Published on May 26, 2020

Amir Sethu (FCA)
Head of Sustainability and ESG, MS Amlin

Will the ESG / sustainability agenda continue to gain traction or will the fallout from the pandemic, and the availability of very cheap oil, create more reasons to kick the can down the road? Personally, I believe it would be a mistake to put this important topic on hold until the pandemic is ‘dealt with’. Whilst market conditions will fluctuate, let us not forget:

• We have all been aware of environmental issues for a number of years – the extent of the problem and its consequences are well documented.

• Social issues were previously acknowledged but were neither prioritised nor explicitly linked to progress because the financial incentives were simply not there.

• Good governance ensures purpose and leads to good decision making, which drives improved social and environmental outcomes; good governance is essential.

The pandemic is a stark reminder that stressed societies cannot function effectively. ESG is the best preventative defence against societies becoming stressed, irrespective of the root cause (e.g. diseases, droughts, extreme weather events, conflicts, poverty, inequality, social exclusion or famine).

Progress

The astute leaders recognise they can’t ignore ESG and, those with foresight, see it as something they can use  as a differentiator that creates a competitive advantage (e.g. healthier societies, more votes, an aligned sense of purpose, greater employee motivation, lower costs, higher sales, cheaper energy, enhanced reputation for wanting to do the right things and higher investment returns). In respect of the latter, ESG investments have outperformed the wider market during the pandemic, principally because ESG funds are not correlated to oil and more aligned with large technology stocks, which have outperformed the markets. What we are lacking, however, is consistent policy and interventions, adequate infrastructure and innovation and connected incentives – all aimed at shifting consumer behaviours.

 In the absence of any semblance of alignment between the US, China and Russia – who have the power and influence to successfully implement global solutions to global problems – we need to rely on corporates and their investors to lead the change because they have the capital and clout to make it happen. Over the last few weeks, there have been some helpful endorsements of ESG by asset managers and well known multi nationals corporations, representing various industry sectors. However, commitments are easy to make, particularly when you’re pledging to long term ambitions that you may not be personally responsible for delivering. The easy bit is communicating ideas and ambitions; the challenge is translating them into an actionable strategy (e.g. a fossil fuel phase out plan).

Putting it into practice

Lendurance was founded upon on an ethical purpose of helping ASEAN SMEs that may not be eligible for bank loans to obtain finance and use the funds to innovate, build resilience, grow and realise their potential. This not only helps them create economic growth, but also encourages social progress, job creation, stability and collaboration in the region. Lendurance believes ESG risk is business risk, focuses on creating value and has concentrated on application of ideas through actionable strategies. Lendurance built a framework to encourage SMEs to change their behaviours by incentivising them to do so. The approach is easy to understand and applicable to SMEs at a practical level. Focus has been on where Lendurance can lend to have most effect and use ESG to drive demonstrable change in SMEs at a reasonable cost (e.g. ensuring SMEs provide training for all employees; and that they comply with applicable regulations on emissions, recycling and waste). For many of the risk indicators used in Lendurance's framework, government subsidies and grants are available to help SMEs change.

The challenge is that there is not a single, common and globally adopted ESG standard. This is a problem because often companies are run by accountants and accountants like clarity and certainty; they can be high on logic and low on empathy and emotion. It also can lead to widespread views e.g. MSCI score Facebook high on their ESG index because of low emissions and how they treat employees; S&P have a different view due to privacy and transparency concerns. Lendurance decided to use the UNs Global Compact (UNGC) as a reference standard and baseline measure, against which progress could be measured. The UNGC suggests 10 broad principles based on human rights, labour, environment and reducing corruption. The principles are straightforward, aim to drive business awareness and action, and provide small steps towards bigger and better aspirations. In light of COVID-19, Lendurance has recently adapted its framework to support SMEs by providing guidance on how to navigate the pandemic.

Conclusion

ESG risk is business risk – Integrating ESG within business as usual can drive greater transparency, better risk management, improved long-term performance and a stronger, more valuable brand.

Actions speak louder than words – take small steps aimed at shifting behaviours and making demonstrable changes at a practical level, both within your organisation and amongst your customers.

The fundamentals are: 1) Good governance; and 2) Having a purpose (that goes beyond just making money) – There are multiple reference standards; use them to help shape your approach.

Consistency is important – green washing / window dressing will come back to bite so avoid it; each decision needs to pass the “does it align with our culture, values and purpose?” test.