The Great Reprioritisation – why ESG is moving up the corporate agenda

As the world becomes more aware of its collective responsibilities, focus on the environmental, social and governance (ESG) credentials of an organisation has now become an essential puzzle piece in the corporate agenda. In our latest True Story, we cover the three primary factors driving this reprioritisation.

The Great Reprioritisation – why ESG is moving up the corporate agenda

/ Insight / 5 Oct 2022

As the world becomes more aware of its collective responsibilities, focus on the environmental, social and governance (ESG) credentials of an organisation has now become an essential puzzle piece in the corporate agenda. At True, ESG shapes everything we do. Working alongside our corporate partners and portfolio companies, we've seen first-hand the need to prioritise ESG strategies and the impact this has on the bottom line, whilst navigating - and adjusting to - the rapidly evolving regulation in this space. There are three primary factors driving this reprioritisation.

Reactivity to regulation

Europe continues to be at the forefront of the regulatory landscape in this space and heavily influences the picture in the UK and the rest of the world. In 2018, the European Commission published its far-reaching action plan on sustainable finance, which had implications for all businesses, particularly around operating and reporting.

Since then, the European Union has successfully implemented three major related regulations which aim to enhance transparency around reporting benchmarks, as well as addressing greenwashing concerns. Alongside these regulations, lies the Taskforce on Climate-related Financial Disclosures (TCFD) which seeks to improve reporting of climate-related financial reporting.

Beyond reporting and disclosure, there are a range of regulations requiring companies to adapt how they operate. There are several environmental tax relief schemes encouraging businesses to operate in a more sustainable way, such as the Plastic Packaging Tax and the Climate Change Levy.

Lower costs of capital

These regulations may seem onerous, but there are well-documented benefits to aiming high on ESG scores.

An extensive four-year study by one of the leading ESG reporting companies MSCI, found that businesses with higher ESG scores, on average, experience lower costs of capital compared to businesses with poorer ESG scores. This was also featured in a study by McKinsey, which evaluated more than 2,000 academic studies to conclude that a better ESG score translated to an average 10% lower cost of capital.

ESG is a top priority for fund managers and is increasing pressure on corporate leadership to set and meet ESG strategies and targets. Achieving profit and hitting revenue goals alone are no longer sufficient success metrics, and 86% of Eurozone CEOs felt that ESG is an even more important driver of value than revenue growth.

The cost of debt is also increasingly driven by performance, versus ESG-related factors. For example, the John Lewis Partnership has recently agreed on a new £420m credit facility, with the interest rate tied directly to three sustainability targets.

The driving force: consumers and employees

Consumers and employees are some of the largest driving forces behind the demand for better ESG practices from the companies they shop with and work at.

Consumer behaviour is changing; a study released last year in the journal Environmental Management concluded that 79% of people surveyed were willing to pay a premium for sustainable food products, a figure that is typically higher for younger demographics. Even back in 2016, almost two-thirds of millennials stated they would consider a company's social and environmental commitments when deciding where to work.

Globally, we're in the early stages of this ESG revolution, and the degree to which consumer and employee demands are driving change for the corporate agenda varies. In some cases, it looks to invoke less pressure and be less potent than regulation.

Price, convenience and quality remain the biggest factors influencing purchasing decisions, and many sustainable products are not yet meeting the high bar of all three combined. This, teamed with inflationary pressures may widen the gap between intent and evidenced behaviour further, causing changing priorities.

There is no doubt that the increasing focus on ESG is a step in the right direction. The ESG ball is rolling with no signs of stopping, gathering its own regulations, pressure from governmental bodies, consumers and market forces driving the flow of capital. But these additions are reactionary, and only time will tell how businesses leverage the higher prioritisation of ESG to differentiate their own growth strategies and operating models. Fortunately, many entrepreneurs are developing technology that can, and will, play a key role to help corporates address some of the biggest opportunities and challenges in this area through impactful innovation.

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