Climate crisis, a grave reality, holds the centre stage given its momentous impact. The outbreak of COVID-19, a global scourge, only underlines the current challenge we have ahead of us. As we focus all our efforts to come out of this pandemic with limited damage, it’s pertinent to remember the short and long term insidious impact of climate change. Rapid global warming and exploitation of resources is bringing about drastic changes in the ecosystem. Be it the heat waves causing catastrophic forest fires in California, Brazil or Australia to rising sea levels due to melting glaciers and shifting ice sheets in Antarctica. All these are signals of a harbinger of possible dystopian world we are heading to. The island of Kirabati, which is nearly submerged and is already referred to as the ‘poster child for climate change’.
The Paris Agreement and laying down of Sustainable Development Goals (SDG) in 2015 led to a cultural shift in thinking where climate change established a foothold in key discussions across countries. The Intended Nationally Determined Contributions (INDC) by countries is an intention to reduce their emissions and keep global warming below the target of 1.5 degree Celsius, which is a herculean task. The role of industry is equally critical here, and the logic of environment conservation hasn’t eluded other stakeholders in the ecosystem, even the investor community.
Environment is used as a key catalyst by investors, given the shift in how they align their money with a broader goal in life than just simple return on investments. This led to the term, ‘responsible investing’, which entails not only ‘environment’, but also ‘social’ and ‘governance’ indicators to be relevant in investment decisions, which earlier were not even tangentially considered. The term ‘ESG’ (Environmental, Social and Governance), although coined decades ago, has gained traction recently given the shift from a traditional mindset to a more comprehensive approach. It’s no longer limited to just corporate performance and overall returns. There are pressing questions such as the corporates ability to combat climate change, its approach on reducing its carbon footprint, its policy and procedures to safeguard health & safety of its employees, its efforts to drive sustainable supply chains, and its protocols to ensure transparency and adhere to business ethics. Thus the ESG indicators have become increasingly crucial and it is envisaged that their relevance will further accentuate in future investment decisions. The ESG investment has grown to more than $30 trillion, and estimated to reach a mark of $50 trillion.
Global growth in Sustainable Investment (A surge since 2012)
Responsible investing resonates well with the Mckinsey Quarterly Report (Five ways that ESG creates value, November 2019), which emphasises that the corporates who consider environment, social and governance indicators are better equipped to create value over a long term period. An excerpt from the report outlined an example of Unilever, during the time it developed Sunlight, a brand of dishwashing liquid that used much less water than its other brands. As an outcome the sales of Sunlight and Unilever’s other water-saving products progressed slowly to outperform the category growth by about 20 percent in some water-scarce markets. Another initiative is the establishment of OnePlanet Sovereign Wealth Fund, influenced by Paris agreement, to integrate its efforts to combat climate change by bringing it to massive asset pools. All this succinctly describes the growing prevalence of ESG in the world of investors.
In the current unprecedented times, a bigger question looms upon us – Is sustainable investment a nice to have feature or has the current pandemic revealed that ESG issues are far too huge to be ignored?
Data from various reports indicate that companies that invested in ESG strategy found themselves to be better placed during these times. According to a recent article in the Economic Times, “MSCI factsheets show that the MSCI World, USA, Emerging Markets and Europe ESG leaders all have outperformed their non-ESG equivalents during the sell-off in Q1.” Further, it mentioned that the ESG indices not only outperformed globally, but also outshone by over 5% in India during COVID related sell-off. This clearly indicates that companies should focus on ESG if they want to see a better valuation and higher return for their shareholders.
It is imperative that companies embrace ESG, and incorporate it in their reports. Else the pressure will come from shareholders, climate activists, customers and even governments. The demotion of Lee Raymond at JP Morgan Chase, considering his former role as Exxon CEO, is one such action. Another one is altering the name of Uniliver’s product ‘Fair & Lovely” by dropping the word ‘fair’. Yet another example is about the $27 billion London-based hedge fund, The Children’s Investment Fund Management, which outlined its plans to vote against the directors of companies who are unable to provide their carbon footprints.
The financial indicators have long been a part of the report, whilst the non-financial disclosures received the spotlight recently.The London Stock Exchange Group has issued guidance setting out a set of recommendations with best practices in ESG reporting.
It is heartening to note that the rapid increase in ESG reporting in India indicates the ongoing transition. The reporting landscape has seen some significant milestones, from the introduction of a mandatory CSR report to a Business Responsibility Report for top 500 organisations by market capitalisation. There has been a gradual shift by the Corporates to integrate ESG indicators with the Annual Report. According to WBCSD, “23% of India’s provisions request sustainability information to be disclosed in companies’ annual reports, a third more than China.”
The above narrative reiterates how we are gradually moving towards furnishing transparent information for our stakeholders in order to build the trust and confidence they require from us. The writing on the wall is clear – a new normal means that we need to look at a new sustainable world and have to… Go The Distance
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of India CSR and India CSR does not assume any responsibility or liability for the same.