Understanding and Overcoming Mounting Pressures on ESG Investing

Environmental, social and corporate governance (ESG), the framework widely used by listed companies to evaluate sustainability-related disclosures, was first mentioned in the United Nation's Principles for Responsible Investment (PRI) in 2006. Due to a confluence of events, the COVID-19 pandemic accelerated ESG into the mainstream when governments were simultaneously making decisions to sustain their economies and looking ahead to a sustainable future.

For organizations looking to grow and prosper in 2022, an ESG agenda is critical. It sets a firm up for success and helps to mitigate risk. In the current landscape, companies that have yet to pivot are putting themselves — and their stakeholders — in a vulnerable position of potential financing and investor activism risks.

With the transition to ESG driving change from the boardroom, some firms are opting to take the easy path. They're doing this by misleading investors and the public through "greenwashing" — the marketing of false and deceptive statements that present a company in a positive light for environmental stewardship.

Greenwashing comes with significant risks and consequences, and its prevalence is concerning. A recent survey of 1,491 executives across 16 markets conducted by The Harris Poll for Google Cloud reported that over half (58 percent) of executives say their organization is guilty of greenwashing.

To learn more about the ubiquitous, nascent and sprawling topic of ESG, greenwashing and how companies are using data for ESG investing, I spoke with Sam Shiao, a SaT partner from EY.

Sam has worked with Fortune 500 companies, state-owned firms (SOEs) and multinational companies (MNCs) and private equity firms across multiple industries to provide valuation and modeling services for business transactions. Currently, Sam drives change by helping to create long-term value for sustainable futures for his clients.

SS&C Intralinks: What are some of the pressures from the institutions and investors about ESG investing?

Sam Shiao: The pandemic has reinforced the importance of ESG issues and accelerated the transition to more inclusive capitalism. Investors increasingly believe that companies that perform well on ESG are less risky and are better positioned for the long-term, making them better prepared for any uncertainties ahead.

Larry Fink, CEO of BlackRock, mentioned recently that companies whose stakeholders focus on ESG are putting themselves in a good position to be winners in the future. Stakeholder capitalism is only going to be more prominent in the future. This means that non-financial performance is being considered more frequently and more seriously when investment decisions are being made. Companies wanting to raise capital need to communicate their sustainability agenda to their investors.

What are the telltale signs of greenwashing?

Sustainability is not something that can be achieved overnight or even in the short term. The value that sustainability creates for corporates and organizations in long-term value, which is reflected in the management of environmental, social and regulatory risks, and by building a more resilient business model.

An organization is serious about its sustainability agenda when they are consistently committed to executing and reviewing its sustainability strategies by making sustainability front and center at the board level with strategies that are relevant to the company’s core business, and carefully thought out opportunity analysis with reasonable and quantifiable targets set out in the form of performance matrixes. All of which should be transparent and communicated with stakeholders regularly.

Assurance engagement, where When a company engages professional services firms like EY to provide assurance services on ESG sustainability reports,  it adds credibility to the company’s commitment to sustainability.

Will firms survive carbon costs, or will it get passed on to consumers?

Depends on whether economies can successfully decarbonize. For decades, economies thrived on the back of cheap fossil fuels. The reason why it’s cheap is that externalities associated with burning fossil fuels have not been factored in. Fossil fuels are ultimately a product to provide the energy needed for economies to evolve and grow. As the price of carbon increases, fossil fuels lose their competitive edge and new technologies are likely to emerge. This creates an unprecedented opportunity for firms benefitting from the decarbonization process.

How are companies like EY utilizing data for ESG investing?

What investors look for in ESG investing is to gain alpha on investments in the long term. On the other hand, what is being considered in the ESG framework is very broad and often cannot be easily measured. If you invest in fundamentals, you need to be able to analyze a lot of data — big data over a long horizon that is not necessarily quantifiable. This could be text data or non-numeric data. This is where technology matters. ESG rating firms have extensive data and analytics capabilities leveraging technology to help clients with their ESG investments. This is where anyone would see the most value in ESG ratings.

Any additional takeaways you can share?

ESG is not a concept or theory that will be moving away from the limelight anytime soon. United Nations Climate Change Conference in Glasgow (COP26) committed countries to climate action and has gotten the commitment of private financial institutions and central banks to redeploy trillions of dollars toward achieving global net-zero emissions. If an organization does not have a sustainability agenda, it could put them at a grave disadvantage as world economies leverage non-financial performance factors for investment decisions.