With a strong emphasis on sustainable practices and responsible investment strategies, emergent ESG regulations have placed new demands on companies, investors and regulators alike. These ever-evolving regulations bring significant challenges for project sponsors to address as part of their day-to-day management. Often, the response has been to add capacity and capability, develop new sources of expertise and create departments that can respond to the new requirements.
The evolution of ESG
The concept of Environmental, Social and Governance (ESG) investing has evolved over several years and has been shaped by a number of key milestones. It began with the negative screening of unethical products such as tobacco and weapons, but it was only in 2006, with the launch of the United Nations Principles for Responsible Investment that ESG rose to prominence. Today, ESG has gained considerable momentum, and now addresses topics as varied as sustainability, business ethics and human capital. Efforts are ongoing to standardise metrics and global reporting requirements, emphasising the fact that ESG is fast becoming a crucial aspect of responsible investing and corporate governance.
While corporate governance has become well established, ensuring robust governance processes for environmental and social aspects is equally important for comprehensive reporting. Therefore, project sponsors need to respond to the new ESG demands, but also manage this process within the existing “traditional” framework of risk, cost and compliance.
Better reporting has been introduced to improve transparency, thereby reducing and mitigating carbon impact from projects or companies. There has also been a tightening of the broader environmental impact of projects, such as those that are required for licences and permits, particularly with regard to impacts on biodiversity.
However, this focus on environmental concerns also reflects the fact that the governance aspect had already advanced. Meanwhile in some regions, such as in Latin America, there has been, arguably, an even more rapid advancement in the social aspects of ESG in the last couple of years. The demonstrable impact of a project on indigenous groups, on gender diversity, and on improving the quality of life of lower socioeconomic groups, for example, has become a huge project finance focus.
These social issues were prioritised for the same reasons that environmental issues came to the fore – with projects that go beyond avoiding creating harm, and, instead, focus on generating positive social benefits, rising up the agenda.
ESG: interconnected
There are many similarities and overlaps between the developing ESG regulations, such as a drive for transparency. However, in many cases there is direct reinforcement under each of the “E”, the “S” and the “G” factors, when assessing the specific impact of a project. For example, many projects improve environmental and social aspects at the same time, underscoring the fact that the various facets of ESG are interconnected and will often influence each other.
A new electric transit system that connects a low-income neighbourhood to a city centre is, at the same time, lowering carbon emissions and pollution. However, it is also improving the health of the local community and enabling individuals to travel more quickly to employment, improving productivity and helping family and social cohesion. In this case, which is more important, the “E” or the “S”?
Sustainability standards: push – but also pull
ESG reporting is not just about meeting increasingly stringent standards or engaging in a compliance exercise. There are also tangible benefits that can be generated for companies that take the lead in adopting ESG processes.
These include:
- improved financial performance – adopting sustainable practices will eventually reduce costs, increase profit margins and drive competitive advantage
- effective risk management – a focus on ESG factors will help mitigate financial and reputational damage, and boost investor confidence
- talent attraction and retention – employees, particularly young adults entering the labour market, are more likely to remain loyal to organisations that adopt sustainable business practices
- enhanced stakeholder relationships – ESG reporting promotes greater transparency, which, in turn, builds stakeholder engagement and trust
- future-proofing your business – a commitment to sustainable practices will buffer your organisation against uncertainty and foster adaptability.
By embracing ESG principles – and viewing them as interconnected – organisations can leverage multiple benefits on the road to long-term sustainability.
Sustainability reporting: a global trend
The global ESG reporting landscape is changing and ESG reporting requirements have expanded beyond the EU, with multiple countries introducing mandatory ESG disclosures.
In the United States, for example, the Securities and Exchange Commission (SEC) has introduced new rules requiring public companies to standardise and enhance disclosures regarding climate-related risks. Similarly, in Canada, eligible banks, insurance companies and financial institutions are now required to report on their climate-related risks, though this is not yet compulsory for organisations in other industries.
In Asia, China's three major stock exchanges have recently announced mandatory ESG reporting requirements for large and dual-listed companies and, in Singapore, all listed companies are required to disclose their sustainability practices.
Other jurisdictions, such as Australia and Brazil, have also begun adopting reporting standards based on the International Sustainability Standards Board (ISSB) framework.
In Europe, new legislation – the Corporate Sustainability Reporting Directive (CSRD) – will make sustainability reporting mandatory for more than 50,000 companies operating in the EU. Multinational organisations with branches in the region are also obliged to abide by CSRD rules or face penalties.
The ESG reporting journey is complex and multifaceted, and the global movement towards more standardised ESG reporting is gaining momentum. International frameworks such as the Global Reporting Initiative (GRI) and the IFRS Sustainability Disclosure Standards provide guidelines to help organisations effectively communicate their ESG impact, in the quest for greater transparency and accountability.
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