10 years ago, all companies were busily developing their Corporate Social Responsibility (CSR) policies and making sure that they were treating their employees fairly, supporting their local communities and taking on their responsibilities as companies with resources and power with integrity.
These days the word on those same companies’ lips is ESG. And although it encompasses all those good intentions, Environmental, Social and Governance strategies it goes so much further.
The first pillar of this – Environmental and Climate Change risk in particular – is the one that is taking a priority as there are many financial services regulators, including the one that regulates insurers, who now require all their members to design and commit to a strategy by the end of 2021. With 189 countries having ratified the 2015 Paris Agreement, let’s hope that this corporate push will have real and lasting effects.
An ESG strategy should include a detailed review of the business activities and how it impacts our planet. This will include the impact on carbon footprint, sustainable energy use, single use of plastics, waste disposal and better adoption of eco friendly materials. That, in itself is quite a task for many well-established companies who have legacy systems and procedures.
However, the strategy must also encompass the parameters for selecting companies for investment. For most financial services institutions, this means taking a long hard look at their investment portfolios and setting up a new set of requirements and metrics – how do these companies behave with regard to their impact on the planet, their attitude towards modern slavery, their use of fossil fuels etc. And this could inevitably mean some difficult decisions to not invest in otherwise attractive companies that offer growth potential. Indeed, there may be companies that fail on these new criteria and either need to adapt or just won’t survive in the long term.
ESG is something that none of us can avoid. CO2 levels in our atmosphere are the highest in human history. 2019 was the warmest year on record and 800 million people are now impacted from the effects of global warming causing floods, droughts and extreme weather conditions. Television series such as The Perfect Planet shows David Attenborough’s hard-hitting views about the impact of humans on our planet.
In response, more and more companies are offering concentrated capsules to order for cleaning and household goods that avoid the transporting of gallons of unnecessary water around the world. And major car manufacturers like Jaguar are now committing to manufacturing only electric cars from 2025.
Of course, this is all good news for us and for our planet; we should all be hopeful that these new regulations will force corporates to start making a real difference to the world that we leave our children. However, there are many difficult and costly decisions that corporates will need to make in order to comply and we are heading into some unsettled waters as the implications of these ESG strategies are felt.
And, riding on the back of a global pandemic, the future of many companies is even more uncertain as they are forced to face up to their ESG responsibilities.