Corporate Environmental, Social, and Governance Risks under the Lens

This article is published in collaboration with Refinitiv.

In the context of the pandemic, environmental, social, and governance (ESG) has now become a priority for global companies as they build their supply chains in a sustainable manner.

Additionally, the idea of business continuity in the supply chain has become not just a luxury but a necessity as the economic impact of the pandemic continues to be felt by businesses.

Many suppliers have taken short-term efforts to keep their operations running and these short-term solutions are proving to be unsustainable.

As has been shown by previous economic downturns (such as the housing crisis of the early 2000s), the temptation grows to cut corners or engage in misconduct to win deals when times are tough. This includes certain financial crimes but also ESG concerns.

From COP21 to COP26

By the end of UN Climate Change Conference (COP26) in Glasgow, United Nations Secretary-General Antonio Guterres, stated that “we must accelerate climate action to keep alive the goal of limiting global temperature rise to 1.5 degrees.”

Within the last 5 years—after the COP21 of 2016, when world leaders agreed to limit global warming to 2˚C—investors have committed to the Paris Agreement, and an increasing number of corporations have committed to adapt to quickly shifting markets, in which their investments would qualify according to their ability to commit to cutting global emissions by 50% in 2030.

And public companies figure among the stakeholders that have committed to the most ambitious targets.

In October 2021, Shell set its target to reduce absolute emissions by 50% by 2030.

Other corporations, like Walmart, BASF, and Repsol, have pledged to become carbon-neutral, carbon-negative or net-zero.

Amazon has made significant progress in its pledge to reach net-zero emissions by 2040, having achieved 65% renewable energy across its operations, an increase from 42% in 2019.

Lastly, institutional investors, such as pension funds in the UK, Denmark, and Germany, have adopted a “divest/invest” approach, by reallocating capital to climate change mitigation initiatives, as more investors seek green bonds.

Improved understanding of ESG compliance

More companies have gained a better understanding on the benefits and ROI of implementing ESG compliance programs and standards. Analytical tools are helpful to filter criteria, measure, and rate performance by industry, country, currency, and other factors.

Better understanding also helps to distinguish between financially relevant ESG approaches and others that are more focused on social objectives, allowing the formulation and implementation of strategies based on hard facts.

Policymakers and investors have increased awareness on biodiversity loss, and companies that trade/supply food and agricultural commodities (like cattle, soy, palm oil, and timber) are more aware of burdens caused by their operations, as agriculture contributes to approximately 80% of global deforestation.

In Latin America, companies that have processed soy, an in-demand commodity, have shifted priorities due to consumer pressure and high deforestation risks in countries like Brazil.

Though the largest processors and traders of soy have adopted zero-deforestation goals, a substantial part of their exports have remained uncertified to third-party sustainability standards, between the last quarter of 2020 and the first of 2021.

Sustainability reporting and disclosures

The Task Force on Climate-related Financial Disclosures reporting became mandatory for signatories of the UN Principles of Responsible Investment in 2020, and is still on track to become compulsory in the UK, New Zealand, and the US.

Additionally, the EU’s Sustainable Finance Disclosure Regulation, which came into effect in March 2021, requires institutional shareholders to report on social and corporate governance issues, such as salary gaps by gender, among other items that transcend environmental sustainability.

Financial advisers, bankers, and corporate consultants have begun offering services for formulating and/or implementing ESG reporting and sustainability strategies.

Investing in diversity

In 2021, investors ventured into financing vehicles like social bonds to address challenges that can affect companies’ reputation and performance.

Scandals, resignations, and major drawdowns not only result in adverse media, but are also likely to trigger lawsuits and strikes, therefore affecting business continuity and financial performance.

Companies like Adidas and PepsiCo have pledged to fill more positions with racially diverse candidates. Other companies like Twill—a business of Maersk—have included age, culture, and disability in their diversity criteria.

Investors have urged companies to improve workforce disclosures and continue diversifying their leadership ranks, as they will continue looking to UN Sustainable Development Goals as a framework for addressing inequalities, and will pay more attention to issues like poverty, hunger, health, education, gender equality, and dignity of working conditions.

Companies that have become leaders in the social dimension of ESG include banking corporations, like Bank of America and BBVA, which issued their first corporate social bonds between the second and third quarters of 2020.

Biden administration’s role in ESG

US President Joe Biden has pledged to reinvigorate ESG policies and climate urgency in the US. He sought to re-join the Paris Agreement and pledged to set the path to net-zero greenhouse emissions in the US by 2050, including an interim goal of decarbonizing the power sector by 2035.

According to S&P Global Trucost, about 60% of S&P 500 companies have at least one asset at high risk of physical climate change impact; and according to the National Oceanic and Atmospheric Administration, in 2020, the US experienced 22 climate change-linked disasters. These events caused at least $100 billion in damages.

ESG trends for the future

Lastly, we can list four major ESG trends that are predicted for the next 5 years (2022–2026):

• Regulations and public pressure will continue generating further demand for ESG investment data and initiatives applicable to public companies in several industries, including the supply chain and logistics sectors.
• Information and reporting requirements are expected to become stricter, as enforcement actions related to ESG compliance will become more effective and specialized than in the previous 3 years (2019–2021). This period has seen regulations include the EU’s Directive on Mandatory Environmental and Human Rights Due Diligence and Germany’s Corporate Due Diligence Act.
• Boards will continue empowering compliance officers and investing more in their compliance departments by delegating tasks related to formulating and implementing effective ESG policies and processes. Otherwise, they may appoint specialized ESG officers who report to the chief compliance officer and the boards.
• Companies will assess the ESG standards of their supply chains. As companies aim to improve their own efforts in the areas of ESG, there will be an increased focus on partnering with third parties around the world where ESG priorities are not as high. To encourage them to adopt acceptable ESG standards, in this manner companies will drive change and demonstrate their commitment to ESG.

Refinitiv remains committed to helping organizations identify and eradicate risk within even the most complex global supply networks. We are also committed to ensuring that reliable and complete ESG data is accessible, and to promoting the mainstream use of ESG criteria as part of broader risk management strategies.

This article was first published by Refinitiv on 14 January 2022.