ESG—No Longer Just a Buzzword
While the acronym ESG—Environment, Social, and Governance—has recently gained attention, the movement is not new.
Socially responsible investing, sustainability, and corporate social responsibility (CSR) have all been used as terms to assess governance mechanisms and evaluate corporate performance in managing environmental and social impacts. The practice of socially responsible investing has been around since the eighteenth century with the movement gaining steam during the 1960s and the following decades. In 1972, journalist Milton Moskowitz compiled a list of ‘socially responsible stocks’, which he published in a bi-weekly newsletter, Business & Society. In 1984, the US Sustainable Investing Forum was founded. By the year 2006, 60 sustainable stocks were available to investors. CSR brought to the forefront the idea that corporates have an equal responsibility to society in addition to their stakeholders. Sustainability is built on the idea to encourage a more holistic look at human development. The 17 Sustainable Development Goals (SDGs) issued by the United Nations, demonstrate this need.
The broader term of ESG gaining popularity is in response to the changing landscape, particularly in the last decade. Consumers and employees now demand high standards of sustainability and employment. Policymakers and regulators want organizations to take an active role in solving social and environmental problems like workplace diversity and carbon emissions. Investors are also increasingly taking note as there is a significant body of research pointing to the rewards of sustainable investing.
Added to this is the changing risk landscape. A decade ago, the risks identified by the World Economic Forum’s (WEF), annual Global Risk Report were mostly economic in nature. In the 2020 report, we see that seven of the top 10 risks by likelihood and eight of the top 10 risks by impact are related to environmental, social, or governance. In the light of an organization having to manage and report on these new risks, the broader term of ESG enables a significant measurement index—satisfying the transparency demanded by various stakeholders including investors, regulators, non-governmental organizations, customers, and employees.
Clearly, ESG is no longer just a buzzword. The association of ESG with corporate purpose and growth is here to stay. ESG is moving rapidly from the periphery to the center—defining future business strategy, rewiring business growth, and calling for greater ESG risk integration.
ESG Now Core to Driving Future Corporate Strategy
Consider the following statistics.
- 92% of business leaders in the US, Brazil, the UK, Germany, and India, in a 2021 report released by PwC, agreed that companies with commitments to ESG policies will outlast competitors without.
- 50% of the UK's 100 biggest companies (FTSE 100) link executive pay to ESG measures, as per a 2021 survey by PwC and London Business School.
- 42% is the recorded increase, from 2018 to 2020, in total US assets under management using ESG strategies, as per the 2020 report on US Sustainable and Impact Investing Trends.
- 83% of consumers and 86% of employees, in a 2021 PwC study, said that they favor organizations that support ESG best practices.
- In 2020, Goldman Sachs announced that they would only underwrite IPOs that have at least one diverse board member, increasing this number to two starting in 2021.
- 57%—more than half—of investors in the APAC region, according to the MSCI 2021 Global Institutional Investor survey, expect to have ‘completely’ or ‘to a large extent’ incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.
The statements above are just a fraction of a growing body of research that points to ESG as core to driving future corporate strategy. Organizations are aware of this. They understand that they can be held accountable for unhealthy ESG practices including the extended ecosystem of third-party relationships, such as suppliers, vendors, service providers, partners, and more.
More importantly, though is the strong link that exists between establishing an ESG priority & value creation. As per research by McKinsey, incorporating an ESG proposition creates value in five essential areas:
- Increasing revenue as more customers are attracted to the organization’s sustainable products and the organization gains access to better resources through stronger ESG scores
- Impacting cost through clean and green initiatives
- Gaining the freedom to strategize and grow through deregulation and stakeholder support
- Enhancing investment and asset optimization through an ESG-led capital allocation
- Boosting productivity by motivating existing employees while attracting new talent
As the potential of ESG-value creation—both short-term and long-term—becomes more pronounced, the role of ESG in driving corporate strategy will gain greater importance. Instituting a proactive and comprehensive ESG approach will then be a vital step for companies seeking to amplify this potential.
ESG Risks Have Become Essential to Organizational Growth
The COVID-19 pandemic catapulted ESG risks to the forefront. The implication of risks pertaining to the environment, society, and organizational governance such as climate change, social justice and equality, employee benefits, and diversity in organizations are now being more strongly felt by stakeholders. While investors and clients want to see returns through ESG-sustainable endeavors, customers and employees want to engage and work for organizations that support their values. In this current landscape, ESG risks provide the unique opportunity to fuel growth—while ensuring that there is purpose behind profit.
Globally, ESG risk factors are increasingly gaining in relevance among investors and regulators post-pandemic—with financial markets placing greater emphasis on transparency and disclosure of ESG risks. As per the latest data released by the Global Sustainable Investment Alliance, professionally managed portfolios that include ESG assessments have reached US$35.3 trillion. The numbers indicate a growth of 15% in two years and now includes 36% of all professionally managed assets across the United States, Canada, Japan, Australasia, and Europe.
Investing in sustainable funds is further been viewed as reducing risk for investors. As per data from the Morgan Stanley Institute for Sustainable Investing, sustainable equity funds in the United States have outperformed their traditional peer funds by a median total return of 4.3 percentage points. The reason behind the higher performance of ESG-related investments pointed to sustainable equity funds holding, on an average, larger growth stocks—which resulted in not just better ESG performance but lower exposure to carbon risk.
“If there could be a silver lining to the tumultuous times of the last 18 months, I would say we desire to foster responsible growth. We are no longer being measured just on profit but more importantly our purpose and a desire to make this world a better place for everyone is front and center.” - Gunjan Sinha, Chairman and Founder, MetricStream
Consumers and employees are further necessitating the need for ESG risk to be factored in. PwC’s 2021 Consumer Intelligence Series survey on ESG, found both consumers and employees rewarding brands with strong ESG commitments. 80% of consumers said that they were more likely to buy from a company that is committed to environment and governance standards with 76% of consumers preferring to buy from companies committed to social justice. Among the employees surveyed, 84% of employees said they are more likely to work for an organization that stands up for environmental priorities. 86% of employees also felt motivated to work for an organization which prioritizes social and governance commitments.
For companies seeking to ‘Thrive on Risk’, including turning ESG risk into an advantage, a start has to be made with quantitative measurements that will help them identify key areas where they are actually better and faster than their competitors—all the while building sustainability as a core fabric of the company giving greater confidence to stakeholders like shareholders, customers, and employees. The greater alignment and execution of this strategy will need to be supported by improving the quality of risk data that will enable risk-intelligent decision-making.
ESG Risk Integration is the Need of What’s Next
ESG risk failures are not new. From physical environmental risks like the disruptions in supply chains during the recent COVID-19 pandemic to transition environmental risks such as reactions to climate legislations—environmental risks encompass all environmental metrics that can impact an organization with direct financial impacts, potential exposition to regulatory action, and damage of reputation. Factoring in social and governance metrics, sometimes overlooked by organizations who primarily view ESG as complying with environmental values, is equally important. A Bank of America study conducted in 2019, found that ESG controversies had resulted in a loss of over $500B in market value. The study had analyzed 24 ESG-related events from data breaches to sexual harassment.
As organizations seek to leverage ESG risks to shape corporate strategy and accelerate growth plans, they often find that environmental and social risks are not part of their Integrated Risk Management (IRM) and Governance, Risk, and Compliance (GRC) programs. To manage ESG risks and gain clear insight through risk assessments and analysis, organizations will need a structured ESG risk framework that helps document and manage ESG risks and related details. This requires an integrated approach, where the components of governance, risk management, and compliance will be needed for organizations seeking to implement and deliver on ESG monitoring and reporting.
Organizations will need to start by integrating their structured and unstructured data across the different facets of their organization. For instance, metrics on GHG emissions or water use would require that data be aggregated from manufacturing facilities, commuting methods, and so on. This will have to be followed by aligning external and internal data, since defining ESG benchmarks would require access to ESG data exchanges. Additionally, standard reporting templates will need to be created for board members, partners, and other key stakeholders. And to ensure that the integrated framework provides real-time risk intelligence with the desired speed and visibility, organizations will have to leverage artificial intelligence, robotic process automation, and machine learning.
Enabling Growth with Purpose MetricStream’s ESGRC Solution
Enabling you to simplify ESG integration into your existing risk management frameworks and streamline all of your organizational requirements relating to environmental, social, governance, risk, and compliance (ESGRC) is MetricStream’s ESGRC product.
Built on the industry-leading MetricStream Platform, our ESGRC product will empower you to define and manage ESG standards, frameworks, and disclosure requirements, link standards to organizational entities and key metrics, automate the collection and aggregation of data, and report through real-time analytics and dashboards. The product’s centralized risk repository will enable your organization to effectively manage ESG-related risks and perform various assessments across business units and suppliers. AI-powered engines help classify and recommend remedial actions, while any identified ESG issues can be tracked with the remediations implemented in an automated manner.
With MetricStream’s ESGRC solution, your organization is empowered to:
- Improve top-line growth, by creating a better public perception, gaining the confidence of customers, and impacting revenue growth by offering environmentally and socially responsible products/services.
- Attract better investments, by gaining better access to investors and investments.
- Optimize investments and assets, by aligning capital allocation based on ESG practices.
- Reduce costs, through the overall energy and natural resources consumption.
- Meet regulatory and legal requirements, by decreasing regulatory fines and legal costs as well as reducing long-term restrictions through healthier relationships with regulators.
While the acronym ESG—Environment, Social, and Governance—has recently gained attention, the movement is not new.
Socially responsible investing, sustainability, and corporate social responsibility (CSR) have all been used as terms to assess governance mechanisms and evaluate corporate performance in managing environmental and social impacts. The practice of socially responsible investing has been around since the eighteenth century with the movement gaining steam during the 1960s and the following decades. In 1972, journalist Milton Moskowitz compiled a list of ‘socially responsible stocks’, which he published in a bi-weekly newsletter, Business & Society. In 1984, the US Sustainable Investing Forum was founded. By the year 2006, 60 sustainable stocks were available to investors. CSR brought to the forefront the idea that corporates have an equal responsibility to society in addition to their stakeholders. Sustainability is built on the idea to encourage a more holistic look at human development. The 17 Sustainable Development Goals (SDGs) issued by the United Nations, demonstrate this need.
The broader term of ESG gaining popularity is in response to the changing landscape, particularly in the last decade. Consumers and employees now demand high standards of sustainability and employment. Policymakers and regulators want organizations to take an active role in solving social and environmental problems like workplace diversity and carbon emissions. Investors are also increasingly taking note as there is a significant body of research pointing to the rewards of sustainable investing.
Added to this is the changing risk landscape. A decade ago, the risks identified by the World Economic Forum’s (WEF), annual Global Risk Report were mostly economic in nature. In the 2020 report, we see that seven of the top 10 risks by likelihood and eight of the top 10 risks by impact are related to environmental, social, or governance. In the light of an organization having to manage and report on these new risks, the broader term of ESG enables a significant measurement index—satisfying the transparency demanded by various stakeholders including investors, regulators, non-governmental organizations, customers, and employees.
Clearly, ESG is no longer just a buzzword. The association of ESG with corporate purpose and growth is here to stay. ESG is moving rapidly from the periphery to the center—defining future business strategy, rewiring business growth, and calling for greater ESG risk integration.
Consider the following statistics.
- 92% of business leaders in the US, Brazil, the UK, Germany, and India, in a 2021 report released by PwC, agreed that companies with commitments to ESG policies will outlast competitors without.
- 50% of the UK's 100 biggest companies (FTSE 100) link executive pay to ESG measures, as per a 2021 survey by PwC and London Business School.
- 42% is the recorded increase, from 2018 to 2020, in total US assets under management using ESG strategies, as per the 2020 report on US Sustainable and Impact Investing Trends.
- 83% of consumers and 86% of employees, in a 2021 PwC study, said that they favor organizations that support ESG best practices.
- In 2020, Goldman Sachs announced that they would only underwrite IPOs that have at least one diverse board member, increasing this number to two starting in 2021.
- 57%—more than half—of investors in the APAC region, according to the MSCI 2021 Global Institutional Investor survey, expect to have ‘completely’ or ‘to a large extent’ incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.
The statements above are just a fraction of a growing body of research that points to ESG as core to driving future corporate strategy. Organizations are aware of this. They understand that they can be held accountable for unhealthy ESG practices including the extended ecosystem of third-party relationships, such as suppliers, vendors, service providers, partners, and more.
More importantly, though is the strong link that exists between establishing an ESG priority & value creation. As per research by McKinsey, incorporating an ESG proposition creates value in five essential areas:
- Increasing revenue as more customers are attracted to the organization’s sustainable products and the organization gains access to better resources through stronger ESG scores
- Impacting cost through clean and green initiatives
- Gaining the freedom to strategize and grow through deregulation and stakeholder support
- Enhancing investment and asset optimization through an ESG-led capital allocation
- Boosting productivity by motivating existing employees while attracting new talent
As the potential of ESG-value creation—both short-term and long-term—becomes more pronounced, the role of ESG in driving corporate strategy will gain greater importance. Instituting a proactive and comprehensive ESG approach will then be a vital step for companies seeking to amplify this potential.
The COVID-19 pandemic catapulted ESG risks to the forefront. The implication of risks pertaining to the environment, society, and organizational governance such as climate change, social justice and equality, employee benefits, and diversity in organizations are now being more strongly felt by stakeholders. While investors and clients want to see returns through ESG-sustainable endeavors, customers and employees want to engage and work for organizations that support their values. In this current landscape, ESG risks provide the unique opportunity to fuel growth—while ensuring that there is purpose behind profit.
Globally, ESG risk factors are increasingly gaining in relevance among investors and regulators post-pandemic—with financial markets placing greater emphasis on transparency and disclosure of ESG risks. As per the latest data released by the Global Sustainable Investment Alliance, professionally managed portfolios that include ESG assessments have reached US$35.3 trillion. The numbers indicate a growth of 15% in two years and now includes 36% of all professionally managed assets across the United States, Canada, Japan, Australasia, and Europe.
Investing in sustainable funds is further been viewed as reducing risk for investors. As per data from the Morgan Stanley Institute for Sustainable Investing, sustainable equity funds in the United States have outperformed their traditional peer funds by a median total return of 4.3 percentage points. The reason behind the higher performance of ESG-related investments pointed to sustainable equity funds holding, on an average, larger growth stocks—which resulted in not just better ESG performance but lower exposure to carbon risk.
“If there could be a silver lining to the tumultuous times of the last 18 months, I would say we desire to foster responsible growth. We are no longer being measured just on profit but more importantly our purpose and a desire to make this world a better place for everyone is front and center.” - Gunjan Sinha, Chairman and Founder, MetricStream
Consumers and employees are further necessitating the need for ESG risk to be factored in. PwC’s 2021 Consumer Intelligence Series survey on ESG, found both consumers and employees rewarding brands with strong ESG commitments. 80% of consumers said that they were more likely to buy from a company that is committed to environment and governance standards with 76% of consumers preferring to buy from companies committed to social justice. Among the employees surveyed, 84% of employees said they are more likely to work for an organization that stands up for environmental priorities. 86% of employees also felt motivated to work for an organization which prioritizes social and governance commitments.
For companies seeking to ‘Thrive on Risk’, including turning ESG risk into an advantage, a start has to be made with quantitative measurements that will help them identify key areas where they are actually better and faster than their competitors—all the while building sustainability as a core fabric of the company giving greater confidence to stakeholders like shareholders, customers, and employees. The greater alignment and execution of this strategy will need to be supported by improving the quality of risk data that will enable risk-intelligent decision-making.
ESG risk failures are not new. From physical environmental risks like the disruptions in supply chains during the recent COVID-19 pandemic to transition environmental risks such as reactions to climate legislations—environmental risks encompass all environmental metrics that can impact an organization with direct financial impacts, potential exposition to regulatory action, and damage of reputation. Factoring in social and governance metrics, sometimes overlooked by organizations who primarily view ESG as complying with environmental values, is equally important. A Bank of America study conducted in 2019, found that ESG controversies had resulted in a loss of over $500B in market value. The study had analyzed 24 ESG-related events from data breaches to sexual harassment.
As organizations seek to leverage ESG risks to shape corporate strategy and accelerate growth plans, they often find that environmental and social risks are not part of their Integrated Risk Management (IRM) and Governance, Risk, and Compliance (GRC) programs. To manage ESG risks and gain clear insight through risk assessments and analysis, organizations will need a structured ESG risk framework that helps document and manage ESG risks and related details. This requires an integrated approach, where the components of governance, risk management, and compliance will be needed for organizations seeking to implement and deliver on ESG monitoring and reporting.
Organizations will need to start by integrating their structured and unstructured data across the different facets of their organization. For instance, metrics on GHG emissions or water use would require that data be aggregated from manufacturing facilities, commuting methods, and so on. This will have to be followed by aligning external and internal data, since defining ESG benchmarks would require access to ESG data exchanges. Additionally, standard reporting templates will need to be created for board members, partners, and other key stakeholders. And to ensure that the integrated framework provides real-time risk intelligence with the desired speed and visibility, organizations will have to leverage artificial intelligence, robotic process automation, and machine learning.
Enabling you to simplify ESG integration into your existing risk management frameworks and streamline all of your organizational requirements relating to environmental, social, governance, risk, and compliance (ESGRC) is MetricStream’s ESGRC product.
Built on the industry-leading MetricStream Platform, our ESGRC product will empower you to define and manage ESG standards, frameworks, and disclosure requirements, link standards to organizational entities and key metrics, automate the collection and aggregation of data, and report through real-time analytics and dashboards. The product’s centralized risk repository will enable your organization to effectively manage ESG-related risks and perform various assessments across business units and suppliers. AI-powered engines help classify and recommend remedial actions, while any identified ESG issues can be tracked with the remediations implemented in an automated manner.
With MetricStream’s ESGRC solution, your organization is empowered to:
- Improve top-line growth, by creating a better public perception, gaining the confidence of customers, and impacting revenue growth by offering environmentally and socially responsible products/services.
- Attract better investments, by gaining better access to investors and investments.
- Optimize investments and assets, by aligning capital allocation based on ESG practices.
- Reduce costs, through the overall energy and natural resources consumption.
- Meet regulatory and legal requirements, by decreasing regulatory fines and legal costs as well as reducing long-term restrictions through healthier relationships with regulators.
