ESG and its importance after COP 26

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Why should business leaders consider ESG?

Following more ambitious targets set at COP 26, more than 130 nations have made a commitment to achieve net-zero by 2050 or sooner. For these targets to be somewhat attainable, this ambition must be reciprocated by the private sector. Many countries have already employed carbon taxes, fuel levies and mandatory carbon reporting in an attempt to coerce some of the industry’s heaviest polluters into taking action. However, there is a growing appreciation that these measures are not there to impair large businesses, but it is recognised that it has created a shift towards a more sustainable and profitable way of doing business.

Environmental, Social and Governance (ESG) factors are a key way in which businesses are looking to balance profit and purpose. Hindsight has shown us the damaging effects of profiteering without regard to external factors. This has initiated a shift from conventional capitalism to ‘stakeholder capitalism’, where businesses recognise that profit is no longer the bottom line, but People, Planet, Profit and Purpose.

Many business leaders have already developed an ESG mindset and have capitalised on the opportunities that it has presented. It is estimated that up to 72% of organisations now mention sustainable development goals in their annual corporate reports (Source: PwC 2019). Climate-conscious investing is becoming the standard and ESG indices such as the S&P 500 ESG Index have outperformed many traditional indices. The financial consequences of climate change are becoming clear, and it is not only affecting the broader economy but corporate balance sheets – market analysts have coined the term ‘the carbon correction’.

 

What do we mean by ESG?

Environmental (E) assesses how a company performs as a steward of nature. It analyses how its activities impact the environment and manage environmental risks. It includes both direct operations and across the supply chain. For example, resource scarcity and management, natural resources preservation, animal treatment and greenhouse gas emissions. Many companies have already started on this journey. In fact, Sky has made firm commitments to achieve net-zero by 2030, Microsoft declared a target to become net negative by 2030 (removing historic emissions) and Starbucks has announced its commitment to a resource positive future.

Social criteria (S) examines the strengths and weaknesses of how a company manages relationships with employees, suppliers, customers, and the communities where it operates. For example, these criteria include working conditions, operations in conflict regions, health and safety, employee relations and diversity.

Governance (G) deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Investors want to know if they can trust the company and what kind of decisions are taken behind closed doors. It includes executive pay, gender equity / equal pay, bribery and corruption, and board diversity.

How to begin your journey?

We all know the saying, “in business what doesn’t get measured, doesn’t get managed”. Therefore, businesses should start by measuring, managing and disclosing their ESG performance. Much like a company’s financial records, sustainability disclosures must be accounted for in a way that is meticulous and standardised. Carbon accounting, essentially bookkeeping for greenhouse gas emissions, is a fundamental way of monitoring and developing your environmental performance. It enables you to determine the scale and influence of emission sources within your value chain, allowing for sustainability metrics to be tracked in a way that links them to economic value terms for decision-makers. Carbon accounting should be the first step in any environmental journey. 

Contact us to see how we can use carbon accounting to help you deliver a more sustainable and profitable end result.