ESG: Driving the sustainability agenda – a global outlook

Balancing profit and ESG concerns

It was with great pleasure that ICSA Uganda – CGI East Africa Region and KPMG Uganda hosted the 11th Director and Company Secretaries’ Conference on Wednesday, 4 May 2022 in Kampala. The theme of the Conference was ‘ESG: Driving the sustainability agenda’.

The closing remarks of the Conference were delivered by the President of the Chartered Governance Institute UK & Ireland, Victoria Penrice. Below are those remarks summarising the ESG agenda and its global outlook.

Although the world is opening up, it seems almost as if we are destined to replace one crisis with another. Only today, reading the morning newspaper, I was struck by the number of difficulties we are facing. A few headlines – war in Ukraine, displacement of people, corruption in parliaments, cost of living hikes, possible fuel restrictions. And of course, the continuing pandemic, climate change, gender pay gap…the list goes on. Everyone of those topics affects how we run businesses and organisations both in the long and the short term and so there has never been a more appropriate moment to consider how environmental, social and governance measures can influence our success.

Several years ago, I was the company secretary of a leisure business. ESG was not, at that point, a mandatory area for corporate reporting and, as we were in the business of running gyms, it wasn’t something the board had ever considered. But when we were planning the annual report, someone suggested we include a page on environmental and social factors affecting the business. We were then challenged as why we should do this.  My response at the time was that some significant investors had been asking for it as a way of checking we had recognised any inherent risks. Much later, I congratulated myself on picking up the point about risk – a focus on ESG = sustainability.

Environmental, Social and Governance (ESG) concerns are becoming ever-more important for organisations as consumers, investors, employees, customers and regulators alike demand action – and boards must take note.

On Saturday, I was about 40 miles from home when I saw that my car was nearly out of petrol. Up ahead, I saw a Shell petrol station, but I took a deep breath and drove on past, hoping that my reserve tank would last for a bit longer. Why? On 6 March this year, Shell publicly defended its decision to continue to buy cheap oil from Russia following the Russian invasion of Ukraine. It claimed that it had “no alternative”. However, two days later, on 8 March, after a public outcry, it apologised for this position and announced its intention to withdraw from Russian oil and gas. Whilst I applaud this reversal, and Shell’s statement that it was sorry for doing the wrong thing, I still wanted to make my own private protest at its hesitation and its initial decision to put profit ahead of human lives. Reputation damage can be very deep indeed.

We need to trust businesses. We need to know who we are dealing with. This goes to the root of reputation and long term success. And it is those businesses that recognise the risk in ESG that are likely to be with us the longest.

The Edelman Trust Barometer report is an eye-opener in this regard. For those of you who are not familiar with it, this is an annual global survey of tens of thousands of people in 28 countries which explores trust indicators for business, media, government and NGOs. Out of all of these, in 2022, only business met their threshold for being trusted by the public, although NGOs are not far behind. Communications from an employer are more trusted than communications from any other source.

Although the report claims that business is not doing enough to address societal problems, it notes that the majority of the public in the surveyed countries do not consider their government to be leading efforts to solve societal problems. But they do see it as something businesses and NGOs can lead on, admittedly only by a small margin of positivity (55%). When it comes to climate change, however, the clear majority do not believe that business, government, NGOs or media are doing well. Over 65% are clear none of these types of organisations are delivering. That is against a background of three quarters who worry about climate change. Why does that matter? Some 60% say they choose where they work according to their beliefs and values. The same percentage say they expect their CEO to speak out about the social and political issues they care about, even if controversial.

Employers can’t restrict themselves to only talking about the business. They cannot divorce themselves from geopolitical concerns. Their consumers, shareholders and employees expect them to take a view. COVID-19, Black Lives Matter and now the war in Ukraine, have all demonstrated that how organisations respond to key external issues is important to their stakeholders. Some might even drive for 40 miles on a low tank of petrol to make that point. In fact, the 2021 Edelman report stated that 88% of institutional investors subject ESG to the same scrutiny as operational and financial considerations.

So, trust in business is generally higher than trust in government. Stakeholders care about an organisation’s views on issues beyond its core business and the issue they are most worried about apart from job losses is climate change and institutional investors are scrutinising the details. The Ukraine war has resulted in the UK government revisiting policy on oil, mining, nuclear and defence – which some suggested showed that ESG is malleable and fickle. A mere fashion. Others point out that understanding whether a company’s plans are credible or greenwashing is confusing as there are so many different ways of rating them.

However, recent developments such as COP26, the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) and the launch of the International Sustainability Standards Board (ISSB) suggest that ESG issues are increasingly taking centre stage.

ESG has become a focal point of stakeholder scrutiny and people are holding organisations to account for their environmental and social impacts. This shift in power makes it even more important for organisations to ensure their business purposes and values are in line with stakeholders’ expectations.

To be successful, it is no longer sufficient for a company to exist to maximise returns. The 2006 UK Companies Act introduced the concept of wider stakeholder rights. which requires companies to look at the impact of their decisions on stakeholders, including employees and community when considering what is best for the companies’ owners – the shareholders. The requirement now for large companies to report on how they are discharging their duties under section 172 means that wider stakeholder concerns must form part of any board’s consideration of strategic objectives and how they impact on the wider world.

In the UK, the Better Business campaign lobbies to remove investor primacy in law suggesting directors need to be freed from prioritising shareholders and that S172 should be amended to enshrine this change in law. It is seeking to align the interests of shareholders with those of wider society and the environment, and to empower directors to exercise judgement in weighing up and advancing the interests of all stakeholders. This is a significant move forward from the position at the start of this century where the rights of shareholders were paramount. Whether the Better Business Campaign succeeds or not, I suspect its agenda is here to stay.

In November 2021, the IFRS Foundation Trustees announced the creation of a new standard setting body – the International Sustainability Standards Board (ISSB) to help create transparent and reliable reporting by companies on ESG issues. It is aiming to build on existing frameworks and guidance to createdisclosure standards, that will provide investors with information on sustainability issues to help to them to make better informed decisions. Whilst the focus of ISSB is on meeting investor needs, it is expected that certain jurisdictions will mandate the standards or combined them with other requirements to meet the needs of wider stakeholder groups.

The Task Force on Climate-Related Financial Disclosures (TCFD) published its framework for including climate-related information within the financial reporting process, in 2017. By 2021, eight countries had passed legislation requiring large companies to report in line with the TCFD recommendations and over 2600 other organisations have pledged support for these recommendations, including over 1000 financial institutions. TCFD is now influential in over 80 countries, with international standard setters and regulators encouraging or mandating that organisations report on climate-related risks and opportunities.

This includes disclosures on governance of climate-related risks and strategic disclosures on their potential impacts. It also includes discussion on how the company identifies, assesses and manages climate-related risk as well as disclosure of the metrics and targets used by the company in relation to these risks. In the UK, all companies listed on the Stock Exchange are now required to report against the TCFD framework and, for accounting periods beginning after 5 April this year, all companies that have a turnover of more than £500m and more than 500 employees will need to start publishing data in accordance with the TCFD framework from May 2024.

And whilst organisations will necessarily take a risk-based approach to environmental matters, it is true that what gets measured gets done. And stakeholder activism and greater transparency can lead to changes in behaviours.

Late last year Coca Cola came under the spotlight for its ESG practices. Coca Cola is responsible for producing over 100 billion plastic bottles that are sold globally every year. Originally, the cola came in glass bottles that were washed and refilled at the company’s expense. Now the bottles are plastic, and the disposal costs have been transferred to local municipalities. Developed countries may have the wherewithal to recycle the bottles; however, It is not acceptable to create plastic bottles which could be recycled where there are no facilities or infrastructure to do so. The bottles simply become trash. Or worse yet, toxic fumes as they are burnt. A classic example of poorer nations subsidising the profits of a mega global corporation.

Now that we are aware of this, we should expect Coca Cola to address the problems and, in so doing, address the reputation damage. It is no surprise therefore that on its website, Coca Cola now talks about investing in state of the art plastic recycling facilities, ensuring that its bottles contain a minimum of 50% recycled plastic, and running consumer awareness and educational campaigns around recycling.

The COP26 summit in Glasgow last year focused on encouraging investment in renewables and the protection and restoration of ecosystems. We can expect increased pressure from governments and regulators to take action to protect the environment to achieve net zero. This can only be accelerated by the war in Ukraine, with its threat not only to people but to the security of fuel supplies. Perhaps this will focus greater efforts to replace petrol and diesel vehicles with electric power to achieve zero-emission road transport before the 2040 target.

Crises, of one sort or another, often bring governance, and ESG, into focus, not least because it is implicated in the ways people work. We have seen the importance of how organisations manage their relations with their employees and community through the pandemic.

The pandemic forced many, previously office or factory-based, people to work from home, which was, for some, a cultural shift. Where there was already trust and devolved decision-making, this shift had less of an impact, but many organisations have had to look hard at what they were doing to ensure that staff were adequately supported, had access to the most appropriate forums for exchanging information, and were able to manage stress.

We cannot separate our workplace from our wider world. The Africa Governance Report 2019 discussed the causes of conflict in Africa and noted that most of the violent conflicts and crises facing parts of the African continent are rooted in governance deficiencies, including the mismanagement of diversity and mismanagement of natural resources. Diversity and inclusion is not a marginal issue.

A recent report by the Fawcett Society stated that the gender pay gap in the UK was 18.4%. Globally, it is 32% and, according to the World Economic Forum, at the current rate of progress, it will take around 260 years to close. Whilst the majority of countries have legislation that ensure equal pay for equal work, these laws are not always implemented and the factors giving rise to the gender pay gap run far deeper than headline figures.

The gender pay gap is systemic. It reflects a view held in many cultures (whether overtly or subconsciously) that work undertaken by women is of less value to society. It reflects inequalities of opportunity and healthcare, and importantly of empowerment.

The World Economic Forum looks not only at the gender pay gap, but at the gender gap overall. It rates countries on four criteria - economic participation/educational attainment/health and survival/and political empowerment. And whilst Iceland is rated as being the most equal society, Rwanda, Namibia and South Africa are within the top twenty for gender equality, ahead of the UK, the US and Canada.

Why should this matter? Is the focus on the gender pay gap, or indeed on wider ESG matters, just a short term fad, driven by the odd circumstances we have all found ourselves in over the last two years or so? Ultimately, does ESG add any real value to a business?

Numerous studies have concluded that greater gender equality leads to better economic performance. An International Monetary Fund research paper in 2016 demonstrated that per capita income growth in sub-Saharan Africa could be higher by as much as 0.9 percentage points if inequality were reduced to levels seen in certain fast-growing Asian countries.

The Global Alliance for Banking on Values consists of banks that focus on creating value for society by using finance to deliver sustainable economic, social and environmental development. The Alliance evaluated and scored banks on their pursuit of material sustainability issues and, in analysing their stock market returns from 2007 to 2017, identified that those banks which consistently scored highly on material ESG issues delivered higher risk-adjusted returns compared to those that performed poorly on the same ESG issues. Material ESG issues included labour practices and business ethics, including creating a culture to promote responsible practices, and compliance with regulation. I don’t need to tell you that this goes to the heart of reputational risk.

Indeed, Blackrock last year announced that it had identified 244 companies that were not making progress on the climate emergency and had voted against 53 of them at their AGMs. The remaining 191 companies are now “on watch”. It is not surprising that many of these were energy companies, vehicle manufacturers and airlines. It will be interesting to see the outcome of this year’s AGM cycle.

Coming back to where I started this morning. Will any of the matters discussed change the way of the world and lead to happier headlines? On an individual basis, and in the short term, probably not. But information is power, and the ESG agenda is about getting good information into the hands of stakeholders, not just managers and shareholders. With that information, we can vote with our feet. We can choose where we work, where we shop, where we buy our petrol. We have seen the power of the Black Lives Matter and MeToo movements.

Collectively, we can influence our companies to do the right thing, to report the good and the bad and, most importantly, to recognise and appropriately handle risk. This will result in resilient, robust organisations that are trusted to deliver.

Victoria Penrice FCG

Victoria is President of the CGIUKI Board. A Chartered governance professional with over 30 years’ experience she was Group Company Secretary at Seadrill Limited until June 2020. Victoria has experience in a number of sectors and is skilled in corporate governance, project delivery and board leadership, having worked for major listed companies.

We will be discussing ‘ESG: what does it mean in the boardroom?’ at Governance 2022.

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