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Archived Insights

Insights shared

December 2022

The last year has seen a seismic shift in the ESG and climate landscape. Regulators are upping the ante on everything from greenwashing to stricter climate target disclosures, while the war in Ukraine, disruptions in the energy market, rising interest rates and soaring inflation have all combined to produce a global cost-of-living crisis and renewed geopolitical and macro uncertainty. Add to the mix a spate of climate-induced disasters and the increased politicization of ESG investing, and it’s easy to see why investors have tended to tread cautiously as they seek to understand companies’ challenges and opportunities.

Excerpts from MSCI

Six ESG and Climate Trends to Watch for 2023

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Insights shared

November 2022

Last year in Glasgow at COP26, we outlined the nine requirements for a more orderly transition, which highlighted the complexities—fraught with challenges and also opportunities—of solving the net-zero equation. With the conclusion of COP27 in Sharm El-Sheik, Egypt, we are reminded that while the annual UN climate gathering is a predictable event—the path to net zero is anything but. The transition was never going to be easy, and recent headwinds such as surging inflation, rising energy costs, and an ongoing war in Europe have brought greater challenges to the journey.

Excerpts from McKinsey

Reflections from COP27: Ten takeaways for CEOs

Insights shared

October 2022

“We should try to regulate ESG ratings to try to get much more commonality because they’re very important—they’re being used a lot—but there’s also so much confusion. And we’ve seen that debate, where certain oil and gas stocks are in a rating, and certain stocks like Tesla are out. Not saying one is right or wrong, but the methodology is being confused.”
FCA’s ESG director Sacha Sadan

Excerpts from The SustainAbility Institute by ERM

Rating the Raters Yet Again: Six Challenges for ESG Ratings

01

ESG Ratings Are Expensive and Bothersome

A recent ERM research study found that 33 institutional investors spent an average of US$487,000 per year on external ESG ratings, data, and consultants. Those higher operating costs generally get passed on to sustainable investment product customers in the form of higher management fees, which may impact investor returns rather than the bottom lines of asset managers.

02

ESG Ratings Contradict Each Other

Each ESG rater uses its own methodologies to collect and analyse data and to produce scores – methodologies which are often quite secretive. There is little impetus for ESG rating firms—who compete against one another for market share—to try to produce more interchangeable scores or to adopt a unified approach to ratings methodologies.

03

ESG Rating Divergence Is Often Intentional

The divergence described comes about both unintentionally and intentionally. Unintentional divergence is mostly at the level of specific factors or datapoints. If different raters assessing a given company encounter variations in data access or interpretation that lead to contradictory verdicts for one or more sustainability factor, unintentional divergence of ratings is the result. Intentional divergence is mostly at the composite score level and is a product of the sum of a company’s sustainability data—this divergence is the “secret sauce” that distinguishes raters from one another.

04

ESG Ratings Are Not Evenly Distributed

ESG ratings are not equally accessible to investors or to corporations. Nonpublic companies are often left out of ESG ratings entirely. Companies that have recently gone public are unlikely to be rated during their first year of listing. Companies trading on major exchanges in North America and Europe are far more likely to get properly rated than those trading elsewhere, especially in emerging markets. And even within the ranks of stocks listed on major exchanges, companies with a higher market cap or free float get covered by more raters and have their ratings refreshed more frequently than other companies.

05

ESG Ratings Are Not Predictive

ESG risk is not as straightforward as credit risk. Even the definition of success regarding the determination of ESG risk may be in the eye of the beholder. Counterintuitively, improving predictiveness may depend both on more accurate and more divergent ratings, allowing investors to compile a risk assessment that is a composite of differing perspectives and informed analyses.

06

ESG Ratings Are Unregulated

ESG raters can expect increased scrutiny of their methodologies as a likely ripple effect due to regulatory developments such as the U.S. Securities and Exchange Commission’s upcoming rules to improve transparency on ESG investment practices, the inclusion of ESG rating rules in the European Commission’s Sustainable Finance Strategy and new rules governing corporate ESG disclosure from both regulators and key standards setters.

Insights shared

September 2022

The extremely detrimental impact of fast fashion on the environment is no news. Besides being responsible for nearly 10% of global carbon emissions, the industry is also infamously known for the amount of resources it wastes and the trash it produces. Here are 10 highly concerning statistics about fast fashion waste.

Excerpts from Earth.org

10 Stunning Fast Fashion Waste Statistics

Tonnes of textiles waste is produced every year
0 mil
The global emissions increase in the apparel industry by 2030
0 %
The average weight of clothes the US consumer throws away every year
0 lbs
The decline of the times a garment is worn in the last 15 Years
0 %
The global waste water produced by the fashion industry
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litres of water required to produce 1kg of cotton
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That is lost each year because of under-wearing and failure to recycle clothes
US$ 0 b
The microplastics dispersed in the ocean each year due to textiles
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tonnes of returned clothes ended up in landfills in 2020 in the US alone
0 mil
The amount of clothes fashion brands are producing today than in 2000
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Insights shared

August 2022

Being forward looking in ESG necessarily calls for considering the needs of a range of stakeholders and society more broadly. Anticipating risks and opportunities and considering what value stakeholders have at stake requires continuous, judicious analysis; ESG is a process, not an outcome. The approach of forward-looking companies is marked by four reinforcing parts of mapping, defining, embedding, and engaging.

Excerpts from McKinsey

How to make ESG real

Insights shared

July 2022

The “S” in environmental, social and governance (ESG) investing moved into the spotlight during the COVID-19 pandemic as companies faced concerns about employee wellbeing and bold calls for action on social inequality.

Excerpts from Reuters

What is the ‘S’ in ESG investing?

1. What does the ‘S’ mean?
The social component of ESG covers all the ways companies interact with their employees and the communities in which they operate.
2. How is it measured?
Risks are evaluated in qualitative, quantitative and industrial comparisons
3. How do investors apply it?
Common processes include "ESG integration", explicitly excluding stocks whose social characteristics do not align with their values or seeking investments that have a measurable social benefit
4. Are there issues with the 'S'?
Investors must still rely on management to provide much of the information, making it difficult to verify claims or compare one company with another. Also, ratings agencies' use of different methodologies, metrics and weighting schemes to assess social risks. Some in the industry have also raised concerns about which social risks are measured.
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Insights shared

June 2022

 

Recent pushback on ESG is a sign that it is evolving, with stakeholders taking steps to make ESG efforts more consistently tangible, meaningful and measurable. Calling out misinformed approaches helps make the case for proper design and action. Many business leaders are using the critique of ESG programs to analyze their current approach and rethink their strategies to create more value and impact. Effective leaders take the following seven actions to evolve ESG sophistication.

Excerpts from Willis Towers Watson or WTW

Why the pushback on ESG is good for ESG

1. Listen to the content of criticism and acknowledge problems with ESG
By taking concerns seriously, leaders create the next level of maturity for ESG. If they ignore them, they reduce the credibility and effectiveness of ESG efforts.
2. Don’t treat all ESG as good or all ESG as bad
Business leaders risk falling into a binary trap where anything associated with ESG is good (halo bias) or anything associated with ESG is bad (reverse halo bias).
3. Avoid “greenwishing” and other forms of fanciful thinking
To enhance impact, effective leaders understand and are realistic about what is achievable through ESG, as well as costs and benefits associated with short- and long-term ESG activities.
4. Acknowledge “fair weather” investors, consumers and employees
By recognising that certain investors, consumers and employees will be less enthusiastic about supporting ESG economically during recessions, bear markets and inflationary periods, leaders can maintain a more consistent approach to ESG.
5. Create specific measures
Effective organisations use data and analytics to drive ESG and sustainability efforts. For example, climate, DEI, health, wellbeing and savings analytics help leaders predict and measure the impact of decisions, as well as identify and address specific risks and opportunities
6. Focus on value creation and risk mitigation
Leaders can accentuate the value of ESG by addressing both risk and value creation opportunities as they prioritize and make decisions. This type of measured – and measurable – response follows the lead from investors and major private equity and venture capital entities, incorporating material ESG factors into decision making.
7. Focus on the long term
To counter concerns over the disadvantages of short-term ESG thinking, effective leaders link ESG goals to managing long-term performance and risks.
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Insights shared

May 2022

If you want to deliver on the promise of your ESG and Governance) and sustainability strategy, then change is not just inevitable; it’s vital. And for truly successful ESG and sustainability transformation, you need to define your purpose, then develop the skills, talent, leaders and culture you need to achieve it.

Excerpts from Korn Ferry

To become a sustainable business, you need to do things differently

01

Purpose

Set the tone from the top

Transform your culture

 Measure success

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Governance

Enhance board capability and composition

Adopt governance mechanisms

Align executive pay

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Leadership and Talent

Hire and keep great people

Reinvent leadership to drive ESG

Close the skills gap

04

Operating Model

Embed ESG commitments into organisational design

Enable your workforce for ESG

Make transformations stick

05

Culture

Shift mindsets at scale

Build an ESG-enabled culture

Engage all stakeholders

Insights shared

April 2022

Many leaders still see an inherent trade-off between choosing a more sustainable future and achieving business growth and profit. They see ESG-related spending — a capital expense to reduce energy use, opting for renewable energy, paying living wages, and so on — as purely cost, not investment. Much of the reason comes down to five big problems with how we make decisions.

Excerpts from Harvard Business review

Yes, Investing in ESG Pays Off

PROBLEM

SOLUTION

1. The Numbers Hide the Truth About Real Costs

Our economy relies entirely on inputs from the natural world. Every ton of carbon emitted raises the temperature a tiny bit and reduces air quality, but companies never pay for those costs to society, also known as externalities. They also get, for free, the tens of trillions of dollars in value and services nature provides.

Solution: Price the unpriced.

Many leading companies internalize the externalities by putting a “shadow price” on carbon inside the business (some collect real money as a self-imposed tax). Raising the price on carbon or other inputs drives different capital and investment decisions.

2. Our Own Biases Trick Us

Even when the sustainable choice is more profitable by traditional measures, it doesn’t mean people opt for it. We all have biases in how we make decisions, including thinking in linear, non-systemic terms, or going with what’s easy or right at hand.

Solution: Diversify the group making decisions.

If we tend to go with what we know, or fall into groupthink and inertia, then we should expose organizations and their leaders to different perspectives.

3. We Focus on Short-Term Costs and Benefits

While it’s wrong to say sustainability always costs more, it’s no more accurate to say it always pays off, at least in the short run. There are technologies that may cost more now, until they get to larger scale — which describes every new technology.

Solution: Redefine your tools for investment decisions.

Metrics like ROI or IRR are generally broken. They miss sources of value and use a too-high discount rate, which makes any investment in the future look worthless. On a gut level, we know that can’t be right. Instead, find and internalize the data that proves the value of longer-term thinking.

4. We Think About Costs in Silos (Instead of Systems)

A focus on paying living wages will raise costs today in every tangible way — it’s kind of the point. But focusing only on the budgetary silo of wage expense gives only a partial, narrow view on the investment choice.

Solution: Broaden thinking on value and think in systems.

Again, ROI and other tools don’t work correctly here. The “return” part of the equation doesn’t capture the intangible value from choosing the sustainable, net positive path (employee engagement, customer passion, resilience, and so on).

5. We Miss the Bigger, Existential Costs

According to insurance giant Swiss Re, not acting on climate will destroy around 18% of GDP by 2050. That number is equivalent to a deep economic depression, but it may sound survivable.

Solution: Understand the world’s thresholds and learn to think in net positive terms.

We humans are notoriously bad at predicting the future. Big failings include not understanding exponential change and only seeing the local situation. So study the big trends that are moving non-linearly — climate change, inequality, resource use, clean tech economics, AI, misinformation, and more.

Insights shared

March 2022

The built environment—that is, the cement and construction value chain—accounts for approximately 25 percent of global CO2 emissions. Reaching net zero by 2050 will require the buildings and construction industry to decarbonize three times faster over the next 30 years versus the previous 30. How can the cement and construction industry achieve net zero by 2050? Here are the key takeaways from a roundtable discussion McKinsey hosted at the COP26 Climate Change Conference.

Excerpts from McKinsey

Decarbonizing the built environment: Takeaways from COP26

1. Shift from volume to value
Decarbonization is a license to grow, but grow responsibly. The industry historically has relied on GDP and population growth to create value—this will no longer suffice in a retrofit, redesigned world. Players must differentiate through decarbonization and by meeting new green demand.
2. Scale by sharing
Fragmentation distorts the risk equation for new green investment. The industry can boost innovation by developing common standards, shared R&D resources, and a forum to navigate and align decarbonization levers and new technologies.
3. Get serious about green investment and new technologies
There is no shortage of patient, green financing. Investors, however, face a shortage of large-scale green projects. Corporates can channel capital by making bigger bets on sustainability—decarbonizing existing assets at scale and partnering with the wide range of green start-ups serving the built environment.
4. Start with the customer
Unlocking demand will require high-quality, convenient solutions, with a clear payback. In the retrofit market, for example, consumers are often deterred by complexity, unattractive offerings, and unclear financial benefits. Companies can break through by investing in new products and integrated solutions, taking a design-thinking approach to customer problems.
5. Create a culture of innovation
The buildings and construction industry is notoriously slow to change. Practical steps include setting targets for net new growth, promoting “test and learn” with minimum viable products, deploying venture capital–style metered funding, increasing R&D budgets, using certifications to drive a sustainability premium, and fostering precompetitive collaboration.
6. Develop the skills now to deliver at scale
Policy and capital are moving and will make skills the bottleneck down the line: for example, the retrofitting workforce of tomorrow is not in place today. Industry leaders across the public and private sectors need to start developing the skills and capacity to deliver on the anticipated demand.
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Insights shared

february 2022

Governments and companies are increasingly committing to climate action. Yet significant challenges stand in the way, not least the scale of economic transformation that a net-zero transition would entail and the difficulty of balancing the substantial short-term risks of poorly prepared or uncoordinated action with the longer-term risks of insufficient or delayed action.

Excerpts from McKinsey

Six characteristics define the net-zero transition

01

Universal

Each of the seven major energy and land-use systems contributes substantially to emissions, and every one of these systems will thus need to undergo transformation if the net-zero goal is to be achieved. Reaching net-zero emissions will thus require a universal transformation of the global economy.

02

Significant

The economic transformation needed to achieve the transition to net zero will be significant. The analysis focuses on demand, capital allocation, costs and jobs. 

03

Front-loaded

Several aspects of the transition to net zero would be more significant in the early stages of the shift. More broadly, action is needed over the next decade to reduce the buildup of emissions and prevent rising physical risks that might occur in future decades.

04

Uneven

While universal, the economic exposure to the transition will not be uniform across sectors, geographies, and communities and individuals.

05

Exposed to risks

Management of the transition to net zero will substantially influence outcomes, and any net-zero transition scenario including the Net Zero 2050 one used in this research will be exposed to risks.

06

Rich in opportunity

The opportunities for countries, sectors, and companies could be considerable if they are able to tap into growing markets as the world transforms to a net-zero economy. 

Insights shared

january 2022

Companies have been responding in increasing numbers to the imperatives set by the 2019 Business Roundtable statement of intent and changing cultural dialogues to adopt ESG strategies, as well as how to translate these goals into practical, measurable, and trackable efforts. 

Excerpts from Harvard Business Review

10 ESG Questions a company needs to answer

1. Is ESG undermining your company’s competitiveness?
If a company does not focus enough on ESG, it risks falling behind in the market, losing the support of employees, customers, and investors, and potentially even losing the license to trade in more stringent regulatory/ESG environments, like the U.S. and Europe. Finding the correct balance will be hard because the parameters will vary across sectors and geographies, as well as over time. What is essential is that boards consistently review their focus on ESG and judge whether they are managing the trade-offs.
2. Does driving the ESG agenda mean sacrificing company returns?
Returns can be higher than on broad base indices. An active ESG agenda grants companies in terms of the license to trade — the right to operate a business, which is granted by governments and regulators.
3. How are you navigating ESG trade-offs?
The shift from a world of financial shareholder primacy to broader stakeholder capitalism encompasses a far-reaching agenda — including climate change, worker advocacy, the pursuit of gender and racial diversity, voter rights, and more.
4. How does ESG change due diligence?
Areas that could come into ESG due diligence include adapting products and services to climate-friendly materials and processes, evaluating diversity and wider employment practices, as well as revamping how companies engage with communities. Corporations today must be ready to demonstrate that they are ESG compliant — with actions and results.
5. Should you become a public benefit corporation?
Financially, companies need to examine the implications of changing their status to a PBC or B-corp — for example, whether or not PBCs are allowed to trade on various stock markets around the world. Business leaders must be alert to any changes in decision rights and restrictions of a PBC structure — for example does it restrict how the company raises capital or pays dividends? Can valid like-for-like comparisons can be made with Delaware registered peers when reviewing performance?
6. How should corporations address societal concerns such as racial equity?
For the sake of employees, customers, and clients, corporations must be more transparent on how business leaders will handle these concerns, and broader ESG issues, as they emerge. An inconsistent approach risks fostering division among employees and creating a culture of “us versus them.”
7. How do you develop a global approach to ESG?
A more comprehensive ESG approach must be inclusive of different countries and cultures.
8. How do you build an ESG framework that is futureproofed for tomorrow’s economic realities?
Business leaders need to focus on ESG design and a system of thinking that applies to how the economy will be shaped in the future — not just how it is structured today.
9. How do you vet company performance of ESG?
Business leaders must decide how their ESG results will be vetted for compliance. Companies already use independent external auditors for financial, operational, cyber, and worker audits. The question is whether ESG standards will need to be assessed and monitored by independent third-party accounting or law firms, or whether ESG will be overseen by a global body or by national regulatory organisations.
10. How should corporations navigate the ever-changing landscape of ESG?
As companies devise metrics to track ESG progress, they must be able to compare performance across time, peers, other industries, and against evolving regulatory standards.
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"Our consumers are very sensitive to social and environmental issues. We have actively engaged with them on these issues in the last ten years, and they have become very aware as consumers. They especially ask for information on environmental policies, workers' rights and product safety."

Walter Dondi, Director of Co-op Adriatica, Italy’s largest retailer