9 Feb 2022
Environmental, Social & Corporate Governance
WHAT IS ESG?
ESG (Environmental, Social and Corporate Governance) constitutes a range of criteria used by investors to evaluate a company/firm’s commitment to ensuring its sustainability, the wellbeing of its people, and its compliance with corporate regulation. These metrics are often non-financial in nature and can comprise a wide range of business activities. While many of the criteria used in ESG evaluations are currently voluntary, this is expected to change in the near future as governments and regulatory bodies move towards mandating aspects of business operation such as sustainability and employee wellbeing.
Consequently, investors are increasingly making ESG considerations a key part of their investment criteria. Companies that are ahead of the curve in this sense will only serve to bolster their prospective valuations and attractiveness to investors.
INDUSTRIES WITHIN ESG
PROPERTY & REAL ASSETS
Property and real asset present one of the largest markets for the ESG-conscious business and investor. c.28% of global carbon emissions come from energy consumption related to real estate, making this one of the key areas for improvement and innovation within the ESG space. As these considerations become increasingly important to green debt providers and investors, many will seek to implement aspects of ESG strategy into every stage of the property lifecycle – this includes everything from the a transaction’s initial due diligence process all the way through the real-asset management. While the implementation of such practices may not directly generate higher investment returns, the move towards a more ESG-compliant asset will ensure its value further into the future as both tenants and investors alike shy away from less sustainable real assets. Firms providing energy-saving/monitoring solutions that help occupiers and investors achieve net zero will enjoy a market that is ripe with untapped potential.
Compliance considerations will continue to become ever more relevant for firms as regulatory bodies from around the world (such as the EU, FCA and SEC) bake aspects of ESG into their legislation. Increased levels of transparency within organisations are now the standard, but implementing all these requirements in the proper way can be a difficult process to navigate. This increased level of both investor and consumer scrutiny has forced organisations to be more aware of their environmental, social, and safety considerations, as well as developing their ethical standpoints. A few key reference texts have been drawn up by the International Organisation for Standardization (ISO):
- ISO 26000 – this standard provides guidance for businesses that recognise their impact on society and the environment.
- ISO 31000 – this standard relates primarily to risk management and performance improvement.
- ISO 37301:2021 – this standard specifies all the relevant requirements necessary for maintaining an effective compliance management system for any business.
Employee wellbeing is one aspect of ESG that has been brought to the forefront of investors’ minds since the beginning of the COVID-19 pandemic in March 2020. Employee wellbeing is not just limited to employees’ physical health, but also the built environment in which they operate, their access to good nutrition, nature, and also their mental wellbeing. A healthier and happier workforce has been proven to be more efficient and productive in the workplace, meaning there are both moral and financial rewards for meeting this part of the ESG agenda. Within employee wellbeing, there are largely four areas of business to consider:
- Company policy and benefits – this includes leave time, medical expenses, and any benefits/rewards packages
- Community – this covers the environmental and social impact (community involvement) of the business
- Strategy – building a healthy and mindful culture can be baked into the core strategy of a business
- Workforce and operations – this involves employee pay practices and occupational health and safety
ESG considerations are quickly becoming one of the key talking points in discussions surrounding investment and business strategy. Organisations must now demonstrate their ethical standards and practices, responsibility towards the environment, as well their compliance with regulation. Due to the ever-changing nature of the legislative landscape, this can be a particularly complex process to navigate. Many businesses now offer sustainability services in a bid to bridge this gap between legislative requirements and owner-manager knowledge by proposing solutions to help their clients on their journey towards net carbon zero. Solutions normally involve a consultative approach in which monitoring software/devices may be used to asses the current efficiency of the business, with many suggesting efforts to increase improve the sustainability of both the business’ supply chain as well as its incumbent technology.
FOOD PRODUCTION & AGRICULTURE
Food production and agriculture are two industries not normally associate with ESG but, in our experience working with food suppliers of all different types, ESG considerations are certainly a key part of the running of such businesses. For instance: c.26% of all global greenhouse emissions come from food production; 94% of earth’s entire mammal biomass is used in food production; and 70% of all freshwater withdrawals are used for agriculture. It is clear that food production and agriculture is having a demonstrable effect on the world we live in. From the point of view of the food producer, these facts present a nuanced and often expensive set of challenges. From Polestar’s perspective, we aim to work with organisations who acknowledge these areas of their business and are actively taking steps to counteract them. Future developments in food production, such as more efficient 5G-enabled factories and methods such as hydroponic farming, promise to help businesses on their way to achieving their ESG goals.
BRANDED PRODUCTS & CONSUMER DURABLES
Branded products and consumer durables represent a huge market for the ESG-savvy business and investor. According to Deloitte’s 2022 Consumer Products Industry Outlook, 90% of respondents claimed brands are not open and transparent enough with their business practices, and 84% said that brands don’t meet consumer environmental, social, and governance (ESG) expectations. Further to this, 82% of respondents thought that brands were guilty of “greenwashing” their businesses – effectively presenting themselves as more sustainable and ethical than they really are. All this means that manufacturers, distributors, and sellers of branded products and consumer durables now face increased awareness and scrutiny from from their customers when it comes to their ESG credentials. In fact, 54% of consumers ranked “sustainability” as the most important area for consumer products innovation in 2022.