When searching for travel on Google Flights, it is significant that airlines have begun to incorporate carbon emissions data into their offers.
As a frequent flyer, all things being equal, including price, you will often go for the most carbon-efficient flight. It's representative of a new perspective like my personal carbon footprint, but it also highlights a real turning point for the investment community.
If environmental data is already available and marketable at the consumer level, this means that the era of ESG (environmental, social and governance) has arrived at the business level and is the next great frontier in corporate governance, risk and compliance (GRC) .
ESG is still seen by some as all talk and little action: there may be executives touting the importance of ESG, but a universal yardstick for clearly understanding ESG performance is still lacking. Without it, it is difficult to distinguish what is right from what is wrong, or what is a strong investment than mere empty messages.
The common denominator that investors need to understand is that the key to understanding ESG is about collecting the data and having it in an actionable format for analysis. Once key metrics are in, both investors and executives can make smarter decisions. So how do you assess ESG performance and make it more actionable?
At Morgan Stanley in a recent poll found that 85% of all individual investors were interested in sustainable investing, up 10 percentage points from 2017, while a Bloomberg report stated that ESG assets may reach $53 billion in 2025, which would be a third of total global assets.
Investors are starting to think about ESG risk in the same way they think about investment risk. Most stakeholders expect companies to play a role in decarbonising the global economy and to be responsible global citizens. Consider the strong consumer reaction when corporate entities are found to be irresponsible: if companies fail to meet a certain ESG standard, they must answer to their customers, employees, investors and the global community at large.
Interestingly, we have seen this same paradigm in the broader risk management industry. Governments have yet to catch up with the rapidly evolving risk factors in a more digitized world – the metaverse and cryptocurrencies are prime examples of new and risky territory with no regulations in place.
As governance bodies catch up, companies must set their own internal standard for how to manage and measure risk. This internal regulation is reinforced by the rest of the business ecosystem: partners, suppliers, consumers and institutional investors drive the need for GRC requirements as they assess their own risks and investments.
Investors also gain insights from the risk management space when considering how to value the role of ESG: For any risk, the best way to understand how to make informed risk decisions is to measure risk as a monetary value. ESG has long gone under the radar: the cost is so high and the probability of a risk event so low that corporate leaders tend to underestimate the probability and cost of an ESG risk event.
As investors, correctly quantifying ESG risk and understanding your plans to address company risk events is essential to providing the right parameters in an investment.
There are the following signs when evaluating investments: These will favor companies that are taking steps to self-regulate their ESG standards and are aware of the true size and scope of the threats of this risk.
The ESG score is what is at stake
ESG regulation will increase as governance bodies continue to catch up with what is happening in real time within and between organizations. The US Congress recently passed the $1.2 trillion Infrastructure Bill, which includes several ESG initiatives, and the Securities and Exchange Commission announced an increased focus on ESG disclosure.
As ESG links to broader governance and compliance standards internally and externally, organizations that have an ESG metric scoring and reporting system in place will be better prepared for the future.
Until a single framework is established as a global standard, companies that understand the importance of collecting their ESG data and making it available will have an advantage in attracting investment, customers and employees.
ESG assessment is embedded in the business
Leaders of global companies see their risk management team as a reactive and diagnostic system, a necessary and preventive defense plan. But playing defense is lagging behind. Any risk breach, including ESG risk, happens so quickly that the business impact is immediate and stakeholders expect just as fast a response.
However, it can take months to collect the data and manually create these ESG reports. Technology can help: Automation and artificial intelligence will affect how companies measure ESG and help make these response systems faster.
Investors pay attention to how ESG, risk and governance data is collected on their portfolio companies. You have to ask yourself: Is data collection built in and always on, or are reports generated manually? Are you leveraging automation and AI to stay focused on analysis and making smart decisions, rather than sifting through disparate data?
Short, medium and long term plans
Capital investment is based on delivering long-term, lasting returns. Transparency around plans for a sustainable world and according to compliance measures is an important element of those returns.
For institutional investors and futures analysts, the new normal is understanding how companies set their short-, medium-, and long-term goals for ESG progress. Companies and leaders must set goals with achievable plans to meet them; this is fundamental to the long-term economic interest of the shareholders.
Meanwhile, ESG standards continue to evolve and mature. It is now common for institutional investors to request that companies issue regular public reports consistent with benchmarks being developed globally, such as the Working Group on Climate-Related Financial Disclosures (TCFD).
La International Financial Reporting Standards Foundation by the end of 2022. ISSB intends to build on the work of investor reporting initiatives such as TCFD to become the global standard setter for sustainability disclosures for financial markets. Organizations can start preparing now for the medium-term expectations of institutional investors' ESG reporting.
Management involvement
When companies participate in ESG rating and are able to quantify the monetary value of specific ESG risks, organizations, through their audit committees, have more valuable information to make better business decisions.
Therefore, it is much easier to understand what is happening in real time and therefore apply investments according to the information in the environment.
The current ESG landscape as an echo of what was seen in the dotcom era. In the late 1990s, companies like Amazon, eBay, and Google were leading the way and betting big on a digital future. Many dismissed this technology and the investments of these companies as difficult to understand or just a minor fad. While many failed miserably at the expense of their investors, those who balanced risk with sound trading strategy still dominate today.
ESG is not a trend or buzzword – it is the next business imperative driving a more sustainable and responsible future. Stakeholders will continue to demand ESG reporting as a litmus test for investment, making it critically important that companies move from empty ESG concepts to real action.
Companies that embrace these ESG insights today and participate in building a global ecosystem of responsible growth will not only survive the ESG wave, they will thrive.
