ESG or sustainability practices have become a bedrock of the modern business and investment strategy. And interest in the sector is only expected to rise in the coming years as many business and portfolio managers look to go carbon neutral.
According to Bloomberg Intelligence, by 2025 ESG-linked assets are projected to exceed U.S.$53 trillion, representing a third of all global assets under management. Accordingly, as investors demand sustainability risk visibility and governments move ahead with standard-setting regulation, corporations are ramping up their disclosure of ESG factors. In fact, in a recent survey conducted by KPMG, 75 percent of Canadian CEOs reported seeing significant demand in addressing ESG issues, while nearly four in five small and medium business leaders reported increasing their ESG commitments in the past 19 months.
Despite all of this attention and effort, however, critics still argue ESG has done little to move the needle on the issues it purports to consider.
“Unfortunately, it’s often an issue of buyer beware,” says Desiree Fixler, an advisory board member for the London School of Economics and Political Science. “There is a huge range of what is considered ESG and, currently, it lacks any standardization. The common thinking is the label ESG implies a company is doing good, but that’s not always the case.”
Last August, Fixler, who had been global head of sustainability at DWS Group, shone a spotlight on the discrepancies in ESG oversight, reporting and measurement when she accused the Deutsche Bank AG’s asset management unit of sexing up its 2020 annual report — which claimed over half of its U.S.$900 billion in assets were invested using ESG criteria.
The DWS situation and others like it provide a cautionary tale for business leaders to guarantee their commitments are not all sizzle and no portobello steak. With that in mind, here’s what leaders need to put in place to ensure they are truly progressing on climate and other impact goals.
Before you can walk the walk, you must talk the talk. Identify, prioritize and validate what the key ESG issues are for your business while avoiding generalizations or easily manipulated catch-all terms. This requires what Katie Dunphy, ESG advisory leader at KPMG Canada calls a “ESG integration” approach: consider how it can be applied across the entirety of your governance and business model. “Identify those topics where you need to invest and formalize your approach to managing some of those risks and opportunities in order to ensure resilience over the long term,” she says.
A good example of this can be found at the University of Toronto, which recently became the first university in the world to join the UN-Convened Net-Zero Asset Owner Alliance. Following its 2016 White Paper, Beyond Divestment: Taking Decisive Action on Climate Change, the University’s asset management corporation employed an ESG framework to reconsider the climate risks of its long-term portfolios with the goal of a 40 percent carbon footprint reduction by 2030. This is in line with the university’s overall climate goals, which include making it downtown campus climate-positive by 2050.
Until global standards for transparency and disclosures have been set, to be considered a top ESG company it’s important to follow a robust reporting template, such as those set out by the Task Force on Climate-related Financial Disclosures or the Global Reporting Initiative, and continue to evolve that template with the market to ensure you’re reporting the full scope of your company’s impact. As Desiree Fixler points out, when it comes to disclosure: “the devil’s in the details.”
Avoid falling into the “best-in-class” trap. Make sure you can show a net-positive impact as you scale up. “If you’re an early-stage company, the first thing you should be doing is to track your impact using ESG criteria to understand what positive or negative effects your company might be having,” says Jason Sukhram, director of impact measurement and management at MaRS. “Over time, the goal should be to get more specific about the positive outcomes that you’re trying to contribute to.” Having that baseline measurement will help you set key targets so that your company isn’t just mitigating any negative impacts (such as carbon emissions or plastic waste) and is actively making a measurable improvement.
It’s not enough to make bold pledges several decades in the future: you need to make sure you can actually meet those goals. To do this, set short-term milestones using data-based, verifiable metrics that will ensure you’re consistently evaluating your company’s ESG performance. At BMO, for example, the bank has set intermediate and longer-term targets for financed and operational emission reduction on the way to net zero in 2050. “It’s important to set net-zero goals, but it’s too easy to kick that can when it’s 30 years down the road,” says Fixler. “Today, to be considered real, it’s very much about what those interim targets are.”
When designing an ESG strategy, it’s important to think holistically. This means embedding ESG factors such as climate and social disruption in risk management when considering the operating environment in the next five, 10 or 15 years. For a company such as Ontario Power Generation, for example, adapting to climate change is a key factor in its net-zero action strategy.
“Companies need to think about those disruptive trends as they tie back to ESG factors and ensure that those are reflected in both assumptions and in the design of strategy.” says KPMG’s Dunphy.
When you commit to ESG as a core business principal, ensure it’s valid across your entire supply chain and organization chart — from the board and c-suite to associates and interns. “You have to ensure there is full integrity,” Fixler says. “Increasingly, a company’s revenue streams and stock price are aligned with ESG. As a result, you have to report out everything you can and make it as painfully accurate as possible to ensure you have evidence to support every single statement you make. And with that mindset, you can remove a lot of the possibility of greenwashing. At the end of the day, all a company can do is try to have the best corporate governance and not game statistics.”
Real impact takes considerable effort, intention and hard work. Business leaders looking to make a material difference need to build a principled foundation to make sure that it won’t be just business as usual.
Learn more about the latest developments in climate innovation and what it will take to transform the economy at MaRS Climate Impact, November 30 to December 2. See the program here.