ESG: a crucial topic in finance

Written by Chris Usher, Managing Director of BPP CI

What is ESG?

Environmental, social, and governance (ESG) are the key principles of performance that can be used to assess a company's or country's influence on society and environmental sustainability. Stakeholders, from investors and employees to consumers and governments, can decide how they interact with a company by understanding its strategy and performance in each area.

What is ESG reporting and why is it important?

There is an increasing sense of urgency to adopt a uniform strategy to address these issues by agreeing on standard metrics in each ESG area, which organisations will be expected to report on to demonstrate their commitment to improvement. This allows for meaningful and reliable comparisons between organisations, as well as an indication of their resilience to external variables like economic shocks or pandemic crises.

Governments and regulators around the world are enthusiastic to demonstrate just how serious they are about their plans for a greener, cleaner and fairer society. Amid claims of ‘greenwashing’ (where a company or government is disingenuous about its ESG implementation plan), there has been a huge focus on ensuring that companies and other entities report their climate impact, sustainability metrics and social impact honestly and clearly. The various ESG reporting regimes aim to keep companies and governments honest, in what is likely to be the most significant element to impact our society in 100 years.

Notwithstanding that ESG has actually been around for decades, we are only at the start of this seismic shift in society and the way in which governments, companies and individuals conduct themselves over the coming decades. The change to society, business and our institutions will be significant and includes all members of the team, not just the board of directors and the senior team. ESG is truly an area where the collective actions of individuals matter and everyone can have an impact, whether that be positive or negative.

New reporting requirements will bring further debate on what it is to be ‘ESG friendly’ and demonstrate sincerity in the quest to improve our society and reduce carbon emissions as we move towards ‘net-zero’ and a more sustainable eco-system.

How has ESG reporting changed?

On March 21st 2022, the Securities and Exchange Commission introduced important new rules regarding the disclosure of climate related risks for businesses in the United States. The new rules include requirements in relation to both direct and indirect carbon emissions. A lack of effective disclosure would likely raise red flags for investors in businesses and call to question the sincerity of boards in fighting for ESG related issues.

Dr Kevin Kelly, an expert on Corporate Governance and ESG recently commented in an interview with BPP, ‘Companies can demonstrate their commitment to ESG by effectively managing their potential for both positively and negatively impacting their stakeholder base and through the timely and accurate reporting on their success and failures in respect of each of the pillars of ESG’.

Why does this matter to businesses elsewhere, such as the United Kingdom? Clearly, the rules relating to disclosure and reporting will become a global benchmark with the harmonisation of standards over the coming years. For businesses, the scale of the task is huge and the sooner they start their ESG journey the better. In any event, the UK introduced its own requirements for reporting in 2021, which only adds to the plethora of reporting frameworks that have arisen over the past 10 years or so. Reporting frameworks will continue to drive regulatory requirements and change collective behaviour.

The Task-Force on Climate-related Financial Disclosure (TCFD) has been around since 2015 and encourages businesses to report on various aspects of their environmental impact and the financial risks pertaining to them.

The TCFD framework is split into three scopes, with one and two being direct emissions that come from a company’s operations, such as energy use in an office. Scope three covers more opaque factors, such as employees’ behaviour around commuting to work and financial emissions, which covers any investments the company undertakes.

On this basis, it’s essential that all employees understand that ESG includes everybody in a business, not just those tasked with completing the reports.

How to incorporate ESG into your business

So how can everyone contribute? Here are just a small number of ideas under the different elements of ESG to show that individuals can make a difference when acting collectively.

Developing ESG awareness

Although the above ideas seem relatively simple, businesses will want to begin the journey to developing a sustainable and coherent response to their ESG challenge as soon as possible. Without the right skills and awareness, this challenge will likely be significant if not insurmountable. Understanding the breadth of the ESG taxonomy of skills will require a long term partnership approach to learning and in order to raise awareness, there needs to be a monumental shift in the collective consciousness of business.

As well as developing awareness of the ESG landscape, it will be essential for certain job families to become experts in complex areas such as the auditing of ESG compliance, sustainability reporting, ESG factors in commercial lending or ESG for investment professionals.

The importance of ESG skills

ESG is important because it provides a focused framework within which governments, businesses, and individuals may work together to address severe global concerns. It is based on a shared moral commitment to do the right thing for people and the environment, but it tries to measure progress in ways that have never been possible before.

ESG performance is a measure of an organization's resilience, and businesses that implement an ESG strategy are better prepared to respond to new challenges. They can adapt to change and continue to develop value in the future. This is appealing to investors who want to maximise their profits. The link between financial and environmental performance is stronger than ever. The benefits of the transition from financial to stakeholder capitalism will benefit the overall society, not just those seeking economic gain.

BPP is your strategic talent partner and has been building careers through education for over 40 years.

BPP is unique in combining deep expertise in training and supporting professionals, we have created a range of courses which can support your team in adapting to the ESG learning challenge.

Chris Usher is the Managing Director of BPP CI

Chris has over 20 years’ experience in international financial services, working both in the UK and offshore, for major financial institutions such as Barclays Wealth and Santander.

Formerly an International Investment Manager he advised both individuals and corporate entities on complex investment scenarios. He now specialises in delivering training in investment management, taxation and regulatory matters in international finance centres around the world.

Chris is a specialist chairman of a number of high-profile events, including conferences such as the Annual Compliance & Economic Crime Symposium and the International Taxation Conference. As an expert in the financial crime risks posed to international offshore financial centres, Chris was invited to speak at the Association of Certified Anti-Money Laundering Specialists (ACAMS) conference on the topic of ‘Understanding the Criminal Vulnerabilities of Offshore Products and Services’.