Samantha Woods, Sustainability Director, Swire Coca-Cola; Mehul Thakkar, APAC Head of ESG Issuer Relations, MSCI Inc.; and Martha Carter, Vice Chairman & Head of Governance Advisory at Teneo joined Mark Watson, Senior Managing Director and Head of APAC ESG Advisory, Teneo to discuss the ever-changing ESG landscape in global markets and how companies can ensure that ESG remains a priority amid challenging times.
Rising Tension Over the Term ESG
Particularly in the U.S. market, the term ESG has faced scrutiny and emerged as a highly polarising term. At the political level, over 100 bills across 20 states have been filed to limit ESG, including preventing the use of ESG as a factor in the investment of state funds.
At the same time, the U.S. federal government has continued to push for wider adoption of ESG, going so far as to designate July as ESG month. This dichotomy has placed many U.S. companies in an awkward position, as rising attention to ESG seems to solidify its importance even as the term becomes increasingly weaponised.
That said, within APAC markets the term is less contentious but continues to be commonly misunderstood. Practitioners continue to work to educate regional markets around how ESG is fundamentally a framework that allows investors and corporations to assess environmental, social and governance risks and opportunities – not a political or ideological concept.
Personalisation of ESG Values
Materiality assessments, or formal exercises aimed at assessing stakeholders’ preferences and values around ESG factors are assuming increasing importance in developing sustainable targets for a firm. This is because each letter within ESG incorporates a multitude of subfactors that would be virtually impossible to tackle concurrently.
For example, governance was traditionally a mainstay for assessing a company, with environmental and social factors used more as screening tools – like gauging the ethics behind investing in tobacco firms or weapons manufacturers. However, the progressive development of quantifiable factors under each of the three pillars has made comparisons much more tangible and allowed companies to develop specific targets based on granular aspects under each pillar.
As a result, unique ESG identities can be further solidified through collaboration with civil society or research groups to enhance the credibility and verifiability of proprietary targets. From this perspective, the reliability of ESG-related claims is particularly relevant as some companies make unfounded claims of clean business practices in hopes of receiving investment from the growing population of ESG funds and investors.
Supporting C-Suite Executives on ESG Efforts
From an operational perspective, supporting C-suite executives can largely be broken into two areas:
- Education around ESG terms: It is important to note that while certain ESG terminology has become commonplace in business parlance, such as decarbonisation or supply chain sustainability, these terms are often only loosely understood. Clarification of what these terms mean and what they imply, particularly by connecting them to tangible business practices – such as how climate change may impact specific parts of operations – allows C-suite executives to understand the magnitude of the challenges they face in the ESG sphere.
- Incorporating ESG targets into business practices: Beyond education, integrating ESG within business practices is another crucial way of supporting C-suite executives. Like any other financial or operational business targets, ESG-related KPIs should be established and regularly communicated across a wide range of internal and external stakeholders.
Tying these efforts together in both internal and external communications is key to ensuring that the board and employees are aware of ESG developments within and outside of the organisation in a manner that makes their implications for performance and business success clear.
Proper governance hygiene surrounding communications prevents ESG whack-a-mole situations in which a company becomes stuck in a pattern of tackling every hot new ESG topic that arises, rather than focusing on individualised and consistent ESG targets.
ESG For Value Creation
ESG is en-route to being considered a factor just as valuable as any traditional financial metric. As a result, there must be a shift from using ESG as a means of mitigating risk to being seen and harnessed as a factor for value creation. This is because companies with strong ESG values inevitably decrease their regulatory and legal challenges, increase efficiency through higher employee satisfaction and help create more long-term and sustainable shareholder value through improved practices.
This sentiment is already echoed by financial institutions, as the recognition that capital allocation truly drives corporations toward positive ESG change has become mainstream. Both passive and active investment funds have begun trending toward promoting companies with strong ESG ratings, which has driven laggard firms and industries toward matching their peers.
There is still a long way to go, and ESG will continue to evolve over time, but the objectives remain the same in terms of driving businesses towards a more sustainable future.