly difficult to navigate when faced with large and often elusive supply chains, alongside time and resource constraints.  

At Simply Sustainable, we encourage transparency in all business publications and disclosures and are adept at guiding businesses to comply with existing obligations on environmental claims. In particular, we ensure that reporting and communications are aligned with the latest environmental regulations and best practice frameworks.  

If you are interested in getting your environmental claims right, but not sure where to start, please contact us or request a call back.

Author: Lauren Hyatt, Senior Consultant

References

  1. yougov.co.uk

  2. investopedia.com

  3. ft.com

  4. independent.co.uk

  5. environment.ec.europa.eu

 

It is vital to understand where you are setting off from, before embarking on your net-zero journey.

Like all targets, net-zero targets point to where you need to get to, from your current baseline and by when. There are various ways of creating carbon reduction targets and it is good to see that we have finally moved on from picking nice-sounding round numbers that worked well together (e.g. 20% reduction by 2020 or 30% by 2030). Today, most targets are being set in-line with what the science is telling us is needed to avoid the worst effects of climate change. Targets in line with climate science, AKA science-based targets.

Before embarking on your net-zero journey, it is vital to consider why you are setting your target and how you want to communicate your goals. What is the scope of the target? Is it for one company, a group-wide target or country specific? This will impact the approach you need to take, particularly the first step in your net-zero journey; measuring your carbon footprint.

Step 1: Understand your current emissions

Every company’s net-zero journey will be different, but they all start in the same place; understanding the baseline carbon footprint.

To establish a resilient and comprehensive net-zero target, it is important to ensure that you include all relevant emissions categories in your baseline carbon footprint. Whilst some net-zero frameworks, such as the Science Based Targets initiative (SBTi), don’t require 100% of your footprint to be covered in your target, it is important to begin with a full picture of your footprint and association carbon hotspots. For the purposes of SBTi, your baseline year must be no earlier than 2019 and ideally should be your most recent year.

Our advice would be to follow best practice emissions reporting standards (e.g. Greenhouse Gas Protocol Accounting and Reporting Standard [2004:2015], ISO 14064-1, SBTi Corporate Net-Zero Standard [2021]). This will not only ensure that you have a solid baseline but will also mean that you can use the data collected for other reporting requirements (such as SECR, TCFD and CSRD). Following best practice standards will also assure that you are audit ready, should someone come knocking!

All seven greenhouse gasses covered under the GHG Protocol should be included in your footprint and emissions from across the entire value chain should be incorporated. This includes emissions produced by a company’s own processes (Scope 1), purchased electricity and heat (Scope 2) and those by suppliers and end-users (Scope 3). For more information on emission scopes see the diagram below and this Simple Guide to Scope 3 Emissions by Sytze Dijkstra, Simply Sustainable’s Netherlands Country Manager.

Simply Sustainable Score 3 diagram

Step 2: Hotspot analysis

Analysing the biggest areas of opportunity and risk in relation to decarbonisation.

Emissions hotspots are areas within your business operations and supply chain that have the greatest carbon impact, and as such, offer the greatest opportunity to drive reductions in your carbon footprint. Before setting carbon reduction or net-zero targets it is important to understand your hotspots and understand how these will be impacted by any areas of significant change or growth within your business.

Step 3: Internal buy-in

Getting buy-in at board level is key to the success of your net-zero strategy.

One common mistake is organisations signing-up to sustainability targets and commitments without fully understanding the implications on their business, or how to achieve their commitments. This does not mean that you need to know the exact actions you will be required to take to achieve net-zero, but it does mean that you need to understand the scale of the challenge ahead, before committing. This is not only important for gaining buy-in internally but can also carry a reputational risk. In the first five years after launching, SBTi expelled 119 companies from the initiative after failing to submit climate targets within two years of committing.

Getting buy-in at board level is key to the success of your net-zero strategy, this will not only help your board to increase its carbon literacy but will also help to drive action when it comes to the decarbonisation required to meet your net-zero commitment.

Step 4: Committing to your net-zero journey

Publicly committing to your net-zero journey will help keep momentum and drive action.

Publicly committing to set a net-zero target is not mandatory, but something that is encouraged by the SBTi. This can be done informally through your own internal and external communications, or more formally though submitting a commitment letter to SBTi. If going through the formal SBTi process, you have 24 months to submit your target after signing your commitment letter.

Next in the net-zero series

This is part 2 of a series of insights into net-zero. The next article in our series will cover how to calculate your net-zero target, how to ensure it’s in line with the science and making sure you are setting the right level of ambition, whilst ensuring your target is achievable.

If you are interested in setting net-zero targets, but not sure where to start, please contact us or request a call back.

Author: Henry Unwin, Head of Climate and Carbon Services


We are living on borrowed resources

As things stand, we are utilising resources that do not belong to us. As of today, 19 May 2023, we have consumed all the UK can regenerate in a year. This comes when we are only 138 days through the year, with just under two-thirds remaining. Today is our Overshoot Day.

The UK has a biocapacity per capita of 0.56 gha/person, whilst the average UK resident has the 9th highest ecological footprint in the world, equalling 7.93 gha/person. We overconsume the Earth’s resources at a rate of 7.37 gha/person, a rate that the UK biocapacity cannot regenerate at – to achieve this, we would need 4.1 UK’s. But this does not just affect the UK, if every person in the world was to live like UK residents, we would need 2.6 Earths worth of resources.

The UK economy is heavily reliant on its resources, with the utilised agricultural area (UAA) totalling 17.6 million hectares in 2022, accounting for around 71% of the total land size. Whilst the use of natural resources for the purposes of agriculture only equates to 0.68% of the UK’s GDP, the larger sectors such as manufacturing and services are also at risk. Analysis conducted by Natural Capital Finance Alliance using ENCORE shows that there is potential high dependency on natural capital over 74% of the FTSE All-Share index sectors.

2023 Earth Overshoot Day

How can we solve this?

To reach a sustainable level of consumption by the year 2050, we would need to shift the date back 8 days per annum to achieve an Earth Overshoot Day of 31 December 2050. But how can you as a business help to do this?

Humanity’s ecological footprint is predominantly composed of carbon emissions, which account for 60% of our overall impact on the planet. Decarbonisation represents the most effective strategy for restoring balance between our ecological footprint and the planet’s renewable resources whilst simultaneously mitigating climate change. If we manage to cut down the carbon emissions that contribute to humanity’s ecological footprint by 50%, it would shift the UK’s Earth Overshoot Day by over three months, or 93 days.

By implementing readily available and commercially viable energy-efficiency technologies in buildings, industrial processes and electricity production, we could shift Overshoot Day by a minimum of 21 days, without compromising on productivity or comfort.

Addressing the ecological debt crisis is not a task that can be accomplished overnight. Fortunately, viable solutions are already available and have been effectively implemented. The need of the hour is to swiftly scale up their implementation.

UK Overshoot animation

For how we can support your business in its decarbonisation, see our carbon services or request a call-back.

Author: Harry Freeman, Consultant

#MoveTheDate
www.overshootday.org

The European Commission is influencing business behaviour through the Sustainable Finance Agenda. UK and US companies will be affected by the ESG reporting regulations if they have subsidiaries in Europe.   

US companies not only need to prepare themselves for the proposed Securities and Exchange Commission1 (SEC) Environmental, Social and Governance (ESG) reporting disclosures but should also ensure they are readying themselves for the impact of the international ESG reporting requirements such as the Corporate Sustainability Reporting Directive2 (CSRD).

Within the EU, CSRD is expected to impact nearly 50,000 entities. This is far more than are affected under the current EU reporting requirements. CSRD, which entered into force on 5 January 2023, requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues and on the impacts of their activities on people and the environment.

EU subsidiaries of UK and US companies will be expected to provide substantial ESG disclosures, demonstrating the robustness of their ESG strategy, targets, KPIs and progress, as well as the ESG performance of their products/services and value chain.

One of the requirements of CSRD is to complete a double materiality assessment to determine the priority topics for a company’s ESG strategy and reporting. This type of assessment involves stakeholder mapping and engagement, determining the impact of ESG on the organisation and the impact the company has on the ESG topic. In addition, the financial impact of ESG is also considered.

Climate change is a good example of this inside-out approach, where the impact of climate change on the company is assessed, for example flooding and supply chain disruption. The company would also need to consider their contribution to climate change e.g. use of fossil fuels, production of single-use plastic, use of their products and advice provided to clients.

CSRD also imposes mandatory assurance for reported sustainability information. This is likely to be conducted by a company’s financial auditors if they have the correct skills and experience.

The first set of companies under the scope will have to apply the standards in the fiscal year 2024, with reports published in 2025.

Next steps

Given the short timescales, we would recommend conducting a double materiality assessment urgently and, in the meantime, reviewing current ESG strategy, targets and KPIs against CSRD requirements and wider international reporting requirements. We would also recommend reviewing the current system in place to track ESG data and ensure data is being tracked robustly at a subsidiary level.

Author: Nicola Stopps, CEO, Simply Sustainable

  1. Securities and Exchange Commission. sec.gov
  2. Corporate Sustainability Reporting Directive. europa.eu

Today, it is now widely acknowledged that companies cannot tackle the climate and nature crises without bold action. The arrival and ongoing development of corporate science-based targets (those in line with the ambition to keep global temperature increase below 2°C and ideally to 1.5°C above pre-industrial temperatures) has crucially set the minimum standard for climate action. Despite this, a significant quantity of greenhouse gas emissions still remain outside of companies value chains, presenting the need for companies to drive net-zero beyond the company boundary.

At Simply Sustainable, we help companies to deliver socially inclusive decarbonisation actions, mitigation measures and investments to avoid, reduce and then remove greenhouse gases that fall outside of the company’s direct value chain. This is referred to as ‘beyond value chain mitigation’. Importantly, such actions play a key role in reducing the emissions gap between today and our global net-zero target date of 2050.

At present however, there is an absence of clear industry guidance on beyond value chain mitigation. The SBTi (Science Based Targets initiative) for instance, is anticipated to release further guidance in 2023 whilst sector specific methodologies are underway. In the meantime, companies must pursue credible mitigation efforts to ensure a chance of achieving global net-zero in-line with the Paris Agreement.

To deliver credible beyond value chain mitigation, companies must consider near-term and long-term targets, align to the wider company strategy and values, and consider innovation and knowledge gaps in the achievement of net-zero. Additionally, such measures should be monitored and reported at least annually with minimum expectations to disclose the nature and scale of involvement, monetary contribution and value realised.

Here’s just a few examples of how we can support beyond value chain mitigation for your company:

  • Delivering credible, socially inclusive net-zero strategies (with beyond value chain mitigation)
  • Conducting just transition assessments to understand opportunity areas for socially inclusive partnerships to deliver net-zero
  • Advisory on carbon offsetting and the purchase of high-quality, jurisdictional carbon credits (including nature-based solutions)
  • Driving climate finance by setting an internal price of carbon and calculating the social cost of carbon of your business
  • Developing research and development plans and opportunity metrics and targets for new climate solutions
  • Assessing and improving climate skills, training and education to deliver decent and green jobs, education, skills, training and re-training for all.

By considering beyond value chain mitigation with foundational principles of social inclusion, fairness and equity, we can support companies to ensure no one is left behind as we strive towards net-zero. Ultimately, we can and must work together to collaborate and partner to deliver co-benefits for nature and people.

Fair tax systems are vital to enhancing public trust and to achieve a modern, sustainable and inclusive economy. Currently, the world is focused on the environmental and social consequences of what businesses do and are calling organisations to respond in a way that demonstrates positive impact. Tax reporting is an area that brings elements of environmental, social and governance (ESG) performance to life, with leaders preparing for a more transparent tax world. Tax transparency is a topic that has seen rapid change in recent years and recent scandals have highlighted the need to retain public and stakeholder trust. Simply Sustainable have a strong focus on addressing the most complex issues and opportunities our clients face. By combining our expertise and commercial mindset, we work to achieve your business goals.

Simply put, to stay competitive in the market, businesses must respond to the increased focused on tax strategies, policies, reporting and risk management in connection with responsible investment. Our approach is underpinned by these four principles:

Good governance

It is important to know that tax lies within both ‘S’ and ‘G’ of ESG. So, what is the most effective way the tax function of a company be managed and governed that upholds social and moral values?

Corporate tax is becoming a reputational risk that companies must consider and is a means for stakeholders to evaluate if companies are paying their ‘fair share.’ This impact is seen on a local and international scale, with “unfair tax” depriving the low and medium Human Development Index countries of an estimated $100 billion per year.3 To follow through with good governance, a company must follow the general business and human rights logic and hold social and economic rights as a key obligation to operations. This means putting in place the right policies and processes to assess the impact of a company’s behaviours and minimise the potential harm done by irresponsible tax behaviour. These should all be measured for effective due diligence and robust impact assessments.

Transparency

Taking a responsible approach to tax means that a company is open, progressive and considers all stakeholder interests – including taxpayers, communities, governments, lenders and the financial community.1 So, understanding tax from a social perspective means questioning how much tax is being paid and where, and what are the global tax strategies being undertaken by companies?

While pressure in different geographical regions varies, the consensus from the global stakeholder community is for companies to reflect on their contribution to society. Voluntary approaches included engaging with disclosures in Global Reporting Initiative (GRI)4, Fair Tax Mark accreditation, B Corp certification and the work done by Principles for Responsible Investment (PRI) such as the Engagement Guidance on Corporate Tax Responsibility and Investors’ Recommendations on Corporate Income Tax Disclosure.5

Companies will already be aware of mandatory requirements in certain regions and sectors. These include country by country reporting (CBCR) in the EU Accounting Directive, public country-by-country reporting (pCBCR) Directive, UK Tax Strategy Disclosures and Base Erosion and Profit Shifting Project (BEPS) for certain OECD countries.

Engagement with Tax Authorities

Even if a certain regions tax regulations are unchanging, a company may still be subject to stringent regulation by tax authorities. Tax authorities are taking a more proactive enforcement to reduce the exploitation of international tax frameworks. Need for transparency and better disclosure has been the focus for global bodies such as the World Federation of Exchanges – include tax transparency as ‘material ESG metric for reporting’; International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) Foundation – work on independent standard-setting on tax disclosures; and the International Federation of Accountants (IFAC).5

 Tax risk management

Tax-related risks extend beyond short-term earnings, so companies should be proactive to changes in their business environments to tax rules. This may include being aware of incentives the company may take advantage of, reputational and brand risk, societal risk from aggressive tax strategies and challenging complex strategies. In addition, a company should understand the potential impact on key stakeholders to understand any long-term risks.

How Simply Sustainable can assist

Many recommendations from all actor groups share the same difficulty: how to distinguish between acceptable and unacceptable tax practices. To address this, Simply Sustainable follow the above four principles to develop an approach for our clients that embraces responsible tax. Our goal is to arrive at the correct tax metrics to support the overall ESG goals to achieve commercial success and wider stakeholder buy-in.

 

1 B Team. Why responsible tax belongs on the ESG agenda.

2 Fair Tax. About us.

3 Oxfam. Endless corporate tax scandals.

4 GRI 207. Tax 2019.

5 PRI. Advancing tax transparency: outcomes from the PRI collaborative engagement.

Greenwashing in the financial sector risks devaluing ESG, but there are three things that could help firms raise the bar; upskilling, target-setting and better reporting.

As Simply Sustainable is a technically experienced consultancy and having worked across financial services clients including banks, private equity portfolio companies and funds, we understand where improvements need to be made.

“In the finance sector, the level of awareness, knowledge and then implementation [of ESG criteria] has risen quickly and dramatically but there is still a journey to continue. What I’ve seen work well is the understanding of the financial risk of ESG and particularly climate change on businesses,” says Nicola Stopps CEO of Simply Sustainable.

The Taskforce on Climate-Related Financial Disclosures legislation coming in has been useful because this framework has helped improve knowledge of the risks of climate change and, by extension, other ESG topics too. Investment firms are “at the table on ESG”, asking the difficult questions of companies and setting the tone for the businesses in which they invest, forcing them to take ESG seriously.

What else can financial services do to make their businesses and those in which they invest, do better on ESG?

  1. Upskilling  

The industry needs to upskill and increase knowledge and education on all ESG topics, argues Stopps. Right now, it’s fairly easy to recruit at a junior level and there is higher education on sustainability that just didn’t exist until quite recently.

At the mid-management level and above, things are more challenging.

There is a really small talent pool of people with 20 years’ experience. We see senior leadership moving in to ESG without the skills and the knowledge. This is a really challenging area to work in, it’s not a quick fix to suggest a programme and implement it, it’s a long slog.

To do that you need purpose and drive to believe businesses can be a benefit to society and the environment, and you can be a cog in the wheel to support that. That is sometimes missed at that senior level.

  1. More than box-ticking

Firms should have a “very robust, strategic approach to ESG and sustainable businesses” to prevent greenwashing. This should be aligned to commercial strategies, and there should be good understanding of the financial risk to the organisation if it doesn’t take such an approach.

Currently, a lot of firms are still treating ESG as a box-ticking exercise or a data set rather than something to be integrated more holistically into every aspect of the business.

Setting science-bound targets and KPIs and then implementing them strategically is key, as well as being honest and transparent about how decisions are made.

  1. Better reporting

We encourage better reporting as companies prioritise ESG and integrate it into every business area. “How do you report transparently in a balanced, coherent, accessible and honest way?”

Standardisation of reporting criteria should help here: the International Sustainability Standards Board is looking at bringing in a global baseline for sustainability-related disclosure requirements.

However, this is not something new, GRI [Global Reporting Standards] has been the gold standard in reporting for decades now, so there’s a lot of experience in that area already. Nicola Stopps, CEO of Simply Sustainable states, ‘I don’t think we’ll end up with one standard, I think we’ll end up with a couple just like with the financial reporting, there will be a few but it will be a lot simpler.”

This should make the concept of ESG more accessible to organisations, she suggests.

The time is now

Overall, our belief is that financial services firms must raise the bar on sustainability, and the time for action is now.

“We’re in 2022. Businesses need to actually start delivering. They need to meet climate change challenges and the stakeholder expectations on them. It’s not good enough now just to have targets and KPIs, they need to look at their business systematically and deliver sustainable transformation across their business,” says Stopps.

“This year and next will be the years of delivery.”

As climate change and sustainability move up the investor agenda, more capital is flowing to funds that demonstrate strong alignment with positive environmental, social and governance (ESG) performance. In 2021, over $500 billion of capital flowed into ESG-integrated funds which attributed to a 55% growth of assets under management in these products.1

With this rise, investors are becoming increasingly sophisticated in their use of ESG information and focusing on tools that can help them understand the magnitude of ESG risks they face. To help ensure risk is managed effectively, financial organisations are looking to ESG rating agencies to provide a robust measurement framework. These agencies are designed to analyse current ESG-related disclosures and their impact against an organisation’s material topics, as well as those common within the sector, to determine performance on these issues.

ESG risks can be numerous, opaque and varied across sectors; so, ESG rating agencies are valuable tools to investors as they produce an impartial understanding of ESG performance to determine if an investment is socially responsible or not. For companies, the scores can be used as signals to showcase strong ESG performance relative to competitors when it comes to the impact on society and the environment.

There is currently much debate around the credibility of ratings agencies, as no two ESG rating agencies offer the same service, or the same methodology which creates varying scores and opinions on the same disclosure. For this reason, at Simply Sustainable, we believe that rating agencies are a good start to performance evaluation but shouldn’t be used in isolation to measure the total impact of an asset or organisation. We would also always recommend those agencies which use performance metrics against identified material topics.

 

Who are the main ESG rating agencies?

There are many ratings providers that use corporate disclosures to formulate ESG scores. With an abundance of choice, it is important to determine which ESG rating agency should be used for your organisation. Listed below are the top-rated, globally recognised ESG rating agencies which are commonly used by investors:

  • MSCI ESG Ratings
  • Sustainalytics ESG Risk Ratings
  • Bloomberg ESG Disclosure Scores
  • FTSE Russell’s ESG Ratings
  • Institutional Shareholder Services (ISS)
  • CDP Climate, Water and Forest Scores
  • S&Ps Global ESG Score
  • Moody’s ESG Solutions Group

It is important to highlight that each organisation applies separate methodologies which means the ranking of performance differs, but all include factors such as investment risk, financial strength, social responsibility and environmental sustainability. Agencies which utilise performance metrics against identified material topics of an organisation include MSCI, Sustainalytics. Other agencies such as ISS have a standard methodology, which weigh individual scoring based on applicability. These stand out as top agencies as the analysis is based on quantitative and qualitative data.

Since there is no one-size-fits-all, you will find that some agencies focus on specific areas of ESG performance. For example, the CDP provides environmental data, tools and research that can be used to inform investors about companies that are addressing material concerns linked to climate change, deforestation and water security.

 

The regulatory landscape: what are regulators saying?

At present, ESG rating agencies are unregulated which means that the methodologies go unchecked. The absence of oversight has allowed a proliferation of rating platforms to use corporate statements and generate their own ESG ratings. Unfortunately, this practice has led to some key challenges that firms have to navigate when looking for ESG accreditation. Such challenges include the lack of reliability and transparency of ratings and the potential for a conflict of interest between providers and users. Just as accounting practices standardised over time, so too will a uniform system be developed for rating ESG performance.

 

Why is regulatory oversight important?

Greenwashing presents a greater risk to investors and consumers, where companies oversell their sustainability credentials. Due to the subjectivity inherent in ESG ratings, there is a risk of confusing fact with opinion. For this reason, there has been further discussion of creating regulations which focuses on the transparency of ESG definitions, methodologies and the actions taken to reduce conflicts of interests within ESG Rating Agencies.

 

The regulatory view from three global jurisdictions

Europe

In February 2022, the European Securities and Markets Authority (ESMA) published a “Call for Evidence” on ESG ratings. In June, they published their findings, that companies using ESG ratings should dedicate some level of resourcing to their interactions with ESG rating providers, and that respondents highlighted issues with the level of transparency as to the basis for the rating, the timing of the feedback and the correction of errors.3 As this oversight increases, ESG ratings will become more reliable and useful.

United Kingdom

Recently, the UK’s Financial Conduct Authority (FCA), expressed its support for the regulation of ESG data and rating agencies.4 Doing so will protect both consumer interests, as well as encourage effective competition. Regulators are welcoming the idea of a Code of Conduct which will help govern the different ESG rating agencies. Such actions by regulators will promote transparency, integrity, and the independence of each rating agency.

United States (US)

The current ESG rating environment is turbulent as US regulators take a strong stance on ESG claims. Since 2019, 65 funds have been repackaged into ESG funds to appeal to sustainability-oriented investors.8 The Securities and Exchange Commission (SEC) primed to crack down on misleading ESG claims to influence a fair and efficient market. Following the SEC announcing a $1.5 million fine on BNY Mellon’s fund management for misleading information on ESG investments, even tighter rules and disclosures on marketing have been promised.5 Further within this field, Harvard Business School is progressing their Impact-Weighted Accounts Project to drive the creation of financial accounts to reflect a company’s financial, social and environmental performance.7

ESG ratings enable companies to showcase strong ESG performance relative to competitors. As experts, we can assist your company to pursue alignment with key ESG ratings and frameworks from the outset to shape the narrative in a format that investors and other stakeholders will understand and value.

 

 

1 JP Morgan. Future of ESG Investing.

2 CDP. Climate Transition Plans.

3 ESMA. ESG Ratings.

4 Reuters. Britain decide this year whether regulating ESG Raters.

5 Funds Europe. SEC fines BNY Mellon $1.5m for ESG misstatements.

6 Financial Times. SEC prepares crackdown on misleading ESG investment claims.

7 Harvard Business School. Impact-Weighted Accounts.

8 US Sustainable Fund Flows Slid First-Quarter 2022. Morningstar.

 

 

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