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Insights

21 February 2020

ESG: what does it mean and why is it important for you?

What does it mean?

Companies operating in almost every sector are now coming under pressure to report on their ESG credentials and policies. ESG stands for Environmental, Social and Governance and is linked to the UN’s 17 Sustainable Development Goals (SDGs) adopted in September 2015.  The SDGs relate to poverty, inequality, climate change, environmental degradation, peace and justice and the UN’s aim is to achieve them all by 2030.

ESG is sometimes used synonymously with such terms as corporate social responsibility;  responsible investing; and sustainable investing. 

Why does ESG matter?

Across the investment space from major quoted companies to private equity and other forms of private capital, investors are demanding that the companies they invest in have regard to ESG and report on how they do so.

Proxy voting services are now recommending votes against approval of the accounts of listed companies that do not include a sustainability or similar report in their annual report and accounts.  And in his CEO letter of January 2020, Larry Fink of BlackRock stated that they will not be investing in companies that do not show progress in meeting climate-related risks.

Anecdotally private equity houses are finding that ESG is top of the list of due diligence questions from prospective investors when they are fundraising.  Many asset managers and pension funds are now providing their own annual ESG report and may be under a legal requirement to do so in future.  Various EU regulations under the EU’s Sustainable Finance Action Plan (see below) will require ESG considerations to be integrated into investment decision and advisory processes of managers of EU regulated funds. 

Climate Change

Currently it is the “E” in climate change that seems to have the most focus.  Responding to climate change is one of the four shareholder priorities for 2020 identified by the UK Investment Association.  The UK government is hosting the COP26 UN Climate Change Summit in Glasgow this November and its Green Finance Strategy includes a requirement for all listed companies to disclose in line with the recommendations of the Task Force for Climate Related Financial Disclosures (TCFD) by 2022. 

The EU’s Sustainable Finance Action Plan includes a regulation on sustainability-related disclosures.  They have also proposed a “taxonomy” regulation which involves a detailed classification system of definitions and criteria intended to provide a common framework to determine those economic activities that can be considered “environmentally sustainable”.

Greenwashing

It is important that ESG is embedded into a company’s considerations and not something that mere lip service is paid to.  A company may be accused of greenwashing when it gives the impression that its products or services are environmentally friendly but does not do anything to substantiate this (and so cannot evidence that it is acting in a way that produces environmental benefits).

Conclusion

ESG should matter to you as it is something that investors now and in the future will demand.  They will also expect that you “walk the walk” as well as “talk the talk” and there is no “greenwashing”.


For more information, please contact Victoria Younghusband. 

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