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The Trading Mesh

Round Table Report: Do Good to Do Better

Fri, 24 Nov 2017 03:52:00 GMT           

November 2017. The Realization Group and Verne Global hosted a round table discussing 'How a focus on ESG can improve financial performance as well as the climate'.

The data to independently verify the environmental, social and governance (ESG) performance of businesses it still in its early stages. But advances in technology will make a clear link between a focus on ESG and improved financial results, as well as an improved climate, according to speakers at a Verne Global round table.

How will the USA pulling out of the Paris Climate Change agreement affect the move to sustainable business models? What can businesses, particularly within the financial services, sector, gain by focusing on ESG? How can firms best report their ESG metrics to investors and how can they be independently verified? Will firms with better ESG performance find it easier to raise capital?

These were some of the questions discussed by a panel of speakers at a round table hosted by Verne Global in London on November 1. There is a large body of academic evidence that shows that sustainability leads to improved financial results, but in a lively debate contributors sought to define what makes businesses sustainable and how to deal with the complexities of measuring, and valuing, ESG performance.

With the discussion led by Verne Global and with ESG experts including Dana Hanby of Allcot and Trevor Allen of BNP Paribas Securities Services, there was a natural focus on the ability of data to quantify sustainability. Companies currently self-report their ESG performance, which is very hard to independently verify, particularly throughout a firm’s supply chain. This is a challenge that needs to be overcome to allow investors and asset owners to engage.

The debate began with the possible impact of the US pulling out of the 2015 climate change agreement agreed in Paris, when 195 countries adopted the first ever legally binding deal to keep global warming well below 2.0C. One participant noted that since President Trump withdrew the US from the treaty, a number of mayors of large cities and state governors have pledged to continue to make progress to meeting the target. In addition, after Trump’s announcement, financial institutions voted against Exxon Mobil management to force the oil giant to report on the impact of climate change on its business.

Round table participants agreed that quantifying the balance sheet impact of ESG is a growing need and will require new types of data. Analysts and investors will also have to develop additional skills in order to combine examination of ESG risks with standard financial analysis. One example given was of comparing the change in a company’s carbon footprint against growth in revenues. If the carbon footprint is growing more than revenues, then the business model is unsustainable.

Since the round table, Deutsche Asset Management has announced the launch of a new set of ESG data. For the first time the fund manager will be able to measure the threat to investment portfolios from climate events such as rising sea levels on coastal and offshore oil and gas infrastructure, how floods could disrupt supply chains, or whether extreme heat affects labour productivity in the agricultural and construction sectors.

Four Twenty Seven, a climate intelligence advisory firm based in California, has mapped the physical locations of more than one million corporate facilities around the world so their exposure to catastrophic events can be calculated from climate models. Deutsche Asset Management will incorporate a company’s physical climate risk equity score within new investment products, in order to be able to model the implications of climate events for individual companies in its portfolios.

There was also discussion on how hard it is to measure social risk, as no models have yet been developed. Consumers will immediately stop buying a product if it becomes linked to a health scare, but a company may not be given the time to change its production model.

Independent ESG monitoring of a company’s supply chain is also needed. For example, Apple has approximately 127 companies in its supply chain, any of which could contain ESG risks.

One participant noted that it is not in a company’s interest to report accurately if they perform poorly on ESG measures, in the same way that people never tell their doctor how much they really drink.

Green- washing was acknowledged as an important issue. Another participant noted that, as a small company, they could not get financing for a green project in Africa, but a large mining project could raise the funds and at the same time burnish its ESG credentials.

There were also concerns that ESG reporting is used purely as a public relations exercise. However, Verne Global gave the concrete example of locating its data centre in Iceland in order to access the country’s 100% green geothermal power, allowing costs to be 80% cheaper than in large cities such as London. German auto company BMW designed their i-Series using data in Iceland. Although BMW had a fantastic story in designing an electric car using renewable energy, the firm also had concrete benefits through saving 82% of their energy costs and 3,200 tons of carbon.

Another concern was that companies self-report progress towards meeting the United Nations’ Sustainable Development Goals, without any independent checks. Countries adopted the United Nations’ 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals in 2015. Governments and businesses are working with the United Nations to mobilise capital in order to reach the objectives.

Fund manager Lyxor has launched the first exchange-traded fund in Europe that invests in the 150 top- ranked firms in terms of gender equality, one of the Sustainable Development Goals. Lyxor also offer ETFs that invest in other UN goals - clean water and sanitation, affordable and clean energy and climate action (green bonds). In addition, HSBC has pledged to provide $100 billion in sustainable financing and investment by 2025, as well as projects that support the implementation of the UN Sustainable Development Goals.

So the optimism that the momentum towards a continued focus on sustainability looks justified. Regulators, exchanges and index providers are working towards standardising ESG reporting while the shareholder pressure on ExxonMobil seems to indicate a cultural shift. The round table participants were confident that new independent data sources will be developed so that the impact, and true value, of ESG can be identified and measured. To avoid charges of green-washing, there needs to be high standards for ESG reporting, independent verification of the claims and penalties for non-compliance in order for progress to be made, which cannot happen soon enough.

This report was first published by Verne Global