ESG no longer a ‘woke’ agenda, it is now BAU
By Meg Lee
Environmental, social and governance is now business as usual in board rooms in Australia and it threads through and is integrated in all decision-making. That was the message from some of the big corporates speaking at the Australian Financial Review’s ESG Summit in Sydney, attended by some of our ESG leaders Meg Lee, Nathan Kennedy and Wolfgang Babeck. We provide some reflections on the emerging themes from the conference and what it means for our clients.
ESG is business as usual in board rooms and it is here to stay
Panellists from a wide cross section of industry were largely unanimous in expressing the sentiment that ESG is not a passing fad and that it is here to stay. Rebecca McGrath (Chair, Oz Minerals) said the board rooms have not been taken over by ‘a leftie crowd’, rather that ESG creates value and is good business. Where previously boards may have been focused on ESG as a reputation risk issue, increasingly, boards are now looking at ESG very much as a legal risk issue where directors are potentially exposed to breach of duty claims and misleading and deceptive conduct claims.
Others observed that ESG needs to be part of a well-integrated risk system and that it would be ‘incredibly naïve and perhaps negligent’ not to consider the risks associated with the energy transition. Matt Patsky (CEO and Portfolio Manager, Trillium Asset Management) commented that there is growing recognition that ESG information is material and that therefore as part of your fiduciary duty, it should be standard business practice to integrate it into the investment process and to look at that additional information as you're looking at investments.
The demand for ESG to be a core responsibility of corporations is coming from employees, shareholders, financiers and investors as well as regulators alike. Others commented that the uptick in demand for ESG products and scrutiny has really only been in the last 3-5 years and that it has been the UN Principles for Responsible Investment (UNPRI) that has led to the increase in focus on environment, social and governance factors in the investment and asset management community. Paul Docherty (GM Risk and Strategy, Spirit Super) observed that demand is not just coming from asset managers but from members as part of a ‘societal shift’ that people are incorporating ESG preferences through their lives, including their investment decisions.
James Thornton (the AFR’s Chanticleer Columnist) questioned a panel of CEOs about whether the economic downturn and international energy crisis would lead to consumers de-prioritising ESG. The response from Nicole Sparshott (CEO, Unilever) was that in reality yes this may occur, but that this places the onus on corporations to think creatively about how to remove non-value added costs from the value chain so that ESG doesn’t lead to increased costs. Her view was that there is never a perfect time, but that is should not be quicker to make a dollar than to make a difference. Similarly, other panel members emphasised that ESG doesn’t happen in isolation, in some regards it can assist in lowering the cost base (eg by switching to renewables), but in other areas can raise costs, again emphasising the need to strip out costs where possible.
Susan Forrester (Non-Executive Director, Diligent Institute) said boards need to be looking longer term more than management tends to and decarbonisation is the biggest issue for long term and is in the best interests of the company.
Daniela Jaramillo (Director, Sustainable Investing, Fidelity International) expressed it this way – ‘you want directors who have one ear in Nordic pension funds and one ear in their daughters Ticktok account’.
Collaboration on ESG through the supply chain is key
It was acknowledged by some that while large public companies, particularly in the resources and mining sectors, have significant resources to focus on ESG, that many small-to-medium enterprises struggle with resourcing an ESG strategy. Responding to this, it was a strong sentiment from panellists across all panels that there is a need for collaboration through the supply chain.
Connie Sokaris (Executive, Corporate Finance at NAB) emphasised the fact that, in order for NAB to reduce its scope 3 emissions (customer emissions) it obviously needed to work with customers and assist them with reduction strategies. In this regard, NAB sees its role in helping clients with measurement of their emissions as key.
Similarly, on a panel that included CEOs and executives from Brambles, Unilever and Fortescue, the sentiment was again on collaboration with the supply chain and an approach that requires the supply chain to meet their standards, but that assistance is then provided to SMEs to achieve those standards. Nicole Sparshott put it this way – someone’s scope 1 emissions are someone else’s scope 3 emissions, so collaboration is essential.
ESG needs defining and focus in a meaningful way for each company
There was also a strong sentiment emerging from the panellists that ESG is such a broad agenda that suffers from a lack of clear definition. Senior AFR Reporter Jonathan Shapiro posed the question whether ESG has become a victim of its own success to the panellists from Jarden, NAB, ANZ and Citi. Similarly, Jennifer Hewett, National Affairs Columnist posed the question whether ESG is too broad to her a panel comprising Tim Reed (President, Business Council of Australia), Simon Griffiths (Co-founder and CEO, Who Gives A Crap) and Lynette Mayne (Executive Chair, The B Team Australasia) whether ESG is too broad.
Panellists all emphasised that ESG requires defining by each entity in a manner that focuses the policy and priorities on key areas of risk relevant to the organisation’s operational impacts and core cultural purpose. When ESG is aligned to and ingrained in the company culture, there are less likely to be catastrophic failures in decision-making, with panellists citing the example of Rio Tinto and Juukan Gorge. Similarly, when ESG is treated as a whole, difficult issues such as those facing the renewable energy sector in obtaining cobalt from unstable jurisdictions can be given a framework for decision-making.
Greenwashing is a big focus of regulators
We have separately written a focus piece on the recent ASIC publication of its guidance material on greenwashing and on the commentary provided by ASIC, ACCC and APRA in the regulators’ session at the summit.
Aleks Vickovich (Wealth Editor, AFR) led a panel discussion with CEOs and Directors form Trillium Asset Management, Sentient Impact, Moodys and Spirit Super and there was acknowledgment that as a result of increased scrutiny on ESG claims and labelling, some funds may back off from using the term ESG until there is clearer and standardised definition.
On the flip-side, however, Paul Docherty (GM Risk and Strategy, Spirit Super) warned that there needs to be caution with explicit definitions that create a ‘bucket’ of what ESG is, because it is such an evolving space and the product suite is by definition constantly evolving and changing and what was best practice three years ago may no longer fit the definition today. Further, as Brian Cahill (Global Head, ESG, Moody's Investors Service) pointed out, another down-side of definitions is that you can stifle some degree of innovation so there needs to be transparency and some level of flexibility in any definition.
ESG has evolved from the ‘triple bottom line’
We also heard from John Elkington, the business author and entrepreneur who – in the early 1990s – first coined the term ‘triple bottom line’, a sustainability framework that measures a business's success in three key areas – profit, people, and the planet. While he has since issued a ‘product recall’ on the term, he still had plenty to say about corporate responsibility and sustainable development.
In his keynote speech (via video-link from the UK), John emphasised that ESG is phenomenally important and becoming more so, and that ‘we may be reaching a peak moment where some of this early circuit of interest starts to pull back as people realise just how complicated all of this can be’. John discussed what he called ‘the evolution of the responsibility agenda’, resilience and ‘the regeneration agenda’. The responsibility agenda is not going away anytime soon. It has become integral, foundational. Companies will have no excuse if they trip up – they have been warned, John said. We are going to see more attention on resilience issues, with energy security and food security, for example, shifting the focus of this agenda.
The question is: will ‘responsibility’ stand up in that new order, that new era? While John believes it will stand up, he said this responsibility agenda will have to adapt in order to remain relevant, and that we will need to move towards what he calls a ‘regenerative economy’, a much more positive concept. While irresponsibility and resilience problems don't come across as very engaging for ordinary people, the rising generation – the up-and-coming talent companies are trying to recruit –cannot ignore the new set of realities, but they are taking them on in a positive way.
The simple message, John said, is that ESG is the future. It just won’t necessarily be called that.
ESG – an eye on the future
The pace of change in the ESG landscape has been significant and the term is now part of mainstream risk management practice and it seems that the overwhelming sentiment is that it is here to stay. Regulatory guidance in Australia has been slow to be released, but is now starting to be released and is following quickly behind Europe and the UK and US. Directors and CEOs will need to keep abreast of changes as they occur and manage their ESG risks accordingly, as well as continuing to keep an eye on the future.
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