With ESG requirements constantly evolving, we aim to bring awareness to the significance of ESG regulations, risks, and growth opportunities, and we are here to help deliver assured results.
Understanding ESG Risks and Opportunities REDEFINING YOUR JOURNEY TO SUSTAINABILITY
SGS.COM/ESGASSURANCE
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This document aims to bring awareness to the significance of ESG regulations, risks, and growth opportunities. Because ESG requirements are constantly evolving, we need to deliver assured results and report organizational performances and impacts carefully. Abstract
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EXECUTIVE SUMMARY Even though sustainability reporting is becoming more widespread, many organizations are still only reporting the bare minimum. This opens these corporations to costly risks, a lack of support from shareholders, and a poor public image. To decrease these risks, companies need to prioritize ESG reporting. For corporations, investors, and rating agencies that value ESG factors, they have to manage a landscape full of challenges. Corporations face greater scrutiny from the public on their ESG performance and are also struggling with not having a standard way to report ESG activity. Investors similarly deal with a lack of standardization and are struggling to evaluate material ESG risks. Rating agencies face the challenge of providing valuable, quality data when there are no uniform requirements for ratings. They also have to deal with an ever-changing world and how these changes impact ratings.
These challenges and risks are essential to incorporate into management plans, but they should not be taken as the complete picture of the state of environmental, social, and governance programs. There are plenty of opportunities for ESG growth. Emphasizing ESG initiatives can also benefit corporations, including less regulatory and legal pressures and improved employee productivity. Now is the time to manage these ESG risks and reap the benefits of growth opportunities. SGS offers ESG verification and assurance services, enabling corporations, investor groups, and rating agencies to provide high-quality results. We also help boards of directors and C-suites continually grow in their ESG management and certifications. By placing environmental, social, and governance practices at the forefront, corporations can become leaders in their industries.
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ESG refers to the environmental, social and governance criteria and goals that a company strives to achieve to demonstrate the value they bring to stakeholders and society. ESG criteria are continually evolving with new regulations and guidance being developed. There are moves towards a more standardized in the future but that there is more emphasis now than there has ever been before on the need to disclose ESG issues which have financial implications. Defining ESG Criteria
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ENVIRONMENTAL CRITERIA Environmental criteria consider how a company performs as a steward of nature. Concerns in this category include how much pollution and waste an organization produces and how it handles reducing these issues. Additionally, this element examines how a company uses renewable energy sources and what actions they are taking to reverse climate change. SOCIAL CRITERIA Social criteria address how an organization manages social relationships with employees, suppliers, customers, and the communities where it operates. Concerns covered here include diversity, human rights and healthcare, and the impact that a certain company has on its social environment in the community. GOVERNANCE Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. It examines how the executive management and the board of directors address stakeholders’ concerns and interests and the influence base on the structure of the board of directors, shareholders’ rights, and transparency.
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The Evolution of ESG
ESG criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest. ESG criteria can help investors avoid companies that might pose a greater financial risk due to their environmental or other practices. 96% of the world’s largest 250 companies report on their sustainability performance and 80% of N100 companies worldwide report on sustainability. The reality in which organizations operate is defined by megatrends like increased connectivity and mobility, climate change, the depletion of natural resources, rapid urbanization, etc. Stakeholders, including consumers, investors, employees and society in general, demand companies go beyond mere compliance with legal requirements and instead have a positive impact that reflects a true commitment to sustainability leadership. This requires an active contribution to the UN Sustainable Development Goals (SDGs) and to embark on a journey towards value creation across the whole business model.
2006 UN PRI is established with 63 signatories and 6.3t AUM
2011 SASB forms with a mission to establish standards for ESG reporting
2009 Global Impact Investing Network is launched
2017 Climate action 100+ TCFD
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2019 • October 15 compliance to PRA requirements • IORP II ESG criteria in investment decisions • Regulation on EUTaxonomy (EU-Ecolabel) • DWP regulation requiring pension schemes to have policy on ESG factors • SEC examination letter to ESG funds focusing on advisors’ criteria and methodology
2020 • EC launches an initiative to revise the Non-Financial Reporting Directive (NFRD) • Prudential Regulation Authority (PRA) publishes ‘Dear CEO’ letter to UK insurers regarding distribution of profits during COVID-19
2018 Asset managers petition SEC for stronger ESG disclosure standards
2021-2022 Full implementation of EU Action Plan
2019 UN PRB
2020 PRI Signatories TCFD reporting/ disclosure
2022 Mandatory TCFD disclosure in the UK
Milestone category: Voluntary
Mandatory
Significant ESG activity
Source: Ernst &Young
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Market Overview of ESG
With the demand for ethical and sustainable practices increasing among consumers and investors, the need for improved transparency and ESG reporting has also grown. Worldwide organizations have been meeting this demand, as shown by a recent report indicating 80% of companies disclose sustainability data to some degree. These organizations are reporting on the risk of biodiversity, climate risk and carbon reduction, and UN Sustainable Development Goals (SDGs). By reporting on these factors, organizations are taking responsibility. However, there is still room for improvement. Less than a quarter of at-risk companies worldwide report on biodiversity loss. Only 40% of organizations acknowledge the financial implications of climate change. And SDG reporting is often disconnected from business goals. Sustainability and ESG reporting have also seen significant growth with investing. The value of global assets related to ESG data increased to $40.5 trillion in 2020, triple the value it was eight years ago. Organizations are developing and reporting strategies centered around ESG themes to entice investors further and meet their demands for honest, sustainable practices. Not only are corporations creating these strategies, but they are also increasing their funding to support sustainable actions. The average amount of ESG funds worldwide is $250 million in AUM. Investors want to support organizations that prioritize sustainability and will critically examine their environmental, social, and governance reporting.
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CORPORATIONS
96%
80%
of the world’s largest 250 companies report on their sustainability performance
of N100 companies worldwide report on sustainability
INVESTORS
2020 global environmental, social and corporate governance data driven assets hit
Investments with environmental, social and corporate governance considerations are growing at
$40.5T
15%
RATINGS AGENCIES
2020 estimated environmental, social and corporate governance data & analytics market with USD is approximately
Market for environmental, social and corporate governance data is growing at
$750M
25%
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Why is ESG important today?
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Executives and boards of directors should be concerned with ESG reporting’s efficacy because it can offer several advantages to their businesses. On top of projecting a positive public image and aligning their practices with investor goals, organizations gain value by reporting on environmental, social, and governance criteria in the following ways:
1. Consumers are more likely to engage with companies that put environmental and social issues at the forefront. According to a McKinsey survey, 70% of consumers interviewed are willing to pay more for a green product that performs just as well as the non-green product. In another study, about half of the companies surveyed stated that business growth drove their sustainability initiatives. 2. Reporting on ESG reduces costs. By actually taking action towards a more sustainable business, corporations reduce raw material costs, water, and carbon costs, and manufacturing costs. Overall, their processes will be more efficient and less damaging on the planet. 3. Complying with ESG standards can relieve regulatory and legal pressures. Government action is less likely to be needed, and organizations could even experience governmental support. If companies refuse to adopt ESG practices, they could risk around a third of their profits to state intervention. 4. Employee productivity and satisfaction will increase. Organizations can attract quality employees who are eager to commit and stay loyal to a company that values environmental
and social matters. These employees will want to perform well when they feel they are personally having a positive impact on their society and planet. 5. Supply chain operations will provide more positive results. By caring for their suppliers’ well-being and treatment, organizations can see more quality materials and higher productivity. 6. By prioritizing sustainable initiatives, organizations can optimize their investment and capital expenditures. Capital can be allocated to opportunities with a greater return, such as waste reduction. It can also help companies understand how their investments in equipment, partners, or suppliers can impact their operations years down the road. Pursuing sustainable operations can improve a company’s bottom line. 7. Finally, corporations are afforded the opportunity to expand into new markets and existing ones because these corporations have developed trust with governing parties. These authorities are then more likely to permit access, approvals, and licenses.
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ESG reports and ratings disclose valuable information for boards and executives to manage company operations. These reports and ratings also help investors determine the potential investment risks of an organization. Even though this information is heavily reviewed, there are still inconsistencies in how sustainability data is disclosed and measured. Because of these discrepancies, corporations, investors, and rating agencies all face numerous challenges to following ESG standards. What are the ESG challenges and risks?
CHALLENGES CORPORATIONS FACE
CHALLENGES INVESTORS FACE Investors heavily rely on service providers for ESG ratings, and the lack of consistent, comparable data makes it difficult for investors to render an investment decision. The ESG data is also commonly combined with other investment strategies. It can be challenging to determine if these ESG factors are the most relevant in projecting a corporation’s long-term value. Investors are not presented with the most accurate portrayal of an organization’s environmental impact. They may also have gaps in their understanding of current material ESG risks.
CHALLENGES RATINGS AGENCIES FACE Raters face the challenge of providing valuable and quality data for investors to use. Since the data they rate are not restricted to the same standards as financial data, the quality of their methods is at risk of varying and not providing an accurate image of the corporation’s operations. The final assessments are not comparable between agencies. On top of a lack of uniform requirements, rating agencies also face the challenge of adapting ratings to accommodate relevant issues, such as how companies have responded to the outbreak of COVID-19 and the Black Lives Matter movement. Rating agencies have to manage multiple elements while staying abreast of current issues.
With consumers and investors putting greater concern on environmental and ethical practices, organizations are under great scrutiny for how they perform and disclose pertinent ESG information. However, corporations are still facing the challenge of not having a standardized approach to managing and disclosing ESG data. Many organizations are self- reporting using various ESG metrics, and raters are using different rating systems themselves. Additionally, corporations are finding it challenging to report non-financial ESG metrics along with financial metrics. Often, accounting data does not accurately portray the benefits sustainability initiatives had on a corporation’s operations.
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ESG Drivers & Challenges
Green Finance Provider, PE & Investor Groups • Increasing focus on non-financial risks and ESG disclosure • Absence of standardized regulations and guidelines • Uncertainty about regulation frameworks • Inconsistent data and metrics
ESG / Ratings Agencies • Credibility of data sources and accuracy of data on which ratings are made • Quality of methodology • Challenges to focus on relevant/ material issues • Inconsistent and incomparable assessments and ratings
To optimize investments and assets with positive ESG impacts
To improve the value and quality of their ratings / data
RISKS COMPLIANCE REPUTATIONAL FINANCIAL
To meet reporting requirements, especially public listing requirements, while meeting reputational expectations
Corporations • Increased scrutiny of company performance and disclosures • Information gap on ESG issues • No standardization of approach to ESG management and disclosure • Difficulties in aligning corporate activities with the SDGs
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SGS ESG Assurance Solutions Our ESG Assurance Solutions provide a comprehensive framework to help clients achieve their environmental, social and governance goals. Leveraging SGS’s expertise in compliance, verification and training services, we create tailored solutions that meet the individual requirements of the client.
ESG Verified Third party ESG risk evaluation, due diligence, data verification and report assurance to achieve high quality and assured results with external expertise and verification. ESG Optimized Advisory services for improved ESG disclosures or processes, management and performance with clear action plan solutions leading to ESG practice optimization. ESG Certified Performance evaluation based on SGS criteria and certifications under environmental, social and governance categories, leading to the issuance of an ESG certificate.
ESG Management System and Action Plan
ESG Disclosure Gap Analysis
ESG Data Verification and Report Assurance
ESG Certification
ESG Risk Evaluation and Due Diligence
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Why SGS? SGS has operated as an industry leader in
sustainability and ESG service provision for over 25 years. With expertise in all major industries, we understand each sector’s pain points and have the technical expertise and logistical capabilities to ensure realistic sustainability outcomes.
Global Technical Expertise & Network
Consistency of Service & Execution
Services Portfolio
1990s Begin offering Green Dove Award and SA8000
2000s Launch Sustainability Report Assurance Service
2010s Expansion of portfolio to include Equator Principles, Higgs Index, and more
2021 L aunch ESG Assurance Solutions
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Conclusion
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Now is the time for corporations to recognize the value environmental, social, and governance initiatives can have. Devoting resources to green practices, providing amenities to employees and communities, and improving their governments can significantly impact brand image, employee loyalty and productivity, and operational costs. Compromising sustainable practices in the name of financial targets destroys a company’s value. While corporations strive for improved ESG practices, they should be aware of the most significant ESG risks and growth opportunities. COVID-19 has changed the landscape of business operations, and the spread of this virus could shed light on the companies that prioritize ESG initiatives (or those that do not). Boards and executives should also note the increase in investments in emerging markets, the demand for reporting standardization, the need for reductions in supply chain CO2 emissions, and the heightened focus on social factors.
The growing ESG market is not just impacting corporations; investor groups and rating agencies also need to evaluate the changes taking place. Within the near future, they will be able to adopt new standardization practices for reporting. They will also need to consider government agendas for ESG issues. Regulators are gradually influencing the requirements of ESG practices and reporting. Investors and rating agencies will need to stay on top of these growing trends and ensure they are evaluating and providing accurate ESG data. With ESG priorities constantly evolving, no organization, investor, or rating agency can become complacent. Each party will need to continually evaluate the sustainability landscape, growing consumer concerns for environmental and social policies, and governance standards. SGS can provide verification, advisory and diagnostics services for rating agencies and investors to help them stay on top of ESG risks and to ensure they are working with reliable data. We can also help corporations stay up to date on ESG matters, aid in conserving resources and improve sustainability performance for a brighter future.
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COPYRIGHT NOTICE The information contained in this document represents the current view of SGS on the issues discussed as of the date of publication. Because SGS must respond to changing market conditions, it should not be interpreted to be a commitment on the part of SGS, and SGS cannot guarantee the accuracy of any information presented after the date of publication. This white paper is for informational purposes only. SGS makes no warranties, express, implied, or statutory, as to the information in this document. Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of SGS. SGS may have patents, patent applications, trademarks, copyrights, or other intellectual property rights covering subject matter in this document. Except as expressly provided in any written license agreement from SGS, the furnishing of this document does not give you any license to these patents, trademarks, copyrights, or other intellectual property. ANY REPRODUCTION, ADAPTATION, OR TRANSLATION OF THIS DOCUMENT WITHOUT PRIOR WRITTEN PERMISSION IS PROHIBITED, EXCEPT AS ALLOWED UNDER THE COPYRIGHT LAWS. © SGS SOCIÉTÉ GÉNÉRALE DE SURVEILLANCE SA – 2021 – ALL RIGHTS RESERVED - SGS IS A REGISTERED TRADEMARK OF SGS SOCIÉTÉ GÉNÉRALE DE SURVEILLANCE SA
REFERENCES 10 ESG themes for 2020: What will influence investors now? (2020). Retrieved March 17, 2021, from https://www.investmentbank.barclays.com/content/dam/ barclaysmicrosites/ibpublic/documents/our-insights/10_Trends_ESG_2020/Barclays- ESG-2020-Trends-Slideshow.pdf Baker, S. (2020, July 02). Global ESG-DATA driven assets hit $40.5 TRILLION. Retrieved March 17, 2021, from https://www.pionline.com/esg/global-esg-data- driven-assets-hit-405-trillion Chen, J. (2021, March 10). Environmental, social, and governance (ESG) criteria. Retrieved March 17, 2020, from https://www.investopedia.com/terms/e/ environmental-social-and-governance-esg-criteria.asp Henisz, W., Koller, T., & Nuttall, R. (2019, July 14). Five ways that ESG creates value. Retrieved March 17, 2021, from https://www.mckinsey.com/business-functions/ strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value Katz, M. (2020, October 19). OECD report Outlines challenges Facing ESG Investing. Retrieved March 17, 2021, from https://www.ai-cio.com/news/oecd- report-outlines-challenges-facing-esg-investing/ MacMahon, S. (2020, September/October). The Challenge of Rating ESG Performance. Retrieved March 17, 2021, from https://hbr.org/2020/09/the- challenge-of-rating-esg-performance Threlfall, R., King, A., Shulman, J., & Bartels, W. (2020, December 01). The time has come: The KPMG Survey of Sustainability Reporting 2020. Retrieved March 17, 2021, from https://home.kpmg/xx/en/home/insights/2020/11/the-time-has-come- survey-of-sustainability-reporting.html Watson, M., & Hagler, C. (2021, January 13). ESG: How mutual fund boards can manage risks and seize opportunities. Retrieved March 17, 2021, from https:// www.ey.com/en_us/wealth-asset-management/esg-how-mutual-fund-boards-can- manage-risks-and-seize-opportunities Whelan, T. (2020, August 17). Making a better business case for ESG. Retrieved March 17, 2021, from https://ssir.org/articles/entry/making_a_better_business_ case_for_esg
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ABOUT SGS SGS is the world’s leading inspection, verification, testing, and certification company. SGS is recognized as the global benchmark for quality and integrity. With more than 89,000 employees, SGS operates a network of over 2,600 offices and laboratories around the world. Enhancing processes, systems and skills is fundamental to your ongoing success and sustained growth. We enable you to continuously improve, transforming your services and value chain by increasing performance,
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