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:
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.
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.
2 Fair Tax. About us.
3 Oxfam. Endless corporate tax scandals.
4 GRI 207. Tax 2019.
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?
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.
- 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.
- 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
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.
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.
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.
In what the World Economic Forum labels the ‘Fourth Industrial Revolution’, technological innovations are becoming faster, more efficient and more widely accessible. Technology has the dual role in transforming organisations within its ecosystem and as a digital enabler of sustainable solutions. Environmental, social and governance (ESG) performance is becoming a basic expectation of stakeholders as discussions around technology and ESG evolve to become more strategic, specific and regular.
Global companies like Google, Microsoft and Salesforce are leading the way in setting bold transformation goals that set them on track for net zero. But there is still a gap between commitments and real action. Analysis by 451 Research reveal that only 29% of the global technology companies have a formal ESG strategy.1 With focus on sustaining competitive advantage, how can technology companies respond to sustainability and measure positive impacts?
- Embedding circularity
The main issues that the sector continues to grapple with is reducing waste and the limitations of digital accessibility. Companies are expected to be accountable for the impact of the entire supply chain and to avoid contributing to ethical, environmental and human right violations. E-waste is quickly becoming one of the world’s fastest growing and most toxic waste streams, making it top of the circularity agenda. The UK is committed to ‘closing the loop’ and are taking a stringent approach to end complacency on e-waste. At the end of this year, the UK government will consult on reforms to the regulations around managing e-waste which will likely impose mandatory waste tracking.
In a circular economy, the intention is to produce a model of production and consumption with no waste or pollution. Rather, outputs are cared for, repaired, reused and recycled as much as possible. In contrast to the ‘take-make-waste’ linear model, a technology company that adopts circularity will benefit from improved efficiency, material cost savings, greater security of supply, better job creation, improved customer engagement and loyalty, more innovation and improved brand reputation.2 Either through improving environmental impact or encouraging habits of circularity, consumer-facing technology companies are in a powerful position to steer consumers towards more sustainable habits i.e. re-using and repairing products where possible.
Partnerships are vital and there are plenty of examples between technology firms and organisations finding ways to embed an inclusive circular economy. Environmental charity Hubbub and Virgin Media 02 launched a £400,000 digital lending scheme to support programmes that deliver on social and environmental benefits. 3 By pioneering a tablet lending scheme, the fund will assist community organisations to support people facing digital isolation to access the internet, and to reduce e-waste by recycling digital devices.
- Identify a specific ESG approach
Another step would be to measure own ESG performance to build a culture of sustainability in and around the sector. Sustainability has never been more important to technology leaders, as 74% of CEOs agreed that increasing ESG efforts attract investors.4 Companies that want to excel in their ESG strategy must use compelling evidence to develop a unifying framework that identifies strategic priorities, commitments and key performance indicators (KPIs). This means that technology companies must first set expectations and commit to transparency. The Simply Sustainable method begins with developing ESG goals to establish mechanisms that measure and track relevant ESG metrics.
Alongside addressing their own priorities, companies should also drive change throughout their wider operating ecosystem. Technology companies should focus on working with suppliers and partners that align to their emission and reduction commitments – this will be a core feature to value propositions of the end-to-end lifecycle.
- Find areas of material impact
To make progress on ESG performance, technology companies need to think about areas where change can make the most impact. Understanding the sustainability issues that are most relevant to the company and key stakeholders demonstrates that focus is on the most important sustainability issues. This will lead to focused efforts that deliver the greatest impact.
Materiality assessments are pivotal to a serious approach to sustainability and corporate responsibility. By continually evaluating, refining and talking to internal and external stakeholders, areas that are the most critical to the business will be prioritised. This demonstrates that a company is aware of the social and environmental issues that present sources of risk and opportunity.
- Evaluate and communicate efforts
Communicating the journey to sustainability in the form of ESG reporting is both important to address growing stakeholder scrutiny, but also acts a measure to improve year on year performance. Companies that fail to provide qualitative context and content to stakeholders miss out on engaging all stakeholders. This is an opportunity for a company to position themselves as the solution that aligns with stakeholder concerns – by giving the ‘why’ behind operational changes and using ESG data to inform your sustainability strategy. By demonstrating to stakeholders their corporate approach to sustainability is beyond a ‘tick-boxing’ activity’, companies can expect to maximise their return on investment into ESG reports.
- Adapt to changing workforce expectations
Today’s generation want company values that align with their personal values, with companies that innovate to address global issues being more attractive to skilled workers. To attract and retain top talent, technology companies of all sizes must be perceived as embracing sustainability with evidence to back up claims. For example, investing in learning and development for STEM subjects, diversity and inclusion, allowing flexible work or donating portion of profits to an environmental cause are ways that will more likely attract and retain skilled employees.
It is about the intention behind the initiative, not the scale of it. Companies are expected to have ESG embedded into the corporate strategy, and this does not exclude the technology industry. Finding ways to bring ESG closer to daily operations while allowing everyone to contribute will maximise a company’s total impact.
How Simply Sustainable can develop your ESG strategy.
Underpinned by decades of specialised experience in sustainability and ESG, we provide deep expertise to all our clients worldwide to enable transformation at speed and scale.
At any stage of the sustainability journey our robust and holistic approach identifies the key levers to match ambitious goals with clear targets and actionable roadmaps.
1 ESG and Technology. S&P Global.
2 The Circular economy in detail. Ellen MacArthur Foundation.
3 Tech Lending Community Fund. Virgin Media O2
4 Survey in CEO thinking on Sustainability. Gartner.
Companies worldwide are experiencing mounting pressure from investors, regulators, the public and other stakeholders to take environmental, social and governance (ESG) matters seriously. In fact, the number of ESG reporting standards and regulations at a global level has almost doubled in the last 5 years.1 As there are more than 600 ESG reporting provisions currently available worldwide, with many having different interpretations of sustainability, the task of disclosing quality ESG information presents a major challenge for companies.1
The lack of a single, standardised framework for ESG reporting, coupled with low compliance to existing regulation, has unfortunately fuelled the disclosure of misleading and/or inaccurate information.2,3 Numerous international corporations, like Volkswagen and BP, have been exposed for greenwashing4 and a global review conducted by the Competition and Markets Authority (SMA) revealed that 40% of green claims made online by firms could be misleading consumers.5
While greenwashing appears to be rife and particularly problematic, companies are also starting to be exposed for misleading the public about how they treat their people. On International Women’s Day 2022, a day to celebrate the social, cultural, political and economic achievements of women, hundreds of British organisations posted to social media to show their support for the cause.6 However, on Twitter a bot was on the loose, which retweeted their posts but also shared the difference in median hourly pay between men and women at each firm.7 The Gender Pay Gap bot, which had the strapline ‘Deeds not words. Stop posting platitudes. Start fixing the problem’, highlighted the apparent hypocrisy between company posts and gender pay performance.7 In many instances, the gender pay disparity flagged by the bot was shocking, such as 68.6% difference at Ryanair.7 Companies in the public sector were not out of the firing line; Cancer Research UK, for instance, was revealed to have a 30.9% median gender pay gap in 2021.8
Consequently, and unsurprisingly, scepticism is high among investors with regards to ESG claims that companies make. Indeed, research conducted by Edelman in 2021 found that 86% of global investors believe companies exaggerate their ESG performance when disclosing results, and 72% do not think they will live up to their ESG commitments.9 Another recent survey of more than 4,600 individual investors across the UK, US, France and Germany obtained similar findings: 90% of respondents stated that they struggle to trust ESG claims made by businesses at face value.10
How can we rebuild trust and confidence among investors concerning ESG disclosures?
In response to growing calls from international investors for high quality, reliable, transparent and comparable reporting by companies worldwide on ESG issues, the International Financial Reporting Standards (IFRS) Foundation announced the formation of the International Sustainability Standards Board (ISSB) at COP26 in November 2021.11 The ISSB has been tasked with developing a comprehensive global baseline of sustainability-related disclosures standards, providing investors and other capital market participants with the information they need to make informed decisions.11 While a host of reporting standards already exist, there is optimism that the ISSB standards will be widely accepted and adopted – the IFRS sets financial accounting rules that companies in more than 140 countries adhere to, and because the standards build on existing ESG frameworks developed by other sustainability reporting initiatives, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI).1,12 By creating a comprehensive and detailed corporate reporting standards framework, companies will be able to measure and report their ESG performance in a consistent manner.11 Ultimately, it will restore trust and confidence among investors and other key stakeholders in the ESG disclosures that companies make.
It is becoming more pertinent that companies need to transparently disclose their ESG performance to reduce the risk of reputational damage. Adherence to globally accepted standards, such as the GRI and SASB, can help companies to understand and effectively report their ESG performance; the imminent release of ISSB standards is anticipated to significantly ESG reporting worldwide.
At Simply Sustainable, we support an array of international organisations with their sustainability reporting, employing best-practice global standards (e.g., GRI) to ensure their disclosures meet the needs of key stakeholders. If you are looking for support with your sustainability reporting, please contact us using the details below.
3 Carbon Market Watch. EU works to beef up regulations on green claims.
5 UK Government. Global sweep finds 40% of firms’ green claims could be misleading.
7 Personnel Today. International Women’s Day.
8 Civil Society News. Cancer Research UK ‘disappointed’ by widening gender pay gap.
10 Edie. Survey.
11 IFRS. ISSB
12 The Globe and Mail. Is a reporting standard finally on the horizon
Here is what we know. More than half of global economic output, a total of US$44 trillion of value generation, is moderately or highly dependent on nature.2 Every dollar invested in nature restoration creates up to US$30 in economic benefits.3 And alarmingly, £300 billion of UK pension money is invested in companies and financial institutions that are exposed to high deforestation risk.4 Clearly, Earth’s ecosystems have massive value. But these systems are in jeopardy due to an unprecedented onslaught of human-induced biodiversity loss.
‘The sectors that are most immediately likely to be affected by the depletion of natural capital are those that exploit it most directly.’ – Mike Scott
Nature’s warning calls are at extreme levels. Global numbers of mammals, birds, fish, amphibians and reptiles have dropped by an average of 68% since 1970.1 Biodiversity loss and collapse of ecosystems from human-made damage has been widely recognised as an existential global threat. Despite the efforts of international economic and financial organisations to draft elements of nature into their growth models, there is still an absence of nature as an essential entity in our economic lives.
What is TFND and why should businesses engage and disclose with prior to release?
It is undeniable that a nature-positive approach to doing business is urgently required. Following the steps of the Taskforce on Climate-Related Financial Disclosures (TCFD), the Taskforce on Nature-related Financial Disclosures (TNFD) acts on behalf of nature. The Taskforce’s approach strikes a balance between science and market participants for clear, transparent, and comparable information. Decision-making can place nature-related risks front and centre, capital reallocation can be catalysed to protect and restore nature. By fostering knowledge, sharing and collaborating on nature-related risks and opportunities, the TNFD creates and delivers a risk management and disclosure framework for organisations of all sizes. The plan is to guide financial institutions and companies to act on evolving nature-related risks, as well as to identify opportunities that ultimately shift global financial flows to nature-positive outcomes. On the release of their second prototype framework, the TNFD outlined overall guidance and illustrative metrics to be consulted by global stakeholders with the inaugural framework being released towards the end of 2023.
Core concepts include:
- Metrics and targets that include a cross-sector approach
- Additional guidance materials to assist market participants
- Nature-related risk and opportunity assessment for financial institutions
Importantly, it is possible for companies of all sizes to engage in nature and biodiversity to promote innovative solutions to a global problem. To ensure success, it is vital to focus on internal drivers and recognise an organisation’s impact from the outset. Nature can be included across all aspects of ESG with the social aspects reflected in business through the conscious creation of urban biodiversity as well as nature-related employee perks.
So, what is on the horizon for businesses, financiers and nature-related risks and opportunities?
As the business community is navigating its expanding role as a key driver of sustainable growth, there is a broad range of market-led, science-based measures to take. By acknowledging that people are part of nature, businesses can engage from a range of aspects across the full spectrum of environmental, social and governance (ESG).
Since the time for action is now, there is an increasing number of leading companies recognising that a prosperous business relies heavily upon nature. However, businesses will be at different stages in their journey to nature net gain – an approach outlined by TNFD to managing an businesses impact that leave the natural environment in a measurably better state than it was beforehand.5 Larger companies will already be reporting nature-related metrics and targets against current ESG frameworks that include GRESB, Global Reporting Initiative (GRI), and non-GHG pollution. For smaller companies, there are many waves to move nature to be the centre of their brand. By engaging with restoration projects on a corporate level and introducing sustainability into procurement strategies leading to reduced impact on natural resources and greater engagement by working with suppliers that meet circular economy targets.
As has been done with climate in the past, these efforts can be built upon by embedding nature into governance through introducing nature into risk management. Recognising the high material financial risk that nature loss poses, it is important to integrate this exposure into decision-making to locate risks and opportunities. Transition opportunities will be high on the agenda, especially relating to evolving markets and policy. A robust understanding of the physical and financial risks and opportunities can guarantee subsequent control measures will be implemented in a timely manner. In light of the Green Claims Code, there is great potential to be transparent about diversifying portfolios into the growing market of green finance and taxation.
At Simply Sustainable, we understand that putting things right will take collaborative action to enable the natural world to flourish abundantly. Our work includes supporting international businesses from across the economy to align their reporting to current disclosure and frameworks related to nature through GRI, GRESB, and communication reviews. We welcome the market-led science-based TNFD framework to promote year-on-year improvements on a company’s journey to full disclosure.
1 World Wildlife Fund. Living Planet Report.
2 UN Environment Programme. Cutting Edge Biodiversity Module.
3 UN Environment Programme. Ecosystem Restoration for People, Nature and Climate 2021 Report.
4 Global Canopy Organisation. UK pensions.
5 UK GOV. Biodiversity Net Gain.
A well-defined and robust environmental, social, and governance (ESG) strategy can help a private equity firms’ de-risk and drive value throughout the fund lifecycle.
Drawing on our decade long heritage of working with private equity funds and their portfolio companies, we have outlined some of crucial factors for successful ESG integration.
As a first step, we would suggest that private equity firms should assess their current environmental, social, and governance capabilities to develop an actionable and flexible plan for driving sustainable growth.
Data, Data, Data
Most PE funds will have to provide stringent monitoring of their fund’s performance, so it is a good place to start. Knowing where you are on non-financial data sets can provide a good ground for providing insight into your current ESG position and the areas that need to improve.
Using an ESG framework as an additional perspective for identifying risks and value creation opportunities is undoubtedly becoming mainstream in private equity around the world. Ensuring these processes are auditable and being used in the right way is essential to avoid green washing.
It is crucial that investment teams have access to ESG and sustainability expertise with experience and knowledge about financial markets in general and private equity specifically. It is imperative that the right expertise is used to develop a robust strategic ESG approach. We have witnessed a rise in financial services receiving huge fines for greenwashing because they haven’t had the right teams supporting them in driving the agenda forward.
ESG Transformation in PE firms are usually complex and involve investment, which may impact short-term profits. It’s important that shareholders and management are aligned for the duration of the transformation.
The World Economic Forum identifies the challenges that might occur – although rarely do transformations run to plan as they are often impacted by the market and competitive dynamics. Quality management will counter these forces by adjusting their plans and efforts, thereby achieving longer-term goals albeit with shorter-term volatility.
Private equity shareholders, being fewer and closer to management, can understand better such volatility and support mid-course corrections.
As ESG performance has become an essential; and with sustainability on the minds of investors and shareholders across the globe, it is no surprise that businesses are looking for short-term validation of their ESG efforts in the form of an ESG rating. Whilst they are an excellent step for companies to publicly disclose their sustainability efforts in the form of the ratings and we encourage businesses to do so, an average-good ESG rating does not guarantee a business long-term resilience. Future-proofing and forward-looking ESG strategies is what we believe organisations should be investing in.
What has spurred on the ESG ratings boom?
ESG ratings are designed to measure a company’s resilience to long-term, industry-specific ESG risks. No ESG rating is the same: each ratings company has a different focus area and methodology, which means that organisations often align themselves to two or three ratings platforms in order to get a more comprehensive overview. Sustainalytics and MSCI being two big players in the ESG rating arena rate over 20,000 companies combined. This rapid growth has been prompted by investors’ increased interest in ESG integration and by the rise in corporate reporting and public disclosure.
Why ESG ratings are one input among many
Research by SustainAbility found that 65% investors look at ESG ratings at least once a week. However, investors insisted that they use the data but explicitly not the scores from an ESG rating to inform their internal research, hereby establishing their own view on the company’s performance. This suggests that whilst ratings are a useful starting point and are an excellent peer-benchmarking tool, the rankings are one piece of the puzzle for investors.
Once businesses have understood their ESG scores and made any necessary steps to improve their performance on the ratings platforms, organisations should also look towards aligning themselves with recognised standards and frameworks that investors will recognise. A positive association and engagement with global standards and initiatives shows that the company is joining ranks with others who acknowledge their impact on the world and are making steps to mitigate this.
Future proofing: focusing on wider-ESG and sustainability best practice
With 90% businesses now reporting on sustainability, in order to satisfy investors and improve overall ESG performance, companies need to widen their gaze to sector-specific ESG and sustainability best practice. Research from McKinsey states from over 2,000 academic studies conducted, 70% of them find a positive relationship between strong ESG performance and financial returns. There is also evidence that brands with a more sustainable impact are growing faster than those who do not: businesses who want to grow need to channel ESG through their value chain.
Sustainability best practice is dependent on the business sector, but there are elements that are applicable across all companies. Organisations should ensure that they are looking at all material elements of sustainability, beyond the very important environment metrics. Gender and race equality, diversity and inclusion, human rights, business ethics, responsible investing and community outreach all create the patchwork of the overall sustainability/ESG strategy business. Researching competitors and having a strong, ethical and innovative approach to every aspect of the business will help to achieve what the long-term goal is: a fundamental culture shift towards a wholly positive way of operating.
As ESG Consultants, we work with clients to develop robust ESG strategies which look beyond ESG ratings and supports the development of a resilient business.
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“In the future, climate and ESG considerations will likely be at the heart of mainstream investing. Investors will tailor their investments and fulfil their fiduciary duties through: better quality and more widely available data on sustainability and performance, and more informed judgements of strategic resilience.” – Mark Carney, Governor Bank of England
It is increasingly clear that capital markets are not adequately pricing the ultimate costs surrounding sustainable business. What is the impact of a persistently unhappy workforce? How safe is a company’s data, and how vulnerable are they to climate change? These and other fundamental sustainable business questions are not captured in traditional financial analysis but are increasingly recognised to have a material financial impact.
To capture this value and position their portfolios with the greatest chance of long-term success, investors are increasingly turning towards ESG criteria to assess performance across non-financial factors. Environmental, social, and governance criteria (ESG), also known as responsible investment, refers to the three central factors in measuring the sustainability and ethical impact of a company.
An ESG criteria is thought to help investors take into account the ‘unmeasured’ or ‘unrepresented’ environmental, social and governance topics when making investment decisions. It reveals data that traditional financial analysis doesn’t usually capture, speaking to the sustainability of a company in its broadest sense.
And, ESG criteria has turned out to be incredibly valuable, with ESG portfolios continually outperforming traditional portfolios. A review of over 200 sources on ESG performance by Oxford University and Arabesque showed that in the overwhelming majority (88%) of companies that focused on sustainability, operational performance was improved, translating to higher cash flows. A meta-analysis of over 2000 studies confirmed that the responsible, as well as the economic case for ESG investment is tangible.
The markets have caught on now, and we have seen a boom in ESG investments in recent years. In Europe in 2018, the total assets committed to sustainable and responsible investment strategies stood at a remarkable 49%. There was an 11% increase between 2016 and 2018, and this trend is set to continue.
ESG ratings and why they matter
With growing interest in ESG criteria, investors need a way to objectively asses the ESG performance of a company. This has led to the flourishing of a number of ESG Rating Agencies such as Sustainalytics, MSCI, and FTSE ESG, who asses 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 media sources and annual reports, with scores given for each material ‘E’, ‘S’ and ‘G’ topic, alongside an overall score.
These unique scores are used by investors as a proxy of ESG performance. Companies that score well on ESG metrics are believed to better anticipate future risks and opportunities, be more disposed to longer-term strategic thinking, and focused on long-term value creation.
How companies can use ratings
With investors using ESG scores in their investment strategies, the consequences of a poor rating can be significant. If, for instance, your company were to receive a poor rating from one ESG data provider, your stock may be considered an ‘unsustainable asset’ by investors and excluded from their investment portfolio. If multiple investors follow this reasoning, this can eventually negatively impact your stock price.
In Europe, where nearly 50% of assets are managed with ‘responsible investment’ criteria, understanding your ESG scores and improving year-on-year is important for your company to continue to attract investment.
It is important to recognise, also, that ratings are can be a very valuable internal benchmarking tool to guide decision making and improve sustainability performance. An evaluation by an external expert on your company’s ESG performance gives an independent view on performance, and how it compares to competitors and peers. This can be a powerful incentive for taking action and steps towards increasing performance.
Further, the assessment can provide a valid source of information to help internal advocates to promote change – as well as highlighting areas of particular weakness and strength.
A word of warning
A lack of consistency between rating provides’ scores has been picked up as a key short-fall of ESG ratings, with a company’s score sometimes differing significantly between providers. Critics have highlighted a need for methodological standardisation across the sector in order to build objectivity and credibility.
It is worth keeping in mind that in generating an ESG score, providers are often attempting to quantify the intangible and hard-to-measure, so the expectation of ESG scores should be realistic: it is a starting point, you get an indicator but not the whole story.
In our experience, delving into the more granular scores (for each part of E, S and G, as well as further breakdowns) can be incredibly useful for our clients. This analysis reveals the areas of perceived strength and weakness in relation to their sustainability strategy and programmes, and positions these within the wider industry group. The wealth of information under each ESG pillar can then be used strategically to set the direction of a company’s strategy and disclosure, not only improving ESG scores, but also raising overall sustainability performance.
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