The global reach of Covid-19 took many people by surprise and did not go unnoticed by investors and issuers alike. Sustainability is becoming an ever-more important aspect of investment decisions, with environmental, social and corporate governance (ESG) topics challenging financial metrics in terms of issuer priorities. As a result, ESG compliance, both with regulations and ethical expectations of shareholders, is key to a successful future.
JP Morgan reports that many business experts have begun drawing comparisons between the impact of the virus and the likely issues related to climate change, for example.
In addition, the recent virtual conference Beyond the Pandemic Crisis in June 2021 also stressed the importance of ESG. The CEO of Bursa Malaysia Bhd, Datuk Muhamad Umar Swift said that businesses with existing ESG practices had proved to be more resilient during the coronavirus pandemic than those that did not. He put this down to the concerns of the newest generations of investors. He told the conference:
“The Covid-19 pandemic is widely seen to have given sustainability further impetus. Millennials and Gen Z are showing greater concern with respect to sustainability and changing expectations of businesses’ role in improving society and protecting the environment.”
WHAT IS ESG COMPLIANCE?
ESG compliance can encompass abiding by regulations relating to ESG that are in place in different territories, such as the EU’s Taxonomy Regulation. It might also mean upholding the various third-party ESG reporting frameworks that relate to sustainability in business.
In a broader sense, there is a necessity to ‘comply’ with the expectations and wishes of investors who look for sustainable options when buying stock. This is a shifting landscape and involves nurturing positive engagement with shareholders to fully understand their desires and priorities.
WHY SHOULD YOUR ORGANISATION CARE ABOUT ESG COMPLIANCE?
ESG compliance is no longer a tokenistic PR device, it is an essential element of running a successful and forward-thinking business. Embracing ESG can also add great value to your organisation. Here are the main benefits ESG compliance can bring to your organisation.
Shareholder activism is on the rise again following a lull during the early days of the pandemic and this means you have to listen to what investors have to say. Norway’s Oil Fund, which holds US$1.3 trillion of investments has recently pledged to become a global leader in responsible investments. It will screen each of the 500 issuers it adds to its index every year to ensure ESG compliance and has focused on voting against excessive executive pay packages.
Reducing the usage of fossil fuels, cutting out water and energy waste and moving to paperless offices, for example, can cut many of your expenses, as well as improve your green credentials. McKinsey reports that organisations can cut their costs by up to 60% by addressing ESG concerns.
Many customers prefer to shop with ethical businesses and do not mind paying a premium to do so. So, showing a proactive approach to sustainability issues and achieving greater transparency about the results is essential for building a stronger corporate brand.
Additionally, strong ESG policies can help when tendering for projects, which can encourage more businesses to follow ESG best practices.
It makes sense that a business that looks after its workforce will attract the best talent and keep them for longer. But it also goes deeper than that. Millennials and Gen Z are increasingly interested in whether the business they work for has the same goals and values as they do. If these are aligned, a bond is created between employee and employer that keeps the latter emotionally invested.
ARE THERE MANDATORY DISCLOSURE OBLIGATIONS?
There are a number of pieces of legislation relating to ESG around the world, including mandatory disclosure obligations in some jurisdictions.
The Sustainable Finance Disclosure Regulation (SFDR) mandates that organisations must report on any adverse impacts relating to sustainability factors. The EU Taxonomy Climate Delegated Act was formally adopted in June 2021 and clarifies the economic activities that the union feels will best contribute to meeting its environmental targets, including its goal to become greenhouse gas neutral by 2050. The EU also issued proposals in June 2021 to amend the reporting requirements of 2014’s Non-Financial Reporting Directive (NFRD). The new Corporate Sustainability Reporting Directive (CSRD) would require ESG reporting to be audited, among other things.
The UK’s Financial Conduct Authority (FCA) released consultations in June 2021 relating to mandatory disclosures on ESG topics. The aim is to provide insight across the investment chain and make ESG-related decision making easier for investors and customers. UK green taxonomy is being developed, based on the EU version, in order to clarify which activities are deemed to be environmentally sustainable.
The US Securities and Exchange Commission announced a consultation on climate change disclosures for businesses in March 2021. These guidelines are seen as the first step towards a mandatory ESG disclosure framework in the long term.
In the absence of mandatory disclosure reporting in some parts of the world, many businesses have undertaken voluntary reporting as a way of showing shareholders how seriously they take ESG risks. To give the results some context, organisations have been aligning their ESG efforts with various compliance frameworks. Here are some examples:
The framework on which the UK’s mandatory disclosure requirements will be based is already renowned for its general and sector-specific guidance. However, this tool only measures climate-related factors.
The Sustainability Accounting Standards Board provides a framework on which to base ESG metrics. From climate to water management and other environmental issues, data security to health and safety, this index is sector-specific.
The Global Reporting Initiative offers universal topics as well as topic standards in the economic, environmental or social arenas.
This is the standard that refers to how to make decisions for your organisation based on the risks and impacts of climate change.
Boardclic’s ESG Index
You can compare your ESG performance against peers using the benchmark that we have developed over many years from our questions and historical data. It features elements such as sustainable value creation, stakeholder management, corporate health, diversity, culture, and climate impact.
THE COMPLIANCE OFFICER’S ROLE
The role of the compliance officer is ever-changing as CEOs and boards begin to realise the importance of an ever-wider range of ESG factors. For example, the death of George Floyd, along with the subsequent Black Lives Matter protests and discussion about the nature of race in the modern world, have added an extra emphasis on businesses’ equality, diversity and inclusion policies. Compliance officers must keep an ear to the ground to stay ahead of the increasing spread of topics that can influence ESG requirements.
How ESG impacts your compliance program
The officer needs to keep ESG issues in mind at all times. With marketing, for example, they should be sure to drill down on any claims made about sustainability. Much of the current legislative moves around the world are aimed at combating greenwashing, where businesses overstate their environmental credentials. One question to ask is:
How can you prove the claims you are making and how do the company’s actions affect its ESG deliverability?
In addition, during due diligence, you should be sure that any third party you work with, the supply chain and all other stakeholders involved are also as green as they claim. Failing to do so can affect your non-financial performance.
There are a number of regulatory requirements about to hit businesses in terms of ESG compliance. This will mean more paperwork and increased administration workload, but the result is worth it. Adhering to ESG requirements not only keeps your business on the right side of the law but also makes it a more attractive prospect to the new generation of investors.
Currently, for many businesses, the biggest mystery around ESG is knowing what a ‘good’ score is. With dozens of standards floating around and the lack of clarification from governments, the best you can do is understand how your peers are doing.
This is where our ESG index (updated monthly) can help you. It can provide you with a benchmark to measure your performance over time as well as against your competitors. You can learn more here.
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