Is there too much emphasis on the “E” in ESG?

Authored by: John Pipon, Investment Advisor & ISESG Ambassador.

Environment, Social and Governance (ESG) has been at the centre of both government and corporate decision making in the past decade however is the growing emphasis on the environment having an unintended consequence on wide parts of society.

There is undeniable evidence indicating significant impacts on the environment as a result of the Earth getting hotter, it is difficult to form a comprehensive argument against this; however, what is the solution: renewable power, electric cars, reduced meat consumption? All of these solutions are effective ways in reducing CO2 emissions, however are they adversely impacting on society in other ways?

The focus on renewable power and transitioning away from fossil fuels has been a key political initiative in recent years, however one of the consequences for European economies of this was the reliance on Russia to meet its energy needs when the sun doesn’t shine or the wind doesn’t blow. As a result, little consideration was given to the social consequences of buying energy from an antagonistic nation until it was too late, and in 2022 this risk was crystallised.

Electric cars make sense when the car is made in a sustainable way, but there is an argument to suggest this is not the case at present. In 2021 Volvo released figures that electric vehicle production produces nearly 70% more greenhouse gas emissions than a petrol car and it would take up to 9 years to offset the higher production emissions. What’s also often overlooked with electric cars is the high quantities of rare-earth metals required to make the batteries, the mining of such has devastated large parts of South America turning lush pastureland into barren wastelands, destroying habitats for both wildlife and people.

Reducing meat consumption in theory will reduce CO2 emissions by reducing not only the areas of forests and land used to farm the livestock, but also to grow the food required by the livestock. This is all well and good but there is an argument to suggest that what matters more is where the food comes from, not what the food is. Local farmers would highlight that by buying locally sourced food, there is less fuel involved in the transportation of the food and there are other social benefits by supporting the local economy.

It’s therefore important to ensure that when taking ESG factors into consideration in decision making, the entire ESG framework is reflected on and not to be distracted by a single strand of this important subject.

Tackling biodiversity loss in the financial services industry

Leonie Kelly, Director and Head of Sustainable Investment Consulting at Ogier, recently joined our webinar to discuss what a world without bees would look like. If you missed the webinar you can view it here. Alternatively, below is Ogier’s insight article which followed the event. 

Introduction

We cannot reach netzero without halting and reversing nature loss, and we cannot tackle biodiversity loss without tackling climate change. The financial community has a role to play in this complex ecosystem – and increasingly, the financial sector is stepping up to the biodiversity challenge. Institutional investors have not fully integrated biodiversity into investment decision-making processes or assessments of sustainability performance. However, investors need to recognise that biodiversity loss is a systemic risk for portfolios and beneficiaries, and we need to see a move from pledges to action.

What is biodiversity?

Nature provides ecosystem services, which benefit businesses and society. The assets that underpin these services are called natural capital and biodiversity is the variety of living components that make up natural capital. In a nutshell, it is the diversity of life on earth. It can occur at the species, ecosystem and genetic level, as defined in Article 2 of the Convention on Biological Diversity.

Biodiversity has a vital role in ensuring the resilience of natural capital assets and securing them for the future. Its loss reduces the quantity, quality and resilience of ecosystem services and creates risks for society and business that can result in significant negative economic and social outcomes.

Biodiversity loss and financial risk

Nature-related risk is a risk encompassing biodiversity loss and ecosystem degradation, and climate-related risk. These are viewed as essential components for the assessment of environmental risk.

The Taskforce on Nature-related Financial Disclosures (TNFD), set up in 2023, has a mission to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. Financial services firms will need to take steps to embed these risk considerations into their strategies, operations and risk management processes. The final recommendations are expected to be published by September 2023.

Has there been progress on biodiversity management since COP15?

2022 UN Biodiversity Conference – Conference of Parties (COP15) concluded the negotiations for a post-2020 Global Biodiversity Framework, which commits the world to take action by 2030 to halt and reverse biodiversity loss, with a vision of living in harmony with nature by 2050.

The Kunming-Montreal Global Biodiversity Framework (GBF), adopted in December 2022, aims to guide global action on biodiversity and nature.

Investors who wish to show leadership in responsible investment are encouraged to take positive and immediate action to protect nature, in line with the GBF.

The long-term vision of the GBF is that by 2050, “biodiversity is valued, conserved, restored and widely used, maintaining ecosystem services, sustaining a healthy planet and delivering benefits essential for all people” (source, Principles for Responsible Investment).

How can investors and asset managers factor nature into financial and business decisions?

Biodiversity loss creates risks for society and business that can result in significant negative economic and social outcomes. Conversely, taking action against biodiversity loss offers opportunities.

Risk exposure to biodiversity loss varies and depends on the following factors, among others:

• sector
• geography
• regulatory frameworks
• market-capitalisation
• operational arrangements
• value chain position (upstream versus downstream)
• extent of dependence and impact on biodiversity
• ability to substitute raw materials

Investors can act on biodiversity in a number of ways. These include, for example:

• awareness, commitments and initiatives (for example, the Principles for Responsible Investment (PRI) nature reference group)
• investment allocation: through a variety of strategies including ESG integration, negative screening or specific thematic investing focused on biodiversity outcomes
• stewardship (for example, there are a small number of investor engagements with a specific focus on avoiding and minimising biodiversity impacts)
  • biodiversity management and oversight – having board and senior management expertise and oversight, company-wide assessment of impact and dependence
  • biodiversity operational impact management – policies addressing biodiversity, direct and indirect supply chain biodiversity impact management programmes, external assurance
  • biodiversity transparency – reporting of KPIs and setting targets
  • engagement response – willingness to discuss biodiversity, responding to engagement over time, participating in external stakeholder initiatives

• policy and collection of meaningful biodiversity focused data

How to get started?

For investors looking to integrate biodiversity into investment decision-making processes or assessments of sustainability performance, the best place to start is by establishing a policy and strategy:

• Assess impacts and dependencies and act to reduce them, while reflecting emerging global policies
• Allocate finance by adapting investment strategies and engaging with investees on their biodiversity impact and dependencies
• Finance to support the transition to a nature positive economy (including linking climate finance and nature) and set targets in line with global goals and the CBD post-2020 Global Biodiversity Framework
• Measure and disclose nature-relating financial risks and biodiversity and continue to collaborate, engage and influence

Find out more

Read the full article and find out about Ogier Sustainable Investment Consulting here, or contact Leonie and the team at: sustainableinvestmentconsulting@ogier.com

Is ESG a fleeting fad or a lasting force for positive change?

Green investment, sustainability, Corporate Social Responsibility (CSR), Environmental, Social and Governance (ESG), Climate risk management; the list of buzzwords is endless. Over the past 40 to 50 years the conversation around these issues has developed both in terms of the focus on them and the compliance requirements around them.

Why should your business be proactive with the latest thinking and requirements? Should it simply be a case of ticking the boxes and regulatory game playing? At the International School of ESG we strongly believe that this isn’t just a compliance exercise. Businesses and individuals should be aware of these matters for many reasons. Let’s just focus on the Environment for a moment. It’s incontrovertible that human beings have, and are causing, damage to the world in which we live. Whether it be bio-diversity or the destruction of the natural world, the impact is huge and lasting. The UN estimates that over 200 million people will be displaced around the world due to rising temperatures and the impact, such as rising sea levels. Sadly, those impacted the most are often those who are least able to minimise the impact and also often are those who have contributed less to the problem compared to more developed nations.

Social issues are a real problem for many sectors of our community. From gender pay-gap issues, to outright discrimination and bullying in the workplace, the world is often hugely unfair and downright uneven in the rewards that we as a society share. Understanding these issues is essential if we are to create a fairer society for everyone. We all have a stake in the future and unless we all play our part in generating positive social dynamics we cannot expect the system to self-correct.

Underpinning all of this is governance. The governance of risk relating to financial crime facilitation, for example. Do we want a society where human-trafficking gangs, narcotics kingpins and other criminals can easily launder the proceeds of their crimes? We’d like to think the answer is no, and yet, there are still far too many instances of lax controls in these issues. The German government has recently introduced legislation requiring companies there to carry out checks of their supply chain to reduce the likelihood of human slavery and other heinous practices. Supply chain risk management and third part risk management aren’t just ‘compliance matters’ and shouldn’t be dealt with as a box-checking activity. Sadly, it often is.

The International School of ESG exists to provoke and challenge us all to move forward our thinking in the role of us all to influence our industries, societies and communities for positive change. Education is transformative and we hope you want to join us on the journey.

ESG and sustainability disclosure standards are increasingly important.

As sustainability disclosure standards evolve it becomes ever more essential that companies in multiple sectors take time to map the international landscape in which they operate in order to understand their exposure.

Environmental, Social and Governance (ESG) is a broad church and dealing with the risks requires a multi-disciplinary approach to understand and implement an appropriate risk management framework.

The plethora of regulatory requirements is often daunting for those tasked with ensuring compliance with the various ESG and sustainability reporting standards. In America the Securities and Exchange Commission (SEC) have introduced requirements for investment advisors and investment managers around disclosure. The International Sustainability Standards Board (ISSB) have drafted various proposals related to climate related issues as well as wider sustainability issues and the European Financial Reporting Advisory Group (EFRAG) has been equally prolific.

The European Union (EU) Taxonomy of ESG was introduced in 2020 with reporting provisions applied in 2022. Importantly, for financial services businesses further disclosure requirements related to the Sustainable Finance Disclosure Regulation (SFDR) will come into effect in 2023. Navigating this complex area is a challenge, particularly given resource constraints with a difficulty post-Covid economy. Not to be left out, the United Kingdom (UK) intends to increase disclosure requirements in certain sectors and for certain entities as far at both entity and product level.

The EU Corporate Sustainability Due Diligence Directive (CSDDD) represents an onerous challenge for many businesses. For those in scope it introduces duties for directors of EU companies to set up and oversee the implementation of the due diligence process and integrate due diligence into the corporate strategy as well as applying a corporate due diligence duty for companies to identify, bring to an end, prevent, mitigate and account for negative ESG impacts in their own operations and value chains; as with most regulation, the devil is in the detail.

Additionally, there are key developments in ensuring companies are conducting effective third party risk management techniques. In January 2023 the German Supply Chain Due Diligence Act introduced requirements on companies to conduct human rights and environmental due diligence to assess risk and ensure they have appropriate remedies in place. This is just one example of the increasing reach of legislation and regulation in all aspects of international business and it is highly likely that this represents to beginning of attempts to develop a fairer and more sustainable global environment for both business and society.

The specific requirements and impact of each piece of legislation and regulation requires deep understanding and it is highly likely that a ‘tick-box’ approach will end badly for those companies who do not take the time to understand the risks involved.