Natural Disasters

Is Environmental, Social and Governance (ESG) the New Bottom Line? | by Andrea Zanon | Oct, 2021

Andrea Zanon

Environmental, social, and governance efforts are now an integral element for organizational success. As such, disregarding them is a disastrous step for corporations.

In another article, I wrote about the risks and opportunities of climate change. I go on to highlight the evidence of climate change in recent decades. Key among them is the increased frequency and intensity of natural disasters. Moreover, they’re even occurring in uncharacteristic places which were historically not affected by climate induced disasters.

From the damage and economic losses they cause, the economy loses billions of dollars annually and according to Munich and Swiss-Re (European Insurance Giants) by 2050 disaster events could cause damage and losses of at least 10% of Global GDP. This points to the need for stern actions and frameworks in relation to climate change and the global environment.

For the private sector, this has come with increased pressure from the government and consumers to do more for the planet and for society. However, the challenge has been investing in such initiatives without compromising business objectives.

With momentum around ESG investing continuing to increase, it’s evident that organizations can benefit from taking a more sustainable and inclusive approach. This is why it has become a top priority for boards, management teams, and governments over the last decade.

As a result, sustainable investing has increased significantly over the last two decades to reach $30 trillion. This represents a 10x growth since 2004 and a 68% rise from 2014. Nonetheless, such investments are still wanting, if the world is to reap maximum benefit from ESG investing.

Much of this is largely reliant on the policies, disclosures and frameworks that will be put in place to drive it forward. Preliminary work has been done by the EU, and US regulators, supported by global foundations that are promoting better data collection, benchmarking and reporting.

Along with being effective, corporate activism is also infectious and is spreading across the country. For major oil companies, the choice is simple; take action or face the backlash that may come. Notable institutions to make good on their promise to divest from the fossil fuel sector is Harvard University and BlackRock, an asset manager.

While it’s a great start, efforts in the US should at least match those in Europe. There, large shareholders’ and asset managers’ targets go beyond oil companies and other carbon intensive sectors. By leveraging their influence, they’re pushing boards to vote for de-carbonization measures. Some of the sectors being targeted include petrochemical, coal, cement, and food which are the sector where we are observing divesting pressure.

Fortunately, things seem to be going in the right direction. Domestically, the US has rejoined the Paris Agreement under the Biden regime. Accompanying this move is the Biden Climate Action seeking to reduce greenhouse gas emissions by 50–52% by 2030. This reduction is in comparison to the 2005 levels. The Biden plan is propelled (if approved by the USD 3.5 trillion infrastructure plan).

More importantly, the Biden Action combines the efforts of public and private stakeholders. A key reason for this is to ensure that ESG efforts are effective and economically feasible.

As I explained in the ‘Is ESG Still in Its Infancy Stage’ article, regulatory actions are increasing. Aside from the US, the European Union now has the European Green Deal. It seeks to regulate and standardize data tracking disclosure and reporting.

At an international level, the UN COP26 Glasgow will build upon key climate change initiatives. Among the key objectives of the summit will be mitigation, adaptation, finance, and structured partnership for a more resilient global environment.

However, arguably the best part is that ESG is now an incentive for corporations. A Mckinsey report indicates that ESG investing helps reduce operational costs and also creates value. Therefore, while it may not yet be, ESG will soon become the new bottom line.

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