Risk & Economy » Climate change » Report: ESG activity spikes during pandemic but data challenges remain

The pandemic was a pivotal moment for organisations to engage in environmental, social and governance (ESG) issues, encouraging them to pay closer attention to external risks.

Julie Brown, CFO and COO at Burberry, said it prompted businesses to use their “scale and influence to make a real difference” to the communities where they operate.

“The pandemic really showed the importance of ESG and the opportunities businesses have to make a meaningful contribution to shape and support the world in which their stakeholders live,” she said in an email. “It is no longer acceptable to not look beyond your own business – the onus is on all of us to drive positive change and build a more sustainable future.”

Demand among investors for ESG-related products continues to rise, with $54bn (£39.2bn) pouring into ESG bond funds in the first five months of 2021 compared to $68bn invested for all of 2020, according to a report by the Financial Times.

But despite more organisations and investors paying closer attention to the ESG space, data challenges around availability and quality remain, says Diane Eshleman, head of Americas at consultancy firm Delta Capita.

“The data is sometimes really hard to collect and it’s hard to know what the right benchmark is,” says Eshleman. “There’s no standard and so the biggest challenge is really around collecting the data in a way that is credible and consistent.”

Samuel Rundle, head of financial market investments at Ingka Investments – one of the three core businesses of Ingka Group, the largest owner and operator of IKEA Retail, added that a lack of transparency and the reporting of ESG data is causing issues for investors.

According to Schroders’ latest Institutional Investor Study, “greenwashing” continues to be a major issue for investors, with 59 percent of survey respondents highlighting it as the most significant obstacle to investing sustainably.

“Definitions and concepts are not clear, so when different companies talk about being net-zero, their concept can be quite different,” Rundle said in an email. “Any regulation and development of reporting standards will help these challenges.”

Standardisation will provide credibility

The discrepancy among ESG and sustainability reporting standards is creating issues for organisations and at times, can be “quite overwhelming”, says Rebecca Self, director of sustainable finance at South Pole. “It can create a bit of a barrier [when] there are so many different initiatives.”

Harmonisation and consistency among standards are important but there will still be some different “national or jurisdictional flavours with ESG,” says Self.

Lorena Pelliciari, CFO at Fineco Bank and chairman of its Sustainability Management Committee admitted that the proliferation of different standards for reporting is challenging the bank’s ability to communicate effectively with its stakeholders.

“Reporting must be easy to read and understandable by stakeholders with different backgrounds.

“It is important for ESG reports to include the full range of impacts and outcomes of its strategy –  both positive and negative – to give a true representation of its contribution toward sustainability”, she added.

A standardised set of standards and disclosures around ESG will allow for greater comparability and make the associated data more credible, which in turn will reduce greenwashing claims, says Eshleman.

“Right now, it’s very difficult to compare one company to another in terms of their ESG performance, even if they are in the same industry, and to compare across industries is nigh on impossible,” says Eshleman.

“It’s going to be important for companies to work together to agree on what the appropriate [sustainability] standards might be.”

Leading the way

A company’s mindset around ESG is one of the biggest challenges to overcome, as it is “not something that can be easily or swiftly changed”, said Rene Ho, CFO at Taulia.

“ESG should not be viewed as a nice thing to do or to be left to corporate social responsibility teams, but the reality is that in many quarters it is still seen through these outdated lenses. Making ESG part of the decision-making process and operations of the company will ensure the strategy will have a higher likelihood of success.

“Ultimately, the CFO needs to think that ESG is an ‘and’ not and ‘or’ decision,” he added

Attracting and retaining talent will come down to an organisation’s attitudes around sustainability as consumers – especially young people – are placing a greater emphasis on the principles of ESG, according to Delta Capita’s Eshleman.

“Generationally, younger people are demonstrating that there is much more focus on ESG, particularly the environmental element, but also the societal element. And so, ESG is going to be increasingly important to companies who want to make themselves an employer of choice.”

However, Gen Tsuchikawa, chief investment manager at Sony Innovation fund, a corporate venture capital arm of Sony Corporation, said most companies struggle with how to apply ESG to the organisation despite knowing its importance.

Earlier this year, Sony Innovation Fund announced it had developed an ESG scoring methodology to assess companies in its portfolio. After establishing its ESG benchmark, other venture capital funds got in touch with Sony Innovation Fund seeking advice on ESG, says Tsuchikawa.

“All the people who reached out to us understand that ESG is important, but they are all facing the problem of how to communicate this and how important it is. There’s a sort of a natural impetus for everybody to collaborate.”

The ESG space will see more collaboration in the future between companies, investors, and stakeholders, he adds.

Mitigating “greenwashing”

Occasionally, a company’s enthusiastic attitude around sustainability can result in unconscious greenwashing. This usually occurs with issues in self-reporting where there is a lack of evidence to support the claims that companies are making around its performance, says Eshleman.

“The emergence of tools which provide better and more concrete evidence of ESG performance will mitigate the risk of greenwashing,” says Eshleman. “Indeed, in some cases, companies report that their ESG credentials are strong, when in fact they don’t have visibility into the ESG performance of their peer group and thus do not realise that they have some deficiencies to address.”

For ESG strategies to become impactful and successful, organisations must tailor them to the areas most relevant to their business, says Eshleman.

Building on this point, Burberry’s Brown believes “bringing climate reporting into line with financial reporting will help to drive further progress among businesses”.

“We publicly disclose climate-related risks and opportunities, in line with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and provide a summary of the action we’ve taken to address them in our annual report. It’s not just a reporting mechanism, but a way of assessing the risks and opportunities associated with climate change, and that brings about positive change in a business.”

Investors driving change

Companies have made strong commitments to ESG efforts in recent months, but as investors’ focus shifts towards sustainable investing they will play a key role in holding companies accountable, according to Delta Capita’s Eshleman.

Last year, investors poured $51.1bn of net new money into sustainable funds compared to $21bn in 2019, according to a report by Morningstar.

“Investors increasingly realise that ESG elements are important to company performance,” she says. “Whether it is making sure that they have ethical business practices, making sure there’s no adverse news, any one of which can impact the value of their investment.”

ESG-focused investing and targets are being deployed throughout numerous portfolios. The Ingka Group’s investment arm, Ingka Investments, developed a new ‘Investing with Impact’ approach. Ingka Investments’ Rundle said it “[pushed] us to look at our portfolio in terms of ESG factors to invest more and more in companies sharing our ambitions in term of sustainability –  since this year our investment portfolio is fossil fuel free”.

“Today, our investment approach is to avoid undesired sectors. The new ESG approach we are implementing allows us to develop and explore the possibilities to invest with an impact: generating sustainable financial returns while demonstrating positive environmental or social impact.”

Financing ESG opportunities

Meanwhile, some companies have launched sustainability bonds as part of their ESG strategy to help finance their transition to sustainable practices. Attached to such bonds are sustainability key performance indicators (KPIs) that companies are committed to hitting. If the targets are not met the company is required to pay a premium.

The total issuance for the green, social, sustainability and sustainability-linked (GSSS) bond market reached $600bn last year – compared to $326bn issued in 2019.

Burberry Group launched its first Sustainability Bond, valued at £300m, linking the firm’s medium-term financing to sustainable projects and it’s climate change agenda, in September of last year. “The addition of this financing will support our liquidity and allow us to secure proceeds for investment in our sustainability agenda over the life of the bond,” said Brown in a statement.

In the same month, the privately-owned Chanel issued a series of five- and ten-year deals, raising $699m (£507m) in sustainability-linked bonds.

The growing GSSS bond market makes it easier for investors to grow their portfolio towards sustainability focused projects, added Ingka Investments’ Rundle.

“These investments simplify and help us target investments where we know the proceeds are directed to green projects, and importantly verified by an objective institution,” he said. “What is very much encouraging is that the dialog with our financial counterparts has clearly over the past year intensified on ESG topics, and we are keen to be active with an ambition of taking a lead in this dialogue.”

However, Fergus Hodgson, director of financial consultancy firm Econ Americas, is concerned about the impacts of sustainability-linked bonds, as he believes it “shifts the performance burden from explicit financial metrics to environmental-impact perceptions, which are easier to fudge and manipulate”.

Meanwhile, Rajul Mittal, head of sustainable finance at Synechron says sustainability-linked bonds are becoming a slightly exhausted choice when it comes to ESG efforts.

“The bond market and the sustainability-linked bond market is quite mature,” he says. “I would not say there’s a lot of innovation or transition that I anticipate when it comes to sustainability-linked bonds in the foreseeable future, except the regulation being more stringent and tighter in terms of […] the sustainability lingo on and how we define it.”

Other companies opted to tie stakeholder bonuses to reaching ESG goals. However, Leonardo Orlando, an executive in Accenture’s Finance & Risk practice, argues this has the potential of “creating a negative loop where the business is compelled to do whatever it takes to provide transparency and ESG without necessarily changing the wheel”.

In May, online fashion retailer Boohoo announced it had tied a £150m bonus scheme to improve its supply chain issues. The scheme was recommended by the Environmental Audit Committee (EAC) following an evidence session in December.

Boohoo are not the only ones to do this as 45 percent of FTSE 100 companies have an ESG performance incentive linked to their bonus or long-term incentive plans (LTIP), a report by PWC and London Business School revealed in March.

Orlando warns such bonuses may result in companies focusing on being ESG compliant from a business perspective rather than ensuring the “entire end to end process […] is ESG compliant”.

A lasting impact

With many of the ESG aspects being dynamic and changing at a rapid rate, the challenge for companies is to remain agile and responsive, according to Burberry’s Brown.

“The needs of our communities may change, meaning we need to constantly review our programmes. Additionally, as climate science evolves, we need to adapt and ensure we’re aligned to the action that will have the biggest impact.”

However, the most positive impact to ESG will be around strengthening governance, according to Taulia’s Ho.

“Better governance will be the game changer for ESG. With stronger governance, all companies can make better decisions and positively impact all their stakeholders, including their employees, customers and communities.”

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