Integrating ESG factors: How a holistic approach is the only approach

People & Organisations / Navigating new forms of volatility
In a world where environmental, social, and governance (ESG) concerns are more pressing than ever, investors and companies have no choice but to pay attention to their ESG performance and risks. In an operating environment where increased regulation, reputation risk and changing expectations are all pushing ESG further up the organisational agenda, it’s now vital for companies to keep ESG front and centre in their human capital and investment strategies.
ESG has moved from a ‘nice to have’ to a must have
There are both push and pull factors making ESG a more important priority for organisations. From a regulatory perspective, boards are increasingly expected to report accurately across a number of ESG metrics. Take environmental impact for example. Many jurisdictions, (such as Taiwan, UK, New Zealand, Europe, to name a few) are considering or already require public companies to disclose specific mandatory climate change disclosures. This trend is set to continue, in March 2022, the US SEC proposed a new rule which, if passed in its current form, would dramatically increase the prescriptive disclosures required on climate-related disclosures.
Outside of regulation, recent market and community reactions to ESG controversies also highlight how it has become an area of tail risk management that companies need to develop strategies in to avoid the worse case scenarios. For example, when UK retailer boohoo.com made headlines for underpaying employees and failing to provide them with protective gear during COVID, their share price fell nearly 50% over a number of weeks from mid-June 2020 to early July 2020.
As well as protecting organisations from litigation and other financial risks, placing focus squarely on ESG also delivers significant benefits. Stronger connections to all stakeholders, including shareholders, employees and customers is just one positive outcome organisations can expect when they commit to ESG. Studies have also made the link between executing an ESG strategy with achieving reduced costs and improved productivity, as well as talent attraction and retention.
Prioritising ESG creates opportunity from a human capital perspective
In the context of heightened competition for talent, the role of ESG in human capital becomes even more critical. Results from Aon’s Eighth Global HR Pulse Survey show that talent shortages (86%) and high turnover (83%) are the top concern for HR leaders in 2022.
While pay continues to be a major driver of turnover, employees are also looking to align their work with their purpose and values. In addition to being a drawcard for talent, embedding ESG in human capital strategies can deliver other important benefits:
  • A robust diversity, equity and inclusion (DE&I) policy can help mitigate litigation, brand and reputational risk.

  • DE&I policies also contribute to building a diverse and agile workforce capable of adapting to the disruption and rapid change that defines today’s operating environment.

  • Firms that embrace ESG in their processes and benefits plans often experience productivity gains and a stronger employer brand, further increasing their ability to attract and retain talent.
How to avoid greenwashing?
From the perspective of a company brand and/or the perspective of managing investments, ‘greenwashing’ has risen as a real cause for concern given the growing gap between needing to appear conscientious and the amount of effort it takes to be conscientious.
While the temptation is to “tag on” some changes, a productive way to have conviction in this area and avoid greenwashing is to start with checking the beliefs of the organisation, the culture; using that to act as an anchor for policy development and subsequent interactions with other stakeholders.
Once ESG-related objectives are developed, and stakeholders agree why they are important, the next steps are to be proactive in gathering the information needed and engaging with stakeholders as required to meet the group’s objectives.
To illustrate this concept, in the context of an asset owner vetting and monitoring of investment products, there are different “levels” of information they could gather to reflect active ownership aligned to their respective objectives:
  • Investment performance, risk and return analysis.
    This baseline is vital for making informed decisions in the retention and selection of appropriate investment funds in the context of the portfolio.

  • The non-investment performance of the Fund is an important aspect of due diligence.
    Governance factors such as having robust trading and operating processes, counter party risk, independence from management, and succession planning need to be considered to ascertain the risk of the Fund’s operations detracting / failing. As is the case with all these “levels”, having such information empowers decision makers to take the opportunity to engage with the asset manager on these issues and raise standards accordingly.

  • A detailed view of the ESG-related practices of the fund manager and the ESG profile of the investment holdings.
    This provides a further opportunity to assess the resilience of the Fund. Our Aon ESG reporting dashboard presents analysis of third party ESG data but also looks beyond the numbers to investigate quality of ESG integration and stewardship. We carry out interviews with the manager, review due diligence questionnaires, and manager self-reported data to determine how robust the Fund’s ESG integration processes are and whether managers are appropriately engaging with the companies they invest in.
Being a responsible company and investor is high on the agenda for leaders and asset owners and is set to go higher still, driven both by increasing regulation and the potential it holds to drive long-term value creation and risk management. Taking the time to develop a clear and comprehensive strategy here provides the foundation for identifying opportunities to develop enduring value in an organisation’s human capital and investments.
Please contact our expert to start your ESG conversation:
Jonathan Taylor, Investment Consultant – International Wealth, Aon

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