ESG (Environmental, Social, and Governance) Strategy for 2022

Both 2020 and 2021 exist as periods of intensive redefinition for all industries around the globe.

The primary objective was continuity mainly through the transition into remote operations, closely followed by both worker and public health. In the meantime, regulations changed, investors reevaluated, and the world of business around us flipped on its head.

Somewhere along the way, it seems that industries and communities took their eyes off the ball when it came to climate change, sustainability, and carbon emissions. In 2022, we can set that right. But how, where, who, when, and why?

Do the answers lay in the boardroom, or are they staring us in the face?

PwC: “The growth opportunity of the century”

The EU takes its environmental pledges very seriously, pressuring member states to set challenging and expansive targets. This is a good thing and allows Europe to be seen as a global role model and the leader when it comes to the ESG movement.

Back in December 2019, the EU introduced the Sustainable Finance Disclosure Regulation (SFDR), which would come into effect in March 2021. The importance of this regulation was that all financial market participants in the EU must report very transparently about their ESG activities. This single piece of legislation would provide pivotal in transforming European finance and sustainability.

As PricewaterhouseCoopers commented, “This increased regulatory momentum, coupled with increased societal awareness and investor demand for ESG, is urging an all-encompassing paradigm shift within Europe’s Mutual Funds landscape.”

In their 2021 report ‘ESG – The Growth Opportunity of the Century’, PwC looked at many considerations around Europe’s ESG dominance. The report pointed out many missed opportunities, reinforced the importance of this industry shift, and proposed a strategic roadmap to asset managers – something that will have forcec the hand of some of the world’s richest or most influential people. That was the intention, too, with the report stating “We hope that this report sparks the necessary conversations among industry stakeholders and provides the guidance that asset and wealth managers need to take advantage of this landmark change.”

Within the report, PwC identified 7 key actions to stay ahead of the curve, each of which may provide food for thought for your organization:

1. Repositioning your organization
2. Being credible and consistent in your ESG approach
3. Moving to the next level of ESG integration at a product level
4. Tackling the ESG data challenge
5. Develop a strong ESG risk management framework
6. Reporting to investors
7. Educating the investment community and your staff

Is Europe the only continent making huge strides though?

Focus: “Organizations across the Asia-Pacific increasingly see addressing Environmental, Social and Governance (ESG) issues as core to their strategy”

In a piece of good news for the globe, it’s not only Europe and the EU that is trying to lead from the front. Focus reports that organizations in the Asia-Pacific region are embracing ESG at an extraordinary rate. They appear to see this as key to unlocking new talent, markets, capital, and customers. They’d be right. It’s mentioned that 71% of surveyed professionals would take a pay cut to work for a company that aligns with their values, however, 65% of existing employees are reportedly unaware of their employer’s carbon reduction goals. Go figure.

With Asia experiencing much of the worst of climate change, from severe droughts and flooding to bushfires and landslides, social equity and business impact are being seen under a more scrutinous lens. The report states that 33% of organizations in the Asia-Pacific region have a Sustainability Lead and 41% have set a target date to reach carbon neutrality. The region’s ESG scores are also growing faster than anywhere in the world over the last 3 years.

Focus offers some incredible wisdom in this report, providing 5 questions that put people at the center of sustainability. You, the reader, can use these questions to amend, inform, and improve on your ESG strategy for 2022.

1. Purpose – Why are we doing this, who are we trying to satisfy, what is our time horizon, and how do we measure success?
2. Governance – How does our board need to evolve to oversee, enable, and support the delivery of our ESG strategy?
3. Leadership – How do we attract, develop and retain the leadership, talent and skills needed to drive ESG strategy and outcomes?
4. Operating model – How do we organize our resources to deliver our ESG strategy? Do we need to change job descriptions and career paths, and invest in new skills and technology?
5. Culture and mindset – How do we create the right culture and mindsets, engage our people and reinforce the right behaviors?”

Forbes: “Does prioritizing ESG drive shareholder return and maximize measurable commercial impact?”

The question Forbes asks the readers is likely a question you or your business has asked, albeit in different words. It’s what everyone wants to know – the ROI.

Forbes made reference to George Serafeim, Harvard Business School professor and ESG expert, who has looked into how good an investment ESG-focused businesses are. The news is overwhelmingly positive. Over the past 20 years, a business that focused on ESG will be twice as good an investment than one that didn’t – and remember, that’s before ESG really entered the public eye.

Serafeim is quoted as saying “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.”

Then, there’s the institutional investment. Back in 2006, 63 businesses with $6.5 trillion in assets under management (AUM) began integrating ESG into their investment decision. Fast-forward to 2020 and institutional investors have truly outdone themselves, with those same metrics boasting 3,038 businesses and over $103tn AUM. In 2021, and moving forward, ESG-oriented businesses will offer more reasons to gain the attention of institutional investors.

Just look at Microsoft, which placed #1 on the list of the best ESG companies in the world. It has a return on equity of 47%, earnings per share are up 25% in three years, and it has an A rating for SMR. How could they get such great results during a pandemic? By investing in people. Through their ESG strategy, they helped more than 30m people get access to education since March 2021, they donated almost $2bn in technology and services, reduced 21m tonnes of CO2 (equivalent to tens of millions of households), and analyzed almost 0.5 trillion emails to protect people from phishing and malware attacks. That’s the impact ESG can have.

The Key Takeaways

ESG brings value, that’s clear to see. In the future, it will bring even greater value. ESG will have its name up in lights, just you watch. Before we know it, every big business from here to the sun will be shouting about ESG. If they don’t we might just return to the way things were being done before. Was it more conscious, considerate, and impactful? How you answer that should help you decide how you will move forward.