Member Article

“I’ve been involved in ESG and sustainability for over 20 years and in the last few years the focus has increased significantly,” says Rich Hall, Head of Sustainability at leading accountancy and professional services firm RSM, on the shift in perception of ESG-related risk within corporate organisations. “Even before the pandemic, we were beginning to see more commentary on ESG issues, mainly centred around the environmental side. But as we have come out of the other side of the pandemic, we are continuing to see a rise in prominence.”

However, this rise in prominence is not just down to an enhanced awareness in the population of climate-related risks and widespread talk of net zero targets – the S in ESG is also on the rise.

“There is much more of a focus on social aspects now than ever before, with equality, diversity and inclusion (EDI), and also social justice, really having ramped up in the last two to three years,” Hall goes on to say. “There are certain things that may historically have been tick box exercises for corporate organisations, such as modern slavery, for example, where organisations thought they had a good handle on the risks. However, in the wake of recent economic and geopolitical events which have led to large movements and displacement of populations, organisations are having to look again at their approach as they realise that perhaps they are not quite as well covered as they previously thought.”

Collaboration is key

But the individual strands of ESG need not be seen separately; there is a growing awareness of the need to embrace the areas of overlap.

Yi Zheng, ESG consultant at RSM, says on this point: “It is important that we have integration in the approach to environmental and social issues so, for example, when we talk about the environmental impact of extreme weather events, we also recognise that there will be a resultant effect on the wellbeing of employees who have to either work or commute in often difficult conditions. The two dimensions are not necessarily segregated, although you can have expertise in each field, but there needs to be collaboration at the centre in order to bring people and organisations together to tackle the overall challenge.”

The need to approach ESG at an industry wide level, with key stakeholders working together to find solutions, drive efficiencies and share insight, is particularly pertinent when considering decarbonisation.

Zheng goes on: “There is a lack of a sy stemic view on how we address decarbonisation. While there is a strong focus on operational scope 1-2 emissions, that doesn’t necessarily factor in the embodied carbon from the production of raw materials. We need collaboration across sectors and between organisations to look at all angles and to identify which resources are most valuable to certain industries. But that type of collaboration is hard to achieve.”

“I completely agree,” Hall says. “One of the biggest blockers to those types of partnership is when the organisations’ commercial interests get in the way. From a legal perspective, we need new forms of contract, new terms and conditions that better reflect the types of partnership model that are specifically designed to support the decarbonisation agenda.”

Industry leading the way

Industry is changing, and businesses are no longer able to pay lip service to the ESG agenda, with organisations of all sizes leading the conversation and setting templates for others to follow.

Hall says: “One of the main drivers we are seeing is the growing realisation that the customer base is changing, whether business to consumer or, in particular, business to business, where we are seeing big brands not only setting net zero strategies but making commitments around EDI and social value, alongside some of the technical things they’ve always done around product quality. And then there is the investment community, which has really got on board. Some of the questions we ask when working with a client for the first time are – Where are you in terms of financing? Who are your investors? Who are your customers? We can then look at the potential impact and how much pressure they will likely be under to deliver against ESG targets.”

“The difficulty is that we won’t have the luxury of being able to wait for regulation to come in to force change,” says Sheelagh Cooley, real estate finance partner at Shoosmiths. “The system moves slowly and, even with those large organisations who are large emitters of carbon, we can’t expect them to change overnight. They will need funding support to improve their carbon credentials, as well as support from the supply chain, whether that is through decommissioning or research into alternative materials, products and delivery of services.”

Hall says: “There is some legislation and regulation coming in certain sectors that is driving change, for example the net zero commitments around housing and the ban on new petrol and diesel cars being brought forward to 2030. But in terms of industry leading the way, we have also seen some voluntary reporting standards becoming de facto standards even before they were made mandatory. With the Task Force on Climate-related Financial Disclosures (TCFD), for example, most of the big organisations that were captured by that started reporting well before it came in. We are increasingly seeing that organisations are looking at things through an ESG lens as they recognise that it provides a resilience. That is why we are seeing US$150 trillion going into principal responsible investment and new financial instruments on sustainable FTSE listings. They are not just there as a stick, they are there because the financial markets have invested a lot of money, time and effort to understand how ESG creates value and maintains it.”

And this goes further than industry, with individuals having an increasingly powerful influence in their role as consumers. Zheng says: “Because the younger generation have become more conscious of their consumption levels, there is now also a drive from the bottom up from the consumer, and that is starting to influence businesses who recognise that they have to react to the demands of their consumer base if they want to continue to attract them.

“Organisations are now often having to change their identities to try to be leaders in their fields and not be the ones playing catch up. That intrinsic drive is important, but that also highlights the need for the whole economy and workforce to upskill. With the circular economy, for example, the waste handlers at the end of the value chain used to be the only ones having to worry about waste. Now they have a crucial role – and an opportunity – to recreate value and close the loop for a circular economy. So, in terms of skills, there is a lot of work being done that all stakeholders can contribute to and benefit from.”

 

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