Over the last two years we have seen our inboxes bombarded with content on Environmental, Social & Governance (ESG) issues from companies: so much so that Google Trends data shows that there has been a 300% increase in the UK for ‘ESG’ searches between January 2020 and January 2022. Over this time, the issues that underpin ESG have moved from a ‘nice to have’ consideration to business-critical in terms of the C-suite agenda, with heads rolling and public apologies being issued for latent inaction on the part of big business.

Despite the measurable buzz around the acronym, many consumers and investors remain confused about what ‘ESG’ is all about. It brings together three distinct issues, where the challenges of improving the gender pay gap is grouped with reducing ‘Scope 3’ supply chain carbon emissions, despite their positions on different ends of the concern spectrum.

Cicero/amo recently published a global report on behalf of Architas looking into investor confusion on what is meant by ESG. We found that investors across Europe and Asia are more familiar with the phrase ‘Sustainable investing’ than they are ‘ESG.’ Furthermore, amongst the E, S & G, it is Governance factors such as ‘Honest and Transparent Accounting’ that were viewed as the top priority to investors. Unpicking these priorities for businesses will be an ongoing conundrum, with it becoming clear that there are no quick solutions.

However, the call for quick action is clear. As the number of firms committing to Net Zero targets for 2050 grows, few CEOs can realistically expect to still be in the seat in 28 years’ time to see through these commitments. Instead, shareholders and stakeholders are pressing for progress that can be measured over the next 12 months, to hold leaders to their word and force the required investment and action.

To rise to this challenge, businesses need to understand the data on their own internal performance. By fully looking under the bonnet, businesses can both benchmark current performance and prioritise areas for improvement. In an upcoming Cicero/amo report in partnership with International Regulatory Strategy Group (IRSG) and Accenture, we explore the data challenges for ESG Rating providers in the market currently. Our recommendations call for increased clarity, transparency, and global coordination in approach. While some may instinctively shy away from this technical side of the task, the devil is in the detail. The risk otherwise could be accusations of failure to take stakeholder demands seriously, or worse still of ‘greenwashing’.

With the data to hand, businesses can build out their ESG messaging and engagement plans to communicate on the issues that matter to them. This should vary across industries; for energy firms it may be about the efforts to decarbonise, for manufacturing firms it could be supply chain concerns, for pharmaceutical firms the challenges of building a resilient healthcare system for the future. This variety should be welcomed in driving forward purpose-led businesses.

In time, as the ESG agenda matures, we can expect that the acronym will again split out into its constituent parts, with firms facing different timeframes and pressures to address environmental, social and governance concerns. With regulators asking for increased levels of disclosure, the scrutiny that firms are under will also intensify. Communicating on ESG issues with clarity, consistency and credibility will be crucial for firms to transition from just talking the talk to meaningfully walking the walk.

This article appeared in the Cicero/amo February 2022 newsletter.

This week, the European Commission published a package of proposals on energy consumption, climate change and transport. The texts published complement the ‘Fit for 55’ package presented in July, continuing the Commission’s mission to deliver on the European Green Deal.

The Commission is doubling its efforts to tackle emissions from the buildings and transport sector, two sectors that have lagged behind in reducing emissions. Notable announcements include a revision to the Energy Performance of Buildings Directive, along with several publications promoting sustainable and smart mobility.

The Commission is also proposing a revision to the functioning Third Gas Package, a timely update given the EU’s new political interest in hydrogen, as well as the ongoing energy crisis. It also presented a Communication on encouraging sustainable carbon cycles within the European economy, setting out how the Commission seeks to support carbon farming as an economic activity.

Cicero/amo’s EU team have prepared an overview. Please click here to view it.

Please do get in touch if you would like to discuss any of these files further.

We have seen the Government use the momentum of the COP26 presidency to place the UK as a world leader in green finance, with hopes for the country to become the first Net Zero financial centre. In the landmark ‘future of financial services’ speech in November 2020, Chancellor Rishi Sunak detailed his goal to ensure the UK leads the world in “shifting finance towards a Net Zero future”.

Amid this ambition for the UK to be a world leader on green finance, questions remain around whether developments so far and the UK’s proposed green finance timeline have placed the country on track to achieve this aim, with a recent report from the New Financial think tank showing the City of London falling behind its EU counterparts across the majority of Environmental, Social and Governance (ESG) metrics.  The Cicero/amo team have prepared an overview outlining the state of play of green finance and a lookahead of key developments to expect in 2022.                               

Please scroll down or click here to access Cicero/amo’s overview of green finance in the UK.

We hope you find this document useful and please do get in touch if you would like to discuss further.

Numerous environmental and social challenges were brought into sharper focus by COVID-19 in 2020. The pandemic highlighted crippling economic inequality, failing  healthcare systems, and an increasingly fragile macroeconomic landscape – all underpinned by the rising urgency to act on climate change. It also caused a leadership shift in the corporate world: Environmental, Social, and Governance (ESG) went from being a ‘nice to have’ aspiration  to becoming a series of active demands required by investors, employees, and third-party stakeholders alike. Business leaders can no longer hide from evaluating, or having others evaluate, their mission, execution, and output based on ESG factors.

The global health emergency helped demonstrate how the climate crisis could unfold, urgently raising awareness and resulting in collective action that prioritises a green recovery made up of investments that help accelerate economic recovery while also enhancing social equity, such as in renewable energy, resilient infrastructure, and social impact. Consequent investor appetite for green investments has further encouraged public companies to illustrate how their values closely align with the cause. 

For example, a group of investors introduced Climate Action 100+, a net-zero company benchmark that assesses the world’s largest greenhouse gas emitters on progress toward the net-zero transition. Investor signatories now represent $50 trillion+ in assets under management, which continues to rise. On the policy side, Europe’s new Sustainable Finance Disclosure Regulation approved earlier this year set out specific rules for how and what sustainability-related information public firms need to disclose, alongside the Task Force on Climate-related Financial Disclosures (TCFD) Reporting becoming mandatory in the large UK-based firms from next year.

‘Green’ has historically been eponymous with ESG, despite only representing one part of it. However, the pandemic highlighted the need for responsible businesses to consider their social and governance impact too. This paradigm shift catalysed a series of events, such as increased stakeholder demand for measurable steps taken towards promoting cultures of diversity, inclusion, and belonging. Meanwhile, board governance has been tackled for systemic gaps in representation, encouraging regulators worldwide, such as the UK’s Financial Conduct Authority (FCA), to set out proposals that would require listed companies to disclose and explain their levels of diversity in senior management and boardrooms. 

From trillion-dollar asset managers to bourgeoning startups, we’ve seen ESG transform into a distinguishable part of many business’ communication activity. It all sounds great, but, as the adage goes, talk is cheap. Conveying authentic corporate interests to improve general wellbeing, increase diversity across organisations, and reduce the effects of business on the environment, is quite difficult. Moreover, it has led to greenwashing. 

While initially used to describe attempts to convey a false impression or provide misleading information about how a company’s products are more environmentally sound, today the term is broadly used to describe any practice towards making brands and corporations appear more sustainable than they really are. Think businesses who gratuitously promote ESG practices, firms that overstate promises to investors, and giants who are reluctant to disclose their data. 

Communicating ESG practices and more importantly, how corporate actions positively impact the environment and the lives of stakeholders by taking into consideration ESG factors requires genuine and heartfelt effort. The occasional internal newsletter on World Earth Day, fanciful press releases, and big website banners that seemingly set corporates aside from their peers can come across as surface-level and even deceitful. 

Growing regulatory pressure and stronger public interest is creating a growing demand for transparent and standardised ESG data, reporting, and disclosure to weed out greenwashing. Oftentimes, PR is tasked with spinning negative stories and being the snake oil. Nevertheless, it’s so easy to fall into this relatively easy trap.  The task is threefold: promote honesty, transparency, and dialogue in meaningful ways, without trying to reduce ESG performance or ambition into a yearly slogan; ensure boardrooms have delegated representatives that move the needle from top-down; finally, hire agencies whose values actually align with what you’re trying to accomplish.

This article appeared in the Cicero/amo December 2021 newsletter.

For all the noise out of COP26, its significance will be measured not in Glasgow but in how the final agreement will be put into action going forward. One decision that did not catch the headlines, but could have seismic implications, is the creation of the International Standards Setting Board (ISSB). Finally, this new organisation will bring clarity to the ESG ‘alphabet soup’ and establish global consistency and comparability of sustainability standards.

For those in the know, the creation of the ISSB was warmly greeted. The announcement was welcomed by the UK alongside 40 international partners from 6 continents. The immediate endorsement of the ISSB will go a long way in it delivering on its future ambitions.

With this line in the sand, it marks a major development in improving the global consistency and comparability of company-level disclosure and lays the foundation for mandatory disclosure being introduced in the future. Now the ask will be for companies to get their own ducks in a row and start demonstrating their commitment to ESG by implementing what it means within their company.

Consistent data disclosure at a company-level will bring greater confidence to investors in comparing the ESG efforts of companies’ side-by-side. It is the enabler that ESG needs to move on from the threat of greenwashing and will demystify the talk from the action. There is no underestimating the internal effort that will be required by firms to align with these new disclosure standards. However, this process should be regarded as an opportunity to embed ESG thinking across the business strategy, rather than being viewed as another onerous compliance hurdle. At its heart, ESG efforts should be improving socially conscious outcomes, it is in this spirit that they must be implemented.

The current read from the ECB is that financial services firms are failing to see this opportunity, with ESG risks poorly integrated across their practices. Their latest report ‘The state of climate and environmental risk management in the banking sector’ requested self-disclosure on the current practices of 112 significant institutions, with a combined total assets of €24 trillion. The findings are damning, with none of the institutions seen as close to fully aligning their practices with supervisory expectations. Firms know they need to play catch up, 90% of those surveyed recognised that their reported practices are at best partially aligned with the ECB’s supervisory expectations. The ECB’s report makes clear that the window of opportunity in which companies have to improve is small, with the call that firms must now adopt a strategic approach and up the pace of progress.

While the volume of noise on ESG has risen throughout 2021, next year needs to be year of increasingly harmonised action from companies. No longer will words and commitments alone be sufficient, with greater disclosure requirements soon to discern between the real progress companies are making. 

After two weeks of negotiations and two years of preparations, the final outcome of COP26 was determined by two powerful countries pushing for last-minute changes on two key words. By demanding that the pledge to “phase out coal” be replaced with one to “phase down”, India and China blindsided negotiators and undermined the collective process, not least in that it now makes the goal of “keeping 1.5 alive” far less achievable.

This intervention came in the final hour of the negotiations, a move which led many countries to express their dissatisfaction with the underhand approach adopted by India and China. It pushed COP President Alok Sharma – who has seen himself from the start as a champion of the most vulnerable nations – to apologise to those smaller countries who will be impacted most severely by climate change. In a press conference on Sunday evening, Prime Minister Boris Johnson “fully and humbly” accepted that the conference had not delivered the “full solution” to climate change but acknowledged that this is “the nature of diplomacy”, alluding to the consensus approach that guides the UNFCCC process.

However, ever the optimist, Johnson stated that the world is “undeniably heading in the right direction” and, to an extent, this is not entirely Government spin. Although the language was diminished, it marks a historic moment, as it is the first climate agreement to explicitly reference fossil fuel as a key driver of climate change. The conference also finalised key parts of the Paris rulebook, such as agreeing to establish an international carbon market and setting up processes to discuss increasing financial assistance for developing countries in the coming years, which has long been a key sticking point for negotiators.

Furthermore, the ratchet mechanism has been revised, with countries agreeing to return annually with amendments to their Nationally Determined Contributions (NDCs), or national plans to reduce emissions. This was formerly every five years, as agreed under the Paris Agreement, meaning that pressure can now be more frequently applied to the big emitters. While it will be difficult to rewrite the commitment that has now been adopted, the US Climate Envoy John Kerry commented after the conclusion of the final plenary, “I’ll take phase it down and take the fight into next year”, signalling an intent to continue these difficult conversations for years to come.

So, what comes next? The UK’s presidency of the COP doesn’t end here. Alok Sharma’s term as President officially began on 31^st October and will continue until COP27 begins in Egypt in November 2022 (7^th to 18^th) as he works in tandem with his Egyptian counterpart. Given that the conference will be held in Africa, under the UN’s system of regional rotation, the overall focus will move to adaptation and mitigation, with Egyptian President Abdel Fattah Al-Sisi making it known that he wants special consideration for the impact of climate change on the continent.

Finance will also continue to underpin all discussions on climate change and, with the issue being so integral to the ongoing success of future COPs, it is likely that the UK Government’s focus will turn to business for financial support in the domestic transition. The UK is already providing £11.6 billion in climate finance for developing nations over the five years to March 2026 and, according to Chris Stark, Chief Executive of the Committee on Climate Change, the UK may have to pledge billions more pounds to help other countries to cut emissions under the Glasgow deal. If the Government is focused internationally, it may expect an increase in domestic support from business to help push forward the UK’s net zero transition.

And it is businesses that have demonstrated they are more fleet of foot than governments in the transition to net zero. The unprecedented involvement of the business community at COP26 has now set the standard for future summits, with many businesses already considering their involvement in COP27. Furthermore, it cannot be denied that the disappointment at the final hurdle will double the pressure for business and governments alike to keep working beyond Glasgow. The UK Government has made it clear that it has high expectations for the climate-related disclosures of financial institutions and listed companies and will continue to push for UK businesses to lead the way in terms of global standard-setting in the years to come. For example, the Treasury-led Transition Plan Taskforce will be reporting on plans to make it mandatory for businesses to publish clear deliverable plans to meet net zero by the end of 2022.

As President of COP26, the UK Government has always made it clear that this COP has been about implementing the decisions of Paris and not being Paris. While it may not have succeeded in every area, the challenge the UK’s presidency faced was significant and, while it wasn’t a resounding success, it certainly wasn’t a failure.

You can find the final outcome documents from COP26, including the Glasgow Climate Pact, here.