ESG & the Reality Gap

Environmental, social and corporate governance is not new to the financial services industry, but there does seem to be a new wave of companies talking the talk, and not walking the walk. There is, in fact, a reality gap between what some companies say they will do and what they are actually doing.

This, of course, does not hold true for all companies, and there are many out there that are truly socially and environmentally responsible, holding themselves accountable, and both thinking and acting proactively on ESG.

But what are the consequences of this gap, and how do we plug it?

I think the answer to this is simple. To truly intertwine ESG into your company is an investment; not just a financial investment, although it does have a fiscal cost, but an investment in time and resources, not to mention the regulatory commitment.

It is just much easier to greenwash your communications.

By end of the decade, around 75% of workers will be millennials or younger. This generation is much more driven by company purpose – they are not looking to spend 30 years with one company, they are actively seeking socially responsible companies that can provide new challenges and experiences. 

This is the natural progression of the workplace. As it becomes more project-based, the environment of the working world is changing, especially as businesses recognise that committing to ESG is an important way of capitalising on the current zeitgeist.

This means that businesses need to go above and beyond to attract and retain great talent. In turn, this impacts other areas, such as governmental change; take the recent US statement on reducing greenhouse gas emissions as just one example.

Taking the decision to become truly invested in ESG requires a corporate focus on creating a framework for financial products to be sold as ESG-compliant.

This means companies must state their aims, justify their actions and change processes and procedures to marry objectives with reality. It requires building more investment teams and recruiting risk management personnel around those investment teams to make sure you are hitting the regulatory framework needs to be ESG integrated, and you have to voluntarily comply with reporting obligations.

As of 10th March 2021, certain financial services companies in the EU must also comply with the Sustainability Related Financial Disclosure Regulation (SFDR) and make sustainability disclosures on financial products, while in the UK, new domestic green taxonomy and ESG disclosure regulations are on the way.

If you do not meet these regulations, you cannot say you are ESG compliant. There is a choice to make – on the one hand, ESG compliance requires a lot more additional investment to make, on the other, ESG itself can create value.

The value that ESG can create greatly outweighs the pitfalls of not doing what you say you are doing.

This statistical snapshot clearly demonstrates just how much ESG is worth: global sustainable investment is more than $30 trillion, an increase of 68% since 2014.

Where does this value come for financial services businesses? In these three key areas:

As I mentioned earlier, there is an increasing amount of the workforce that places purpose at the top of the list of qualities they’re looking for in an employer. Having a true commitment to ESG can help you attract and retain quality talent, and instilling your sense of purpose into your workforce increases motivation, and, in turn, productivity. Additionally, you have to think wider than your own company. Case in point is Unilever’s commitment to ensuring that all workers throughout its supply chain receive the living wage, and an investment of $2 billion each year to underrepresented suppliers. 

The opposite also holds true. Companies that do not have a strong ESG commitment, or say they have one but don’t back up their words, can probably expect a decrease in productivity.

The statistic above shows the potential of sustainable investments. Investing in these types of opportunities, such as renewable energy and waste reduction, is not only on a human and planetary level the ‘right’ thing to do, but these types of investments can also provide excellent returns.

On top of that, less reliance on non-ESG investments, like oil, is probably a better longer-term bet as carbon industries become ever more heavily regulated.

Committing to an ESG framework drives revenue growth by helping businesses break into new - or expand in existing - markets. It can also provide greater access to capital and improve margins. There’s also a consumer-driven benefit. With an increased consumer interest in ESG investments comes a higher demand for stock, that stock performs better and is valued higher.

At Hanover, we believe that there are many businesses taking ESG seriously and doing things well. These are the types of businesses we actively want to work with, and as we adapt to clients that want to be socially responsible, so the skills set of the talent we recruit is changing. 

We are all on this ESG journey and we are all still learning, and at Hanover we will support this from a financial services perspective both as a supplier and as part of the value chain.