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Responsibility towards Environmental, Social
and Governance (ESG) issues have surged in recent years. The central driver of
this movement is Climate Change. Till this very date, there has been broad
understanding amongst countries across the world that Climate Change is a real
threat and the continuous rise in global carbon dioxide emissions must be
addressed.
According to KPMG
Survey of Sustainability Reporting, in 2020, that analysed the annual
financial reports, corporate responsibility reports, and websites of 5,200
companies in 52 countries that provides a detailed look at global trends in
sustainability reporting and offers insights for business leaders, company
boards and sustainability professionals. It was found the 80% of global
companies report on its ESG performance and a majority of companies worldwide
have carbon targets in place.
The question is, what’s in it for companies to
report on its ESG performance and targets?
ESG – It’s the standard of and for the future
As mentioned earlier, ESG accountability has
exploded in recent years. Companies are now looking beyond financial metrics.
ESG policies are meant to push companies to break away from overdependence on
financial metrics, not only in ESG risk mitigation but also in strategy and
business decision-making.
This could be a challenge for companies that
are a few years in its ESG journey and may be a costly investment as well. At
the same time, as ESG covers a wide range of areas, the key focused ESG KPIs
that are unique for the company have always been one of the most highly debated
topics amongst Board members and Senior Management of companies that are
initiating their ESG management. However, for ESG-matured companies, especially
large-cap companies, its ESG strategies are well-defined and measurable. For example,
to tackle Climate Change issues arising from its operations, some companies
established the ‘path to zero’ initiatives which showcase the commitment and
journey towards net zero carbon emissions.
These days, it is not something new that we
read on the growing trend of companies’ ESG policies and strategies as risk
management as well as value creation and generation. In the United States
alone, as of 2019, it was found that one out of every three
dollars under professional management or approximately $17 trillion was
managed in accordance with ESG metrics.
ESG metrics are not merely for compliance
purposes. More and more evidences have been disclosed that showcase that ESG is
not just ‘a good to have’ but instead, ESG is a crucial and strategic
imperative. ESG risks can cause companies that do not factor in ESG metrics to
face substantial financial impact. For example, based on an extensive four-year
analysis on ESG metrics by MSCI,
found that companies that are ranked with lower ESG scores experienced higher
costs of capital, higher equity costs, and higher debt costs compared to
companies that performed and ranked better in ESG scores.
In fact, McKinsey’s statement would best support
this abovementioned finding as they have cited over two thousands studies that
indicated that companies with higher ESG scores benefited a 10% lower cost of
capital compared to companies with poor ESG scores. On top of that, companies
with better ESG scores are said to experience lower environmental, litigation
and even regulatory risks.
Conclusion
Like it or not, sooner or later, all businesses
are faced to confront ESG as an integral component of operating its business.
Many companies that lead in its ESG journey have started reaping the financial
and non-financial value from its ESG investments, and at the same time, manage
to mitigate ESG risks and benefit lower operational and capital costs.
Companies are not able to avoid ESG issues
anymore as ESG has proven numerous times to be a financial issue. ESG is and
will continue to challenge businesses in all sectors. Thus, making ESG a factor
that companies need to embrace from now onwards.
All views and opinions expressed on this site are by the
author and do not represent any particular entity or organisation
