The financial case for ESG
What is the financial case for ESG – and what does ESG really mean? These key questions were posed at the recent Bloomberg Sustainable Business Summit in London, and drew differing approaches from the panelists.
Valentijn van Nieuwenhuijzen, chief investment officer at Dutch asset manager NN Investment Partners, answered unequivocally: ‘ESG is the fundamental variable, or set of variables, to create the right incentives in capital markets for the corporate world to stick to an economical model for a sustainable future.’
This seemed a good summing up of the financial case for ESG. ‘There is a lot of debate about the details,’ admitted van Nieuwenhuijzen, ‘but it is now an embraced concept and everyone understands what it is. Now it needs to be brought into practice and [people need to] spend all the necessary time and effort on that.’
Lees Rodionov, global director of environment, sustainability and government at Texas-based oil company Schlumberger, brought a different perspective; she has been in her current role for only three months and didn’t really know what ESG was prior to taking up her position. ‘It has been a learning curve,’ she confessed.
‘But in terms of what we are measuring and how we go about that, we have social and environmental metrics and gender targets of 25 percent across all roles, and we have a national target in the places we work to match our national mix to our revenue mix. So if 15 percent of our revenue is from Latin America, we want the same proportion of the workforce to be from Latin American countries.
‘In terms of methodology, it is one of my early learnings in the role. We have been incubating it at a corporate level over the last few years in terms of what the programs and priorities are. We have a matrix organization so it is deciding who can drive the action, assigning ownership at the level and in the way that makes sense for the people who can drive the action.’
On where the company is on its methodology in practice, and driving that financial case, Rodionov added: ‘We have been driving the local [social] level for some time, whereas the environmental level has not always been as important a part of the company’s DNA – so that is an emerging priority.’
On the biggest challenges in measuring ESG, Van Nieuwenhuijzen, said: ‘There are a lot of pitfalls when you start working with ESG. I think, overall, the one for investors is governance: how well the company is being run and how trustworthy it is. But this [importance] varies across industries in different sectors from oil & gas and healthcare to industrials and consumer goods.’
Rodionov raised another issue about the financial case for ESG: ‘One of the misconceptions is that ESG is an extra cost – the challenge is making sure that is not the case.’
‘Also, when assessing ESG you have to see what is driving the ESG scores and the way companies rank,’ noted Van Nieuwenhuijzen, warning that big companies, because of their resources, are able to present an impressive narrative around ESG, which may not be the whole story. ‘It is not necessarily an indication of them changing their behavior: they are just bringing ESG into how they run their business model.’