ESG Pressures Mount for Companies Globally
ESG (Environmental, Social and Corporate Governance) is a criterion that is used by socially-conscious investors and shareholders to screen investments and assess a company's impact on the world. That affects how a company will gather and retain funding from investment funds who have a 'socially responsible' investment strategy.
The demand for ESG is being largely driven by investors as they look at investments from organisations such as private equity funds and want those investments to more closely match their own values. ESG’s social criterion examines how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
ESG has become an increasingly popular way for investors to evaluate companies and also to avoid companies that pose environmental or other risks. The issue now is that investors realise they need ESG principles but frankly it is not that well defined in practice. The scope and breadth of ESG solutions in 2020 and beyond can include assessing risk in areas also including diversity, anti-corruption, COVID-19, non-executive and external directorships.
As illustrated above there are many different types of stakeholders. Funds need to demonstrate responsible ESG and show positive impact to society. Investors are demanding this change and funds need to show ‘ESG value creation’. PR, stakeholder mapping and targeting are all new communications frontiers for ESG and provide fertile ground to create opportunity and positive perceptions.
In addition to societal pressures, stock exchanges around the world are forcing companies to move more aggressively to address and define their ESG activities. Of particular relevance in Asia, the Hong Kong stock exchange (SEHK), has implemented mandatory new rules for listed companies around ESG that came into effect earlier this year. To support companies, the SEHK provides extensive guidance including e-training, new guides for board and directors emphasising ‘leadership roles and accountability in ESG’ and ‘how to prepare an ESG report’.
There are various segments that can benefit from ESG. Mainland China companies going global are often seen as connected to the Chinese government or state controlled. The opportunity is alignment with ESG principles, especially for doing business internationally, as they help Chinese companies understand how to be more responsive to stakeholders in global markets where they operate.
ESG is a huge discipline covering many different aspects of doing business. However, there are the people and skills to cover key segments such as oil and gas, energy utilities, and food and agriculture which are more polluting.
In early March 2020, the Financial Times reported that the latest research by Thierry Philipponnat, a member of the Board of the French Financial Markets Authority and authority on sustainable finance, showed climate change poses a bigger threat to financial stability than the current virus pandemic. His research went on to recommend increasing the risk weighting banks apply to oil, gas and coal exposures. This would mean that these exposures would be seen the same way as other risky investments and would require increasing capital investments to protect against possible losses.
Also in early March, Reuters reported that British hedge fund billionaire Chris Hohn, of the $28 billion TCI hedge fund group, “has launched a campaign to persuade central banks to starve hundreds of planned coal-fired power plants around the world of finance, aiming to block the projects before they can pose a threat to the climate”.
There are other opportunities to bring an ESG skillset and package to segments as diverse as FinTech and gaming. But investors and funds have yet to fully wrap their heads around the approaches they can and should use. Lots of companies and funds think they are doing a good job of ESG, but this is a dissonance of perceptions. For example, only a handful of countries are on track to meet emissions targets. The reality is that there is a perception gap between those executing ESG programmes and those that deny they work at all.
The question is are investors and funds ready to enhance their ESG and to create sustainable value. Moreover, the opportunity to engage with a wide group of stakeholders will support companies in Greater China, across Asia Pacific and also around the world.