ESG Murmurings Get Louder - And Nuanced - For Businesses

The pandemic, coming as it has in a world that already feels broken, has sent human beings to consider their core values. The things that are important to each of us continue to become crystallised during lockdowns around the world in a way that may never have happened before for those who are part of a younger generation. But while human emotion overflows across social media, businesses struggle with strategic direction amid a corporate scramble to assess this celebration of values with their stakeholders, and also to exploit it.

Ongoing analysis of shareholder activism by the law firm White & Case recently pointed out that , with a total of 17 activist campaigns recorded in 2020, the United Kingdom continues to be the centre of shareholder activism in Europe. The UK is expected to be the centre for activist campaigns in 2021, it says, “as Brexit-effect uncertainty, compounding the COVID-19 pandemic’s impact on the economy, negatively impacts valuations.” It adds that the impact of the COVID-19 crisis has “served to expose weaker companies that will become prime targets for activist activity in 2021.”

ESG - environmental, social and governance - issues are the ones set to influence activist agenda, says White & Case. “From mounting concerns around climate change to addressing social inequality and diversity issues, companies are looking to ‘future-proof’ their businesses against the range of ESG risks they are facing.” These are fundamentally the issues that focus on human values, as discussed in January on Board Talk.

The murmurings on social values that have raised the volume across social media in a pandemic is a reflection of the same trend identified by the law firm. “Though relatively few companies actually grapple with activists, there is a sense in which virtually all companies are now affected by activism” says White & Case.

Instead of facing the demands of disparate vested interests, businesses now have to contend with human collaboration. Common ground, enthusiasm and anger on the need for climate action has seen baby boomers and millennials come together in a unique way which is being reinforced, perhaps, by the pandemic. When the World Health Organisation (WHO) said “none of us is safe until everyone is safe” about the approach to fight Covid-19 and the route out with vaccines, it could even have been commenting broadly on the climate emergency. This, too, is “a historic test for global co-operation” with implications for all.

As China set out its 14th five year-plan last week, there were fears expressed that this could lead to a strong rise in greenhouse gas emissions as few details were released on how the world’s biggest emitter would meet targets to reach net zero emissions by 2060 and ensure that carbon dioxide output peaks before 2030. This plan has allowed for annual targets instead of the usual five-years. But the devil, as ever, will be in the detail and the sectoral plans are yet to be revealed.

Few will remember the moment in 2016 when China quietly announced it was moving towards mandatory disclosure of environmental information by companies - on the same video-link to the 10th annual conference of the Principles for Responsible Investment (PRI) held that year in Singapore - alongside a commitment to green finance. I do, because I was lucky enough to be there and I covered it at the time on Forbes.

Since then, green finance has slipped into the mainstream. It is not hard to see why, when you consider that the World Economic Forum (WEF) has defined it as “any structured financial activity that’s been created to ensure a better environmental outcome.” Global green bond issuance reached a record high of $269.5 billion by the end of last year and could reach $400-$450 billion this year, according to a report by the Climate Bonds Initiative.

As an international, investor-focused not-for-profit and the only organisation working solely on mobilising the $100 trillion bond market for climate change solutions since 2010, it has turned its focus to define and clarify green finance standards and is stressing the importance of transition finance “to be targeted where it is clear how progress will be measured.”

Amidst this ghastly pandemic, we have a burst of enthusiasm which can generously be defined as climate ambition. But with greenwashing fast becoming synonymous with blowing a giant hole in corporate reputation, businesses and investors must not underestimate the growing scrutiny from all stakeholders.

To clarify climate ambition there are a couple of aspects that must be addressed in the green and sustainable debt market, says Climate Bonds.The first is that real reductions should be made in emissions. “It is not sufficient for an activity to continue the status quo whilst simply purchasing a mechanism to absorb those carbon emissions.” it says. Secondly, it is important that transition finance is targeted where it is clear how progress will be measured. Building on the adage ‘what gets measured gets managed’ transition plans must be backed by operating metrics and tools to track progress. The Climate Bonds’ Financing Credible Transitions paper summarises all these points into 5 principles, and there’s a useful graphic below.

Financing Credible Transitions (FTC) White Paper Image via Climate Bonds (@ClimateBonds) London 2021

Spelling out the nitty gritty of the principles for credible and sustainable finance is no different from many other ESG issues confronting businesses. All of them require accurate data at the outset and transparent measurement of targets set against clear goals. While investors are increasingly demanding such targets, so too are stakeholders looking for a picture that is made up of the sum of its parts - not one presented as corporate spin.

Last month a story in The Guardian newspaper highlighted the complications for all sorts of businesses, not just listed ones, of not thinking of ESG issues as fundamentally interlinked by the definition of values. Publix, the US state of Florida’s premier grocery chain, is not alone in finding that ESG issues can throw a business wildly off doing its “business as normal.”

If there’s a lesson for boardrooms, it might be strengthened by research from the University of Pennsylvania just out which suggests a link between shared social values and director turnover when boycotts of business occur.

At the very least, it’s time boardrooms talked about the values of the business they serve. Ditch the old ‘corporate social responsibility’ trappings and start anew, with conversation in the boardroom.

Cover image credit: Rhys Kentish on Unsplash