The evolution of the term ESG has been a fast one and in almost three decades, we have heard this term being discussed in several boardrooms, events, and conferences linking it to company’s preparedness for the risks that are anticipated in the coming years due to climate change.
ESG issues were first mentioned in the 2006 in the United Nations’ Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins”, published in 2004 under the guidance of UN Global Compact, international organisation that works closely on corporate sustainability and ensures they adhere to human rights, labour, environment and anti-corruption. ESG criteria was, for the first time, required to be incorporated in the financial evaluations of companies and the effort was focused on further developing sustainable investments. The event witnessed 63 investment companies composed of asset owners, asset managers and service providers signed with $6.5 trillion in assets under management (AUM) incorporating ESG issues. It is interesting to note that since then, signatory numbers have increased 10% year-on-year reaching 5,391 signatories (4,841 investors and 550 service providers) by 31 March 2023.
Having right information enables a company to manage different kinds of risks including that of ESG. Business risks can be minimised when the leadership is aware of the global energy outlook, state of play of carbon emissions and reduction strategies, technology adoption to maximise energy savings and also what are the peers of the industry up to. The investors’ expectations are necessary to meet in order to get the investments and concurrently align with Gen Z in being a responsible market and so forth. Now, that is a long list of expectations that a company has to meet in today’s times!
What equips a company to manage risks and unseen emergencies is the level of ESG maturity that it displays. At Oren, we conduct a maturity assessment of the company by asking all the departments on diverse ESG related issues. Basis on the maturity assessment scorecard, we group them into: Leader, Responsible, Efficient, and Compliant. To define each of them, these are:
A Leader is a company which sees ESG as a differentiator and brand value driver; that shapes the future through superior product innovation
A Responsible company is one that addresses Investor & ESG Rating requirements to stand out from its competitors
An Efficient company is one that finishes comprehensive ESG report
A Compliant one is that it meets legal & policy requirements by a regulator or investor or customer
Some of the ESG indicators and corresponding KPIs that are considered in order to assess the maturity level of a company are as follows:
· Policies related to Finance, Legal, HR, Supply Chain Management, IT & Remuneration & Nominee committee
· Governance – policies, practices, processes and systems
· Energy – targets, initiatives and alignment to SBTi
· Water – targets, initiatives, and science based goal using zero net water
· Supplies – procurement, code of conduct, and spend analysis
· GHG emissions – net zero target and emission reduction as part of decarbonisation plan
· Waste – hazardous & non – hazardous categories
· Encroachment – science based goal of encroachment reduction
· Employment Health well-being initiatives undertaken
· Employee Diversity, Equity & Inclusion (DEI)
· Community – ethics followed
· Risk management practices
· SDGs scores
· Awareness of board and executive management, investors, rating agencies, and adverse impact to the environment across value chain
While it’s important to consider where an organisation presently sits in terms of these ESG profiles, it’s also crucial to think carefully and strategically about ESG ambitions and goals.
Which issue will be the most impactful, both in terms of ESG outcomes and business outcomes?
What are the opportunities and risks of making any given decision?
In the following sections, we outline some of the big questions we hear most frequently from organisations at each of these stages of maturity.
i. If you are compliant – doing the bare minimum of meeting legal and policy requirements will negatively impact the business, both now and in the long term. What are the peers doing?. Do you have a good understanding of the ESG-related opportunities for growth and risks to your existing market base?
ii. If you are efficient – the business reports on the diverse principles and topics, and continue to keep disclosing following the implementation. Is ESG baked into its brand, so customers, suppliers and employees see it in their interactions with the organisation?
iii. If you are responsible – This organisation may have more mature disclosure and reporting, science-based targets and strong alignment of executive compensation. But again, the bar is constantly moving. Are they aware of the market trends and regulations outside of their territory and doing the necessary preparation?
iv. If you are a leader - Organizations leading the way on ESG strategy can still benefit from mapping and measuring the overall value they’re delivering to stakeholders and shareholders. This is key to being able to look around the corner and see what’s next for ESG.
Having said this, ESG can enhance operational efficiencies and raise a company’s profile, attract capital, customers and top talent that can be evaluated with KPIs and offer return on investment. The maturity assessment is a good tool to make certain improvements and be prepared to make wise decisions in a complex business environment that we are operating in at present.
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