ESG and “net zero” have been dominating economic and business conversations for a long time now. Governments, institutions, banks and global companies have pledged to be a part of this process. However, for a very large number, how this will be implemented, is unclear. This is largely because the ideals of sustainability and financial goals are still disconnected - which makes ESG a difficult road to walk.
Today, 90% of the Fortune 500 companies publish sustainability reports, and at least 600 of the 2000 largest companies in the world have made net zero pledges. Investors’ interest in these companies is growing exponentially. Annual cash flow into ESG funds more than doubled between 2019 to 2020 and has increased to 10 times their 2018 levels. This interest, is grounded in profitability numbers – as per the 2021 World Economic Forum and Accenture report, companies that embed effective ESG practices have been generating more than 20% higher profitability on average. This occurs, likely through a cohesive ESG plan that understands the landscape, tracks the system and develops accountability for outcomes and disclosures. Let’s understand these elements.
ESG – what is it
Simply, ESG tracks the resources that your company consumes and the waste it creates and measures the sustainability and ethical impact of the company. For the “Environment” element , this includes the cars owned by the company or driven to and for work by employees, flights taken, electricity consumed, paper used, etc. These are then traced to degrees of control. Scope 1 issues are those that your firm is directly responsible for, such as, its cars or its own production process. Scope 2 issues are those that your organization indirectly consumes such as the electricity it buys or any indirect emissions. Scope 3, is related to third parties, supply chains or lending portfolio companies. This includes business travel, how “green” your suppliers are and how your companies are using the funds you lend to them. The “Social” elements are similarly tracked in terms of people related issues such as health and safety standards, labour law, employee contracts, diversity issues. Finally “Governance” refers to how these aspects are tracked, measured and reported.
Why to adopt it
Other than the obvious “its required and good for the world”, it’s also mandated by so many organized across the value chain of almost every business. Banks and financial institutions today manage money across the world. And these international organizations require disclosures. Green bonds, green credit – all of these are gaining traction even in the GCC. First Abu Dhabi Bank has committed to net zero and in 2022 the bank announced its ~213 USD million green issuance this year, following the 500 million euro green bond issued a week earlier. Islamic Development Bank issued a $2.5 billion sustainability sukuk and Arab Petroleum Investments Corporation (APICORP) went to market with its debut green bond of $750 million. Commercial banks are beginning to actively evaluate a green lending portfolio. With the right tools, even unlisted companies can be included in the complex ESG tracking process.
How do you track it
The first step is to develop a framework that segregates activities into acceptable and otherwise. Islamic finance systems in the GCC provide a very basic framework and have the required infrastructure to make such distinctions. That’s a comfortable place to begin. Ratings agencies and organizations such as MSCI have been long tracking ESG parameters and providing a ESG ratings. However, these are more black-box in nature i.e. you will likely get a similar report that is not customised to your needs. Companies such as India based, ESG Data Solutions (ESGDS) cater to a more open-source approach, provide bespoke data solutions with more flexibility in tracking, aggregating and evaluation the very vast and diverse ESG data available- provide bespoke data solutions and an analytics platform that helps clients undertake assessments by customizing the materiality of crucial issues, running data analytics and generate ESG reports. With materiality being the key differentiator across different industries, this flexible approach could be a more impactful way forward for companies looking to track and report effectively.
The question is, why does this matter to you and your organization? It matters because your organization is a part of a larger economic system that has mandated adherence to global standards. Today, supply chain disclosure rules require the entire supply chain of a given company to report on ESG. This could be the tip of the iceberg.
ESG reporting is more than simply ticking some boxes or creating an excel sheet tracker. It has been relegated to that role as an avoidance tactic and its now the time to confront it. To integrate it with your internal systems to ensure that your ESG practises and financial goals are in tandem. If you have the right partners and tool providers, ESG could even be the step that sets you apart, reduces risks, reduces unforeseen financial burdens and has you prepared. It could increases your profitability in the long run and you could be the company generating higher than average profits for your investors. All you have to do, is bring ESG to the forefront. Now.
The Arabic version of this article was originally posted on BFT (News, Media).