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Sustainability and the importance of ESG

Sustainability

Environmental, Social and Governance (ESG) crept into fame in the mid-2000s, however in 2019, it started hitting the headlines and became a KPI for investors. As a framework that measures sustainability, it helps business owners and investors understand how their organisation is measuring up to targets and benchmarks; it enables them to report externally and manage sustainability risks. However, let’s be honest, as the results of our 2023 survey show, a large proportion of owners do not really see value in this “stuff”. This is backed up by KPMG’s report which shows less than 30% of companies feel that they have the ESG policies and systems in place for independent ESG data assurance.

However, investors have an eye on the future and see it as value accretive. Private equity backed businesses nearly all report on sustainability, whilst large and listed companies across the globe are increasingly reporting on their sustainability. It is high on the agenda even in the USA, which lags Europe. According to the Governance & Accountability Institute (G&A), 100% of large-cap companies within the S&P500 reported some form of ESG information in 2022, while 90% of the Russell 1000 index published a report, up 9% on the year prior.

Investment decisions have been and increasingly are influenced by ESG criteria. According to PwC, 75% of UK investors now consider sustainability risks and opportunities when looking at new opportunities. On top of this, past research has shown that companies with higher ESG ratings, on average, produce better returns, as these companies tend to have long-term sustainability goals valued by investors.



Impact of ESG Reporting and ESG Regulations

Irrespective of your views, reporting on sustainability is coming to the UK business owner. Regulatory requirements such as the Corporate Sustainability Reporting Directive (“CSRD”), effective from January 5th, 2023, means that around 50,000 businesses (either EU-based or EU subsidiaries of non-EU companies) need to disclose all information regarding their sustainability-related impacts, risks, and opportunities both internally and externally. The knock-on effect through supply chains means that UK business owners will need to start employing appropriate ESG reporting measures if they wish to sell products or services to businesses that trade in the EU or USA. From 2027, SMEs will also need to start reporting directly under the CSRD.

Under the Sustainable Finance Disclosure Regulation (“SFDR”), which came into effect in early 2021, asset managers and investment advisers are required to show how they address sustainability risks and principal adverse impacts. This gives investors transparency across a wide range of products but also decreases the chances of asset managers greenwashing their investment products, as they must be transparent about how they consider environmental and/or social criteria.

Consequently, and with an eye on value creation and importantly access to capital to facilitate this, business owners more widely will have to adopt operating models and ESG KPIs that prove their sustainability credentials to buyers and funders, as well as to position themselves optimally to an increasingly environmentally aware consumer.

No longer can this just be a tick-box exercise. A study in the EU a couple of years ago showed that up to 42% of all green claims by EU firms were either fake or deceptive, but the game has moved on, helped no doubt by the high-profile publicity on significant penalties for “greenwashing”. Firms that see ESG as a tick-box objective or as a distraction rather than something desirable are at risk of losing business and value.



Sustainability’s Potential

ESG is more than just an issue to meet from a regulatory or investor perspective. For many firms and employees, it spans beyond that, and many younger people entering the workforce value measuring and improving sustainability at a moral level.

Research by KPMG recently highlighted that amongst 6,000 UK adult workers, students, and apprentices, 46% want their employer to demonstrate good sustainability practices, while 20% had rejected a job offer when their values were misaligned with their sustainability commitments. This number rises to 33% for recent school leavers (18–24-year-olds).

This is quite poignant. By 2025, 75% of the working population will be millennials, so integrating ESG into your company’s operations and being clear about the initiatives in place will be crucial in attracting and retaining the best young talent.

Of course, sustainability goes further than just environmental matters, social issues are becoming increasingly more important to employees. Social justice movements such as Black Lives Matter have led people to ask what firms do from a social perspective to promote diversity and inclusion, while ongoing political tensions, such as the conflict between Israel and Hamas, have led both workers and customers to boycott brands that they see as strongly connected with one side or the other where they do not align to their values. On a positive note, firms that have stronger social employee cohesion will see lower employee turnover as employees attach considerable value to non-financial matters which resonate with them.

As a current intern moving into my third year of university, these matters are important to me, friends and other students across the UK. If you want bright talent in your business, sustainability cannot just be a one-time regulatory tick-box. Young people will choose to work for firms where sustainability is central to the organisations; places where we feel the firm’s purpose aligns with ours.

By Augusto D’Agostino on 03/07/2024