After starting life as something of a box-ticking exercise for many companies, embracing environmental, social, and governance (ESG) criteria has become a dealmaker. This is why investors of all shapes and sizes are looking to integrate these factors into their businesses, in a bid to make their companies more attractive but also protect them from future disruptive events. However, implementing ESG can be a long process that includes several steps, so investors should prepare for a marathon, and not a sprint.
Nevertheless, now is the time for investors to ride on the ESG wave as there are more incentives emerging for them to promote sustainability and build back better after the Covid-19 pandemic. In fact, the EU Commission announced in June that it had selected 72 research and innovation projects for funding under the European Green Deal Call. These projects are set to contribute to the EU’s response to the climate crisis and protect the region’s ecosystems and biodiversity.
The UK is also calling on all small businesses in the country to lead the charge to net zero. The Together for our Planet campaign intends to motivate small businesses to cut their emissions to net zero by 2050 or sooner, while helping them grow, adapt and seize new opportunities. This is crucial as “the UK’s six million small businesses make up 99% of the UK’s enterprises, employ 60% of the UK workforce and generate £2.2trn of revenue to the economy”, according to the campaign. Thus, the impact of these enterprises taking action and reducing their carbon footprint would be sizeable for the country.
ESG is a marathon, not a sprint
Incentives such as the European Green Deal and Together for our Planet can encourage investors to embrace sustainability as a way to receive help and incentives from the EU and the UK government, increase their profits, but also deliver environmental and societal impact.
However, investors should not see sustainability and ESG as an opportunistic strategy for the short term, but as a long-term project that they are firmly committed to.
Indeed, organisations should focus on coming up with an ESG road map, which highlights all the important milestones that they are looking to achieve over the next few years. However, what is interesting about sustainable investing is that there is no endgame, no specific moment where the investor will have won the sustainability game and not have to dedicate more attention or resources to the issue. Instead, the relationship between a company and ESG integration should be dynamic, with investors looking to improve their scores across the three elements of ESG as regulations change and the areas in need of attention alter over the years.
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A report from PwC finds that there are still significant gaps between the concerns about individual ESG issues and the actions being taken to address them. The PwC Global Private Equity Responsible Investment Survey 2021 reveals that “in cases where ESG issues have long been a governance concern or are mandated by regulation – such as occupational health and safety, or preventing bribery and corruption – the gap is small. However, on issues that are fast becoming business-defining in the post-pandemic global economy, such as net zero, climate risk, biodiversity and emerging technologies, the gap between concern and action should be a topic of discussion”.
The embracing of ESG also tends to work at different speeds depending on the kind of investor or company. Sophisticated investors, such as a multinational companies or larger pension funds, tend to work at a different pace to smaller investors. This is because the 'sophisticated investor' will tend to have more resources to build in-house teams to focus on ESG integration, or hire external consultants to help with an ESG journey. Such luxuries are not an option for smaller players, which face a different set of challenges when attempting to embrace ESG.
As a result, the journey towards sustainability will be different for each investor or business, dependent upon background or size, as well as the risk profile of each organisation and its appetite to implement changes. For example, some investors might choose to avoid backing companies that invest in tobacco or alcohol, while others might prefer to opt for engagement and be more active in helping companies to improve their impact alignment.
Another key facet of this long-term approach is that it is crucial for companies to have a holistic approach towards ESG and try to embrace it across all parts of their business, including compliance, investment decision-making and value creation.
Implementing ESG is a long process, where each investor will face different opportunities and challenges. However, ESG is also an opportunity for investors to learn from each other’s journeys and to join forces to promote sustainability across several sectors and countries. Looking ahead, incorporating more stringent ESG policies is set to be the only way for investors to mitigate future risks and make their business more resilient, making ESG a strategy that investors cannot overlook.