with Elyse Douglas, Senior Scholar with the NYU Stern Center for Sustainable Business & Rolf Lehmann, Group Treasurer of Vetropack
Without a doubt, climate change is the ‘hot’ topic of the century: from its ramifications for crop and water availability, to the damage it’ll cause to biodiversity and human health, this is the one crisis that will affect us all. But while personal responsibility and sustainable policies are at the core of effective mitigation, when it comes to disclosing corporations’ impact on the planet, one thing is clear: “The data we have is not very good”, says Elyse Douglas, Senior Scholar with the NYU Stern Center for Sustainable Business. “The majority of environmental impact information is reported in company’s Corporate Social Responsibility reports with are not audited and the reporting is not standardized making comparability difficult.. Without quality data, we have no way to assess how effective or ineffective climate action is or the impact on the financial results.”
To address these issues, governments all over the world are turning their attention to ESG (Environmental, Social, and Governance) reporting and the regulation needed to ensure accountability in the fight against climate change.
Used to describe corporations’ commitment to transparency, responsibility, and positive impact on society and the planet, ESG as a concept has existed since the early 2000s – but widespread push for companies to disclose information on those criteria has only taken place in the last decade. 2024, in particular, has set the scene for change, with standardised reporting taking effect or being incorporated into legislation for the UK, EU and the USA, with countries like Japan, Hong Kong, Singapore and Australia following suit.
In addition to consulting with Elyse Douglas, we obtained quotes from Rolf Lehmann, Group Treasurer of Vetropack. Below, we’ll review the differences in legislation taking effect in the EU, UK and USA in the coming years, before turning our attention to the tangible challenges and opportunities that ESG poises for banks and companies alike.
Global Changes
At the forefront of the current ESG reporting efforts is the EU, with the introduction of the Corporate Sustainability Reporting Directive (CSRD) on 5th January 2023. Following The European Green deal pledge of 2020 to cut net gas emissions by 55% by 2030 (compared to 1990), and to make Europe the first climate-neutral continent by 2050, the EU is expecting its first CSRD data in the coming year 2025.
UK is following its separate but parallel regulatory path on ESG, starting with discussions on the endorsement of the International Sustainability Standards Board (ISSB) and its two current standards – the IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures. ISSB endorsement – currently planned to be finalised by Q1 of 2025 – would allow the UK to launch its own Sustainability Reporting Standards (SRS) for UK-listed companies.
In the USA, intentions to regulate environmental reporting were announced by the US Securities and Exchange Commission (SEC) on 21st March, 2022. The final proposal arrived over 2 years later, on 6th March this year, after the careful review and analysis of 24,000 public comment letters. Under the regulation, companies will need to report on their climate action, the carbon emissions they are directly responsible for (Scope 1 and 2, discarding Scope 3), and risk assessment and mitigation plans related to extreme weather. The rules are set to come into full affect in 2026 and affect 95% of the market capitalization in the USA.
Though different in their own ways, these frameworks have in common the ambitious goal to overturn the current status quo and require unambiguous, measurable analysis of companies’ activity. But what does the arrival of stringent ESG regulation mean for the financial world – and are investors on board?
Challenges of Adoption:
A 2023 survey by McKinsey & Company, a New York-based multinational strategy and management consulting, found that investors understand the value of ESG initiatives, with over half (53%) stating such initiatives matter ‘regardless of effect on cash flows and risk’. With other surveys showing similar results on the growing importance of sustainability for decision-making and long-term risk assessment, the banking industry finds itself having to pay close attention to managing the new regulations. As Elyse Douglas confirms, “Banks in particular, have to focus on every dimension of ESG, and not only within their own operations but also throughout their value chain – both upstream, across supplier and partner activities, and downstream to their broader client portfolio.” So, what are some of challenges faced by banks and companies in the wake of tightening ESG regulation?
- Standardised is still not quite standardised
Though substantial steps have been taken to address ambiguity in reporting, problems remain, not just in data collection, but also validation and verification.
“I’d like to stress the importance of ESG centralisation,” tells us Rolf Lehmann, Group Treasurer of Vetropack, a glass container manufacturing company. “Each financial institution, each bank has built its own internal platform that has to be filled with all the same basic information. This makes the process time consuming and binds a lot of capacity we could use for other tasks… I absolutely do think that standardization would help us work [better] with multiple banks.”
Companies with different business models are liable for different environmental footprints: for example, a beverage company may need to put water stewardship high on their list, whereas an energy supplier may need to monitor emissions based on the type of fuel they use. For banks that manage huge portfolios of such companies, this means needing a high-level set of sustainability goals that can work across the spectrum. According to Elyse Douglas, “What makes the most sense in understanding company sustainability strategies and their impacts given [all this diverse] data, is to directly engage with those customers on the matters of sustainability (…) so that banks can make better decisions and assess how customers align with their own sustainability goals versus relying solely on their reported metrics.”
This problem is even more pronounced with international companies that need to plan for and navigate multiples of the over 600 different regulatory frameworks currently in existence, collect different data and report on different liabilities. “Global companies must make the decision whether to adapt to the most aggressive regulation [or have different reporting systems for each] jurisdiction,” explains Elyse Douglas.
- Data Silos
Another key challenge faced by organisations is the difficulty in gathering and analysing the information required for ESG reporting. With data typically siloed and spread across different departments, softwares, or collected in different formats and databases, environmental footprint can become difficult to consolidate and evaluate. Moreover, not all environmental impact is straightforward to quantify, which creates problems when needing to define clear KPIs and monitor progress. To address these problems, organizations need to implement bespoke solutions that streamline the processing of ESG metrics across the board and allow leadership to take a holistic approach to planning and environmental action.
- Understanding environmental initiatives’ impact
Without a unified strategy, companies’ operational disjointedness can have another side-effect – the benefits of sustainability can become overlooked. “[For example], if a salesman comes to the procurement people and says ‘I have a product for you, and it does exactly what we used to sell you but it’s more energy efficient. It’ll cost you a little bit more, but it’ll save you way more in energy prices.’ The procurement people often don’t care because they’re only compensated based on cost and reliability of delivery,” says Douglas. She explains that a sustainability strategy executed in one part of the organization can impact the whole organization, without clear strategic alignment across the functional areas (sales, finance, operations, etc.), benefits go unidentified and opportunities for value creation are missed.
- Cost
Quality data collection requires time and resources, which can be especially difficult for smaller businesses. Luckily, most ESG regulations plan a phased approach to the reporting mandate, with smallest businesses given most time to adapt to the new rules. Nonetheless, companies need to be actively investing in their reporting processes, as according to a 2024 survey by KPMG, nearly half (47%) of businesses continue to use spreadsheets for their data aggregation. As the requirements for ESG disclosure evolve, companies will need to invest in training and educating staff, creating ESG-dedicated roles, and incorporating softwares to improve the efficiency and quality of their data collection and analysis.
Benefits and Opportunities:
Quantifying environmental impact may pose challenges, but it also brings about tremendous opportunities: from reducing costs and expanding sales, to boosting productivity, encouraging innovation and ensuring organisations are better equipped to tackle risks.
- Identifying areas to maximise efficiency:
With comprehensive assessment of their environmental actions, companies will now be able to take a fresh look at their operations and determine greatest sources of waste or loss and work towards adjusting their processes accordingly. With the right data at hand, businesses can identify areas in their operational chains that can be strengthened to provide long-term returns.
“We were working with a company in the Southeast that uses a lot of water in its process,” Douglas tells us. “One of their key sustainability strategies was water stewardship even though there is not cost for water (…). What they found when they looked deeper into their operations was the more water they used, the more energy they consumed and the more wastewater was produced. So, by having a strategy to reduce their water use, they were able to save in these other areas [such as energy and wastewater disposal cost].”
Companies are beginning to take note of the improved efficiency provided by sustainable action. When asked about his view on Vetropack’s environmental strategy, Group Treasurer Rolf Lehmann said: “We have an in-house ESG Manager who is defining a sustainability strategy(…). I’m absolutely convinced that [the strategy] will lead to an improved efficiency at our plants which also goes hand in hand with our goal to reduce CO2 emissions.”
- Increased Sales and Products
Sustainable products are rapidly growing in demand. The 2023 Sustainable Market Share Index™ found that sustainably marketed products – a mere 18.5% of total sales – represent nearly a third of the growth in the consumer packaged goods (CPGs) categories covered. Meanwhile, Kingfisher recently reported that sustainable product made up nearly 50% of its sale this year. With buyers opting for alternatives where companies can prove climate action and awareness, ESG allows businesses to take advantage of the trends and focus on their practices.
Moreover, ESG is creating a new market for financial and banking products. From accounts that can demonstrate green alignment, to climate-change driven investment products and apps, the opportunities for innovation and success are unquestionable.
- Risk:
Managing risk is an essential part of any successful business strategy, and as the climate continues to change, sectors begin to feel the impact of those changes throughout the supply chain and beyond. Crop production liabilities, material scarcity and logistical disruptions in shipping are only a few of the concerns businesses may face due to extreme weather. With robust ESG assessments in place, businesses can evaluate their vulnerability and implement mitigation strategies to protect against potential disruptions or losses*.
- Talent acquisition:
Finally, as boomers continue to move into retirement, the workforce is becoming increasingly dominated by younger generations – and by 2025, three quarters of the global workforce will be comprised of millennials. Millennials and Gen Z care deeply about the environment, with half checking an employers’ environmental policy before applying and 40% prepared to switch jobs over sustainability concerns, according to Deloitte. With these statistics at hand, companies with better ESG metrics stand to gain a competitive edge on the talent market.
Though ESG implementation may require adjustment and adaptation for banks and businesses, with the right strategy and awareness of the market, ESG practices can open the door for new opportunitiesand engage consumers. Undoubtedly, organisations with the mindset to embrace these changes will be best prepared to take advantage of the opportunities presented by ESG data.
* Lobell, D. B., et al. (2011): “Climate Trends and Global Crop Production Since 1980” in Science. This paper analyzes the relationship between climate trends and agricultural production globally, highlighting the sensitivity of crops to temperature and precipitation changes
