In recent times many high-profile companies have appeared in the news due to allegations of greenwashing surrounding their Environmental, Social and Governance (ESG) and sustainable products offering.
Management teams and company Boards are today more than ever finding themselves under increasing pressure to justify their commitment to saving the planet, amid accusations of widespread greenwashing and empty environmental, social and governance promises.
Activist shareholders and large investment Funds such as BNP Paribas and TCI have voted against the re-election of directors and the approval of financial statements at companies that fail to provide details of their carbon emission policy or if they believe they are deliberately being misled or told a better story than the data would indicate.
Whilst there are for sure businesses who have grossly inflated and mis-represented their sustainable and ESG credentials in an effort to appease a wider range of customers as part of their marketing campaigns, other businesses find themselves overwhelmed by the increased scrutiny and expectation to provide meaningful and impactful ESG data and impact results.
Indeed, increasing concern comes from shareholders with regards to the quality of ESG data they see – either because it’s difficult to verify or not trusted. This in turns puts pressure on executives and board to provide assurance about their organisations’ environmental pledges, against a backdrop of mounting investor expectations about climate action but not only.
There is for sure an issue with ESG reporting which lacks harmonised and mandated standards on sustainability which has the risk to turn the perception of ESG efforts to hollow rhetoric.
If we take a look at the asset management industry for example, the governance of ESG has escalated to a high degree of complexity in the past years; however, initiatives like the Task Force on Climate Related Financial Disclosure (TCFD) or new regulations Sustainable Finance Disclosures Regulation (SFDR) in Europe, UK’s Sustainability Disclosure Requirements and soon to come from the US, are looking to bring in standards and metrics that should hopefully provide a roadmap for companies, stakeholders and investors.
There has been a big leap of sophistication in the level of ESG factors integrations expected as well as the quality of the data and results reported, and it is now critical for Boards to keep up with stakeholders’ expectation and be an integral part in setting and overseeing ESG obligations.
Boards need to ensure that ESG is firmly embedded into strategy and risk management practises; identify which ESG elements may pose the biggest threats, be open and transparent about them but also consider how to pivot to opportunity; and verify that ESG compliance controls are in place across the business – from subsidiaries to supply chain companies.
Board should do so not only to support businesses to achieve sustainable operational excellence, which ultimately translates into sustainable value generation for stakeholders, but also to avoid very costly litigation risks: the risk that a firm is sued by a client or investor who claims to have been mis-sold; or possibly litigation by an activist group looking to gain publicity through litigation with a large financial group are no longer a rarity and could tarnish a firm reputation for a very long time. Similarly, smaller privately held companies caught in a litigation might incur a blow to their bottom-line from which it could be hard to recover.
ESG is no longer to be considered a new trend, a badge of honour for virtuous businesses; there is instead a growing recognition that inaction on the ‘E’ of ESG is simply not an option and would have devastating economic consequences; inertia on the ‘S’ has widespread repercussions on a firm’s ability to deal with social trends, labour force and politics; and as for the ‘G’, well, there is where the Board can make the biggest difference by understanding the risk and opportunities in the decision making process, exercising dutiful oversight and ensuring the delivery of the ‘E’ and the ‘S’.
Related post: The intersection and interplay of Artificial Intelligence and ESG
Written by Anna Colombatti
Anna Colombatti is COO for the Investment and Due Diligence function of the asset management subsidiary of the insurance group AXA. Her experience in evaluating, advising and allocating to financial products spans two decades and her most recent focus is on portfolios transition to comply with Sustainable Finance Disclosures Regulation (SFDR) whilst proactively identifying potential greenwashing issues. Anna holds a range of previous voluntary NED and trustee roles, and she is looking to add more non-executive experiences alongside her executive career.
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