There have been several indicators this year, partly in response to the effects of the pandemic, that ESG is evolving very quickly beyond the provision of risk management information towards a framework to proactively solve environmental and social problems.
Two big developments in September have added momentum to that trend:
Firstly, the World Economic Forum’s International Business Council published a framework in partnership with the big four accountants to define ‘a core set of “Stakeholder Capitalism Metrics” (SCM) and disclosures that can be used to align mainstream reporting on performance against ESG indicators.’
This distinction between SCM and ESG, and the tone of the report overall, indicates that this framework goes beyond the standardisation of ESG information for the benefit of investors, and towards a strategic framework for long-term value creation for all. If adopted in the spirit intended by the authors this could result in, for example, corporate governance changes that require companies to act in the interests of people and the environment, and the development of much more ambitious strategies to tackle the climate crisis and inequality, amongst other systemic issues. It’s worth noting that the voluntary standard setters (CDP, CDSB, SASB, GRI, IIRC) are moving in the same direction, which will soon create a globally accepted system of reporting in this mould.
Secondly, the Science Based Targets Initiative (SBTi), the leading organisation for corporate target setting in-line with the Paris Agreement, published new guidance to standardise the definition of corporate net-zero goals at a level consistent with the science for the 1.5 degree pathway, and providing a framework for corporate action which meets that aim. There is a lot in this report, but the main signal I takeaway is that businesses will be expected to take responsibility for emissions across the entire value chain, and where that reduction falls short of the 1.5 degree pathway they will have to permanently remove the equivalent amount of CO2 from the atmosphere – not just balance it out with carbon credits, for example. Whilst we’ve seen the start of a trend for businesses to go even further and remove all of their historical emissions through investment in negative emissions technology, the expectation of the SBTi is beyond where lots of businesses are now.
It’s clear that both of these developments will increase stakeholder expectations of corporate sustainability/ESG/responsible business strategies. When viewed alongside other developments this year, it’s also clear that external scrutiny of corporates is intensifying, and the availability of robust independent information about a company’s ESG performance is increasing. Take for example:
- CDP has launched a new system which rates corporate emissions strategies against their impact on global temperatures – essentially flagging businesses whose strategies fall short of what the Paris Agreement requires. The ratings systems is aimed at investors to give them a science-based and uniform standard to align their portfolios with the 1.5 degree pathway.
- Al Gore is leading a coalition of nine climate and technology organisations using satellite data, artificial intelligence and land and sea based sensors to track greenhouse gas emissions remotely using a platform called Climate TRACE. The platform is the first of its kind and allows users to track where emissions are coming from in real time, down to the level of individual factories, ships and power plants anywhere in the world. Announcing it in a Medium post, Gore said the tool “will ensuring that no one — corporation, country, or otherwise — will ever again have the ability to hide or fake their emissions data.”
- Mark Carney said in an interview in September that COP26 next year (the global UN climate conference) would be turning point in moving from voluntary to mandatory climate risk reporting.
For corporates, there is a risk that the ESG landscape is moving too fast to keep up. In the olden days of Q1 2020, ESG was largely about providing information to (mostly European) investors so they could make investment decisions in the context of ESG risks.
Not all corporates have even got to grips with that yet, but nonetheless, the future of ESG is quickly evolving into a different beast. These developments make ESG about how to mobilise capital for solutions rather than where to put capital to de-risk returns. Managing risk to protect portfolios and bottom lines is still part of it, but that alone doesn’t solve the climate crisis or social inequities – which is really the whole point.
It is easy to see how companies will fall through the cracks that appear as the ground shifts beneath them. Companies could easily find themselves in a position where ESG strategies or responsible business plans that looked good last year no longer meet the expectations of stakeholders and the media. With independent scrutiny increasing, it will be easy to lose control of your narrative to third parties highlighting where you are falling short, but without the context you might see as material.
My advice to corporates now is to get into the same mindset as those setting the rules. That means not just seeing ESG as way to manage risk, but as a way to create lasting value for your business, people and the planet. Once you have a strategy in that same spirit then you need to make sure you have the data to demonstrate your progress, that you regularly communicate with all your stakeholders on what you’re doing, whilst acknowledging the complexities and challenges to your strategy. No one expects you to deliver overnight. Transition is the key word in all of this.