Impact of COVID-19 shows clear ESG frameworks a must in 2021

Investors are now focusing on the shape of global economic recovery and environment, social and governance (ESG) metrics will be a key factor in virtual discussions as they decide who gets funding.

At the recent IR Magazine – Greater China Forum, Hendrik Rosenthal, director of group sustainability, CLP Group, struck a confident note. Just last year, CLP, one of the largest investor-owned power businesses in Asia, updated its pandemic response plan. The updated framework enabled the company to quickly communicate to teams across markets how managers should ensure employee safety, how to respond to COVID-19 cases among staff and how to transition to a remote work environment wherever possible.

The initial focus on social concerns, such as the impact on short-term contract workers and employee health, has solidified the ‘S’ component in ESG.

The group sustainability team found itself in a position of renewed importance and it was able to liaise effectively with IR, legal and operational teams. Far bigger than the IR team, it was able to leverage its expertise to offer timely assistance.

At other panels on the day, IROs explained how the worldwide shutdown of business travel led to a renewed focus on virtual communication, including the use of customized mobile apps to facilitate investor communication.

Investors have asked for engagement with a broader set of management personnel, they said, and are even reaching out to small and mid-cap companies or even individual companies, especially to pose ESG-related queries. ESG-themed roadshows are therefore increasing in number in tandem with a rising number of thematic funds that focus exclusively on the concept.

With Ping An, we are seeing that in China in particular the asset manager and wealth management platform developer is driving the conversation on ESG.

“I liked the dedicated ESG days [organized by some IROs] or sessions where there were two-hour presentations with a customized deck and opportunities for discussions around it,” commented Gabriel Wilson-Otto, head of stewardship of Asia Pacific at BNP Paribas Asset Management, in another panel focusing on investor and analyst expectations.

Of course, every IR team may not have the capacity to hire experts with a supportive sustainability team or carve out dedicated ESG-linked frameworks like CLP has. But there needs to be leadership on the issue when there is growing external demand.

Hard target setting is important. There is a tendency among smaller organizations, those that are not as sophisticated, to focus on incremental ESG goals and highlight improvements but they need to move towards transformational goals. It can drive innovation and set the company apart in the broader investment landscape and do much to convey a compelling narrative.

Previously, there would have been an onus on financial metrics alone among investors but they are now developing methodologies that scrutinize reports (albeit at the global level instead of having a regional focus but this could soon change) on governance as well as environmental factors. It gives an indication on the resiliency of operations as firms that rate higher on ESG metrics are deemed to do better in the long run.

At a time when there’s increased scrutiny from investors and the public as well as political and regulatory momentum there’s a need to demonstrate more resilience, investment in the construction of the right narratives and link them with your core strategy, your core risks and create a purpose that can be communicated effectively with stakeholders including employees who need to be convinced of the process and goals.

At the same time, a challenge worth bearing in mind is the lack of harmonization on agreed-upon ESG principles. Wilson-Otto added that it is a complex topic with a lot of individual moving parts. Quantifying social risks, in particular, is hard, even as it is gaining prominence. As the various components for ESG risks get standardized in the coming years, however, reporting should become a lot easier.

The reward for companies that get it right early on will be a larger pie of the growing sustainability-linked finance pie.

“There’s been an increase for sustainable instruments and 2021 will be a huge year,” predicted BNP Paribas’ Wilson-Otto. “If we are tilting back towards ESG, the funding for global recovery will turbocharge social bond markets.”