Everyone you talk to agrees environmental, social, and governance (ESG) is critical to finance. Where people differ, though, is how best to achieve the goals this timely initialism sets out to capture.
A third of the world’s assets under investment have made ESG commitments under the Net Zero Asset Managers Initiative.
ESG sustainable financing
ESG’s forerunner was corporate social responsibility (CSR).
“There was a lack of maturity in the market, and a lack of readiness. Everything accelerated in 2020, marked by the Blackrock announcement in January 2020,” Workiva’s director of growth solutions Natalia Kaleta-Schraa, said.
Blackrock’s CEO Larry Fink letter declared a “fundamental reshaping of finance”. It highlighted concerns around climate change and disclosure – while also setting the scene for increased socially responsibility investment decisions.
Blackrock would be more likely to vote against boards where they fail to make “sustainability-related disclosures”, Fink said. “Disclosure should be a means to achieving a more sustainable and inclusive capitalism.”
ESG is not just about planting trees, Kaleta-Schraa said. “It’s a part of the core strategy aimed at having access to sustainable capital. It’s about producing less carbon but also about what are the company’s strengths, and where there is room to do better, what can be offset.”
Workiva provides companies with the technology tools to make investment strategies and financial performance disclosures to regulatory bodies easier.
“We see a shift in the market,” said Kaleta-Schraa. “We’re helping customers put together sustainability disclosures. Early efforts had sometimes seen vanity projects or a genuine focus on providing data, but in ways that didn’t provide the required transparency.”
These efforts had tended to steer clear of metrics and were largely up to the discretion of the companies. “Investors are now looking with more scrutiny. That fits well with what we do and there’s a synergy with financial reporting.”
The question of disclosure has migrated upwards, Workiva’s senior director of product marketing Steve Soter said.
“If you’re going to raise capital, investors will want ESG metrics, it’s not just communications anymore. The CFO is participating – and companies need help with how to manage data and best practices. It’s a rapidly changing landscape.”
Operating in financial markets requires ESG compliance – even while the sector lacks nuance.
There has been a growth of companies trying to shed light on the problem through analysis of ESG compliance. Conclusions can vary widely, which can have a serious impact on a company’s ability to secure financing.
Trying to rate companies is “a bit of a serious business and a quack business at the same time”, said Kosmos Energy’s vice president for sustainability Mike Anderson.
“There are some deep deficiencies among rating agencies. It’s hard to get looked at properly as a small company. That is a problem because investment vehicles use these rankings as standards, without necessarily looking into the company,” Anderson continued.
He gave the example of scope 1 emissions. Kosmos may drill no wells one year, then three the next, at which point it appears the company’s emissions are increasing. “We can mitigate that and reduce that. But rating agencies want to track a downward trajectory and can’t explain those.”
Companies have to engage with the ratings agencies but also the banks who use them, the Kosmos executive continued.
Even the world’s largest oil companies must jump through ESG hoops. National oil companies (NOCs) have turned to raising bonds for cash – opening them up to ESG…