The global COVID-19 pandemic has been a transformational period for our society and planet, and we have finally understood our interconnectedness and interdependency with the natural world. As time has stood still over the last two years, we have observed how the world flourished without our intervention, and as a direct result, the pressure is increasing on governments and companies to do better and expectations are higher than ever.
Just look at the recent announcement from Kering banning the use of fur from all its collections and all its brands. It clearly did not have the impact that Kering would have hoped for. Although this would have been a big move internally, the public is now expecting more and is calling for a genuine rethinking of global systems and metrics that define success beyond financial gains to shareholders. Banning fur just isn’t enough for the Greta Generation.
The reality is that Environmental, Social, and Governance (ESG) needs to be taken seriously, and for companies to create real impact, they must embed sustainability into their business strategy. This means business transformation at a global scale, with a genuine change of culture, from the way business is conducted, to the way business is operated. Recruitment, retention, and evaluation of performance, the way products are produced, the procurement process of raw materials, the choices of suppliers, the supply chain management, and the re-education of boards and shareholders on how to rethink success as not just double-digit growth year-on-year but also share value. Change in 2021 is about entire systems, not siloed policies.
With only a few weeks to go until COP26, the conversation around reducing greenhouse gases to pre-industrial levels has hit a fever pitch. But a more important conversation has started quietly in the background and it's gaining momentum.
The investment community has finally recognised the risks and dependencies associated with social and environmental sustainability and is incorporating those risks into the investment process and portfolio allocation. Finance is now channelling capital towards public and private investments that can accelerate innovation and move organisations, big or small, towards finding climate-friendly efficiencies to operate their business. Investors have recognised that sustainability is not disconnected from enterprise value creation and capital market efficiency. If the corporate sector does not transition successfully to net zero, in line with Paris targets, then the adverse consequences will be economic. Yes, economic.
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This is why investors are calling for far more effective climate-related financial disclosure as environmental and social issues become material to them. The recently announced collaboration between the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) will play a very useful role in this regard.
The origins of sustainability reporting on economic, environmental, and social issues come from the work on GRI over 20 years ago. Using a stakeholder perspective, they used a different definition of materiality based on whether a company’s actions are having an important positive or negative impact on the world whether investors think this is important or not. However, investors are paying increasing attention to ESG issues because they now matter to financial performance. As investors realise the importance of the impact of their decisions at a system level, the focus of The Investment Integration Project (TIIP), the line between values-based and value-based investment decisions is beginning to blur.
Many factors determine whether an ESG issue is material for a company from the perspective of its investors. These include growing awareness of system-level effects (e.g., climate change and income inequality), changing social expectations of employees and customers (e.g., regarding recycling and gender balance in the workforce), global norms that companies voluntarily adopt (e.g., the 10 Principles of the UN Global Compact), and laws and regulations (e.g., a carbon tax and minimum wage rates). Whether you’re a listed company or not, having access to capital will soon require having sustainability fully embedded within your business.
I remain optimistic that the necessary conditions for systemic change are coming. COP26 is only a few weeks away. Legislative pressure is growing. And now, with finance driving change, I can’t see a way for businesses to proceed without having sustainability fully embedded in everything they do. Where the money goes, business is forced to follow.