‘Investors are seeing the opportunity as much as the risk’: Highlights from the ESG Integration Forum – Europe

Dec 09, 2021
Attendees debated COP26, the launch of the ISSB and the future of ESG investment

In late November, IR professionals and corporate secretaries gathered virtually to discuss the future of stakeholder engagement and sustainability reporting at the ESG Integration Forum – Europe.

They had plenty to talk about. The forum took place shortly after the UN Climate Change conference in Glasgow, UK, which saw a raft of new commitments but failed to deliver on key hopes such as the phasing out of coal.

Delegates also chewed over the IFRS Foundation’s recent launch of the International Sustainability Standards Board (ISSB), a move that makes good on calls for significant consolidation among sustainability reporting groups.

More broadly, attendees agreed that the pressure on companies to be more sustainable – from investors, regulators, employees and other stakeholders – is only going to grow further. IR professionals and corporate secretaries can expect their responsibilities to continue to evolve to meet this demand.

The event kicked off with an interview with Stephanie Bruce, CFO of the asset manager abrdn, who gave her takeaways on the UN’s climate change summit. ‘COP26 definitely sent a strong signal and delivered enhanced ambition. It’s clear to see elements of positive change taking place as well as the drive and demand increasing across all stakeholders,’ she said at the forum.

‘The downside, I think, is the gap between the pledges governments have made to hold the temperature increases to 1.5°C – or even 2°C – and the actions that are actually currently being taken.’

Bruce also touched on the role finance teams, IROs and governance professionals can play in the shift to more sustainable business models. ‘Reporting around ESG will become part and parcel of overall public reporting responsibilities,’ she said. ‘Therefore, it will require more oversight [and] different types of assurance.’

ESG investment as the ‘standard’

Next up at the forum, Jan Rabe, co-head of the sustainable investment office at Metzler Asset Management, gave a presentation on the sustainable investing landscape and incoming European regulation, outlining how sustainable investing can continue to evolve over the next decade.

‘The total share of sustainability assets under management is around 36 percent, so roughly more than a third,’ he said. ‘We think it can go up to 90-plus percent within the next 10 years. The drivers for this are, of course, the competition among asset managers to be the most sustainable platform, increasing demand from the asset owner community and, finally, regulation. There’s a lot of regulation coming, which will make sustainable investing a standard.’

Later Rabe turned his attention to Europe’s Corporate Sustainability Reporting Directive (CSRD), highlighting its importance as well as areas that regulators may address in the future.

‘The CSRD is really a step forward from what has been in place previously. It provides more transparency and helps asset managers to ask the right questions and then make up their minds,’ he said.

‘But I think what’s more important is not so much what’s in the CSRD, but what is not covered yet, and that’s more transparency in terms of how companies invest their own capital. To date, asset managers have not been able to check companies for consistency simply because there’s very little information.’

As an example, Rabe mentioned a hypothetical company that monitors human rights in its supply chain but not in its own capital investments. ‘There’s reputational risk,’ he said, adding that journalists and NGOs will also likely focus on this area in the future.

Measuring social impact

As the forum continued, attendees had the chance to hear from panelists on topics such as climate change reporting, strengthening board oversight of ESG and the evolution of ESG activism.

Another session focused on how to measure social impact. Over the last 18 months, social issues have grown in importance for companies, mainly due to the pandemic and global protests over racial equality. For many, however, the S in ESG remains the most complicated part of that abbreviation for companies to talk about, especially so when it comes to social impact – explaining the changes brought about by social policies.

‘To assess the impact of social is incredibly difficult – especially when compared with the environment: it’s less researched,’ said Anouk Heilen, global sustainability director for social impact at Unilever. ‘[We] have a commitment to really evolve our measurement and reporting, to go beyond just measuring input and output, [and really try] to understand the impact we have on the lives of people.’

During the panel, Heilen gave examples of how Unilever measures its social programs. ‘Over the course of the last year, we’ve been working… with a company called 60 Decibels on what we call a lean data approach… [which is] done with interviews with the people we most impact,’ she explained. ‘Through interviews we really want to understand: is this helping you? Is this helping your business grow? What works, what doesn’t? And it also gives us an opportunity to course correct.’

Ben Morton, director and co-founder at SIFA Strategy, said investor focus on social issues has grown significantly but it can be difficult for companies to keep up with all the requests for data they receive.

‘Companies are being looked at by ratings agencies and investors – some that use established frameworks, some that are developing their own frameworks and scorecards,’ he said. ‘If they are not careful, they can be on the back foot a lot, just responding to many different queries around social issues.’

During the session, an audience poll asked attendees whether investor interest in human capital management had increased over the last two years: 87 percent said yes, while 13 percent said interest had stayed the same and no one noted a decrease.

Investor targeting and the evolution of reporting

In another session, Audra Walton, head of ESG solutions at CMi2i, gave a presentation on how to find the ‘best fit’ ESG investors. Given the growing size of assets managed through an ESG lens, companies are increasingly asking how they can target this group, she explained.

Forget whether it is an ESG fund or not – that’s irrelevant, said Walton: ‘What we are really looking to do is, as funds incorporate new ESG criteria into their investment decision process, determine whether you as an issuer meet those criteria. Investors are seeing the opportunity here as much as the risk, so they are actively looking within companies that may not be obvious ‘green revolution’ companies for a bit of intellectual property or an angle they can nurture to unlock value over the long term.’

An audience poll found that investor targeting based on ESG factors is becoming a mainstream activity for public companies. Attendees were asked whether they have a set process for finding investors that fit their ESG profile. The results were evenly split, with 50 percent saying yes and 50 percent no.

In the final panel discussion of the day, speakers turned their attention to how ESG reporting has changed over the last year and will continue to evolve in the future.

Phil Redman, ESG offering manager at OneTrust, echoed many other speakers when he highlighted the movement in a number of regions, such as the UK, continental Europe and the US, toward mandatory ESG reporting rules. ‘Today it’s voluntary. But in the future, and the not too distant future, it’s going to be required for at least most public companies,’ he said.

Later, the panel spoke about the official launch of the ISSB. The new body will bring together the Value Reporting Foundation, home of the SASB Standards and International Integrated Reporting Framework, and the Climate Disclosure Standards Board, providing some much-needed consolidation in the sustainability reporting space.

‘We very much welcome that the IFRS Foundation has got together with two other really important players here,’ said Linda Freiner, group head of sustainability at Zurich. ‘We have to go in that direction. In the end, the risk of greenwash, the risk of actually too much non-material information being out there, is just not good for anyone.’

Speakers also noted that releasing an ESG report should not be viewed as the key objective for companies but just the output of a much more important process.

‘We’re not doing this to produce a report,’ said Freiner. ‘This is for us to be able to show the strategic progress we’re making, against the commitments we’ve made. And it’s also a way for us to interact with our stakeholders, and make sure we provide the right information to them.

‘I think we sometimes forget about that when we sit there with our reporting fatigue, and we [ask] why we are doing this again. We have to continue keeping the strategic direction and the stakeholders in mind.’

To find out more about the ESG Integration Forum – Europe or to watch replays of the sessions, please click here.

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