Once viewed as an afterthought, ESG is becoming increasingly central to the bottom line.
The Green Party’s strong showing in recent elections for the European Parliament highlights the increasing importance of sustainability for companies looking to attract investors, engage with the public and adapt their business models to the operational and financial risks of climate change.
The “green wave” is getting a boost in the US from the so-called Green New Deal promoted by progressive Democrats in Congress, and from civil protests such as the one led by Swedish teenager Greta Thunberg and the UK’s Extinction Rebellion. But responsible investing is also being enabled by new technologies that make processing data, including nontraditional financial information, faster, easier and cheaper. It is also empowered by activists using social media to influence policymakers.
“People are increasingly putting value on long-term thinking,” says Ulf Moslener, professor of Sustainable Energy Finance at the Frankfurt School of Finance. “This has lots of potential to drive institutions and policymakers toward the question, ‘Is this business model going to be workable given the structural changes going on?’ This is a question that strategic investors are asking themselves and the companies they invest in.”
That means companies must demonstrate that they can deftly negotiate the transition toward a long-term sustainable economy that is low on carbon emissions and successfully manage the risks of ambitious climate regulation. Moslener recommends that companies conduct an audit of their operations, looking at both upstream and downstream environmental impact, and engage in more forward-looking, scenario-based analyses instead of relying on classical risk models based on data from the past.
A recent report by KPMG China also notes the importance of building capacity at the top level for managing environmental, social and governance (ESG) issues. Forty-three percent of business leaders surveyed by KPMG expect an increase in investment in the next three years to improve their company’s tracking of ESG issues and related communications to the board.
Some companies are going further. Last year, insurer Allianz announced it was divesting from businesses involved in large-scale, coal-fired power plant expansion projects. That was followed by Japanese insurer Mitsubishi UFJ Financial Group's decision to no longer finance coal-fired power generation projects effective July 1, 2019.
Much has changed since former UN Secretary General Kofi Annan got the ball rolling on ESG investing in 2004 with his letter to CEOs of major financial institutions. Now, ESG integration is increasingly seen as part of management and the board’s fiduciary duty. Plus, industry sector–specific reporting is on the rise. In June, the European Commission published a taxonomy laying out which economic activities are “green,” making benchmarking easier and more effective.
However, there is still a long way to go in combatting climate change, say scientists as well as green-oriented policymakers and activists. A good starting point for companies, Moslener says, is to scrutinize activities not just for carbon impact, but with an eye toward other requirements for managing the transition to a long-term sustainable economy.