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Jun 22, 2021

How ESG integration drives cultural change

Highlights from a session on ESG reporting at the IR Magazine Forum – Europe 2021

Companies need to make significant cultural changes to integrate ESG issues into the way they think and act, but the result can be more engaged employees as progress is made against sustainable goals, according to panelists at the IR Magazine Forum – Europe 2021.

Speakers also discussed the challenges of setting long-term ESG targets, especially around climate change. Increasingly companies are announcing the goal of net-zero emissions by 2050, but they also need a credible roadmap to get there.

‘When I talked to my team, two and a half years ago now, I told them that, like it or not, ESG is going to be very high on our agenda,’ said Martin Ziegenbalg, executive vice president and head of IR at Deutsche Post DHL, who spoke on a panel about ESG reporting frameworks and standards.

‘It took them a couple of weeks to realize I was serious about it. [I remind them] this has to be a core part of the equity story and I expect each and every IR team member to be fully on top of these issues. I don’t want just one single ESG expert in my team, just like I don’t want [just one] Ebit expert in my team.’

Ziegenbalg says some aspects of ESG communications are similar to more traditional IR work – for example, you have to be able to explain what’s behind the numbers and how corporate initiatives are having an impact. But other aspects of the work present new challenges, such as dealing with the wide variety of frameworks, ratings agencies and NGOs.

‘With ESG being an integral part of our strategy, and therefore the equity story, the whole team has to have a strong command of what’s going on there, which has been a bit of a learning curve,’ he explained.

Speaking on the same panel, Yulia Chekunaeva, director of capital markets and strategic initiatives at En+ Group, says enthusiasm has grown within the company about tracking and reporting on sustainability topics.

‘The first time we collected the data to release it in 2018, I think as part of the sustainability report, everybody was a bit reluctant and [asked], Why do we get all those data points? or Why do we release those data points?’ she said. ‘But then a very important thing happened. When you put two bars of any metric [compared year by year] and people see that, they would like to improve on them.’

Chekunaeva said over time people start to own the process of collecting the data and sustainable indicators become embedded in how the business views performance. ‘Over the years, what we are seeing is that, culturally, when people know the performance indicators we produce, not only on finance and operations, but also on waste removal, water treatment [and] air pollution, that causes the change,’ she said.

The discussion also covered net-zero emissions targets and how they are evaluated by the investment community. Ramón Álvarez-Pedrosa, head of IR at Respol, spoke about his company’s net-zero goal – the first set by a major oil and gas provider – and the challenges of reporting on climate risk.

‘As our CEO always said, putting in an objective or ambition for 2050 is the easy part. What is much more difficult is what you are going to do in 2025, 2030 and 2040,’ he said.

‘All of the European companies followed us in the following two months. And there are now companies outside Europe that are [taking] the same path. But there is no common framework, every [firm] has its own standard, its own way to communicate. We understand very clearly that that can create confusion within the investor community.’

Adding to the complications, Álvarez-Pedrosa noted that the Science Based Targets initiative (SBTi), which approves emissions-reduction goals set by companies, has not yet produced guidelines for the oil and gas industry. SBTi is aiming to come up with a methodology for the sector this year.

Randeep Somel, portfolio manager at M&G Investments, who manages the firm’s climate solutions equity portfolio, said having a 2050 target is ‘fantastic’ but companies must provide more short-term goals.

‘Let’s be quite frank: the entire board, the entire executive aren’t going to be in charge of these companies in 30 years’ time in most cases,’ he pointed out. ‘Having achievable targets for the shorter term, from 2025 to 2030 now, is the thing to look for, and report every year on how much closer you are getting to these targets.

‘And incentivize your management teams accordingly. Put in those KPIs and tell us exactly what they are, tell us how they’re being reported. Make it a reasonable amount of your compensation package… carve out 10 percent-20 percent for some of these ESG factors. It shows willing, and it shows that the companies are interested in doing this.’

In addition, Somel mentioned that science-based targets are becoming increasingly important for investors. ‘You’re going to have SBTi companies and non-SBTi companies,’ he said. ‘SBTi doesn’t cover everything today. It doesn’t cover oil and gas, it doesn’t cover chemicals, but it is working with companies to get those frameworks in place. And they’re going to be incredibly important.’

To find out more about the IR Magazine Forum – Europe 2021 or to access recordings of the sessions, please click here.