ESG-Epistemy

ESG — From boardroom discussions to a tailored data strategy (Part 1)

Deep Parekh, Managing Partner, Epistemy BV

A holistic approach taken one step at a time

In the past five years, we have witnessed the rise of the term ESG, an acronym for Environmental, Social and Governance. Its rise has been evident mostly in financial services circles but has spilled over to the general marketplace and has reached the masses through mainstream media articles. ESG refers to a holistic set of factors by which enterprises need to manage their operations that make them a steward of the Environment, a net benefactor to Society, and are managed transparently and with adequate internal controls through Corporate Governance. ESG is rising as an important set of metrics through which companies are evaluated by a diverse set of stakeholders, including consumers, employees, regulators, financial services firms and investors.

What does ESG cover exactly?

ESG covers the three core areas of Environment, Society and Corporate Governance. What do these factors include specifically? Whereas definitions are still broad in nature depending on who you ask, there is general agreement on the fact that ESG covers the following:

ESC core areas
Source: www.esg8.eu

 

Profit is just the entry ticket

In the late economist Milton Friedman’s view, the only job of a company was to make profit for the shareholder. However, this view is tilting from shareholder capitalism towards stakeholder capitalism, and this shift is only likely to continue. Larry Fink, CEO of BlackRock Capital, which has over $8.6 trillion in assets under management (AuM), has been influencing CEOs and senior leaders to adopt ESG at the center of their strategies and deliver returns not only in the form of profit, but also of ESG factors, recently even going so far as to threaten to oust board members of portfolio companies if they did not adequately prepare climate change mitigation strategies, according to Bloomberg News.

ESG as a holistic means to deliver the UN’s Sustainable Development Goals

Over the last decade, there has been a smattering of different ‘point initiatives’ that companies have embarked on, all somehow connected with sustainability, but offering different approaches, impacts and endgames. For instance, social entrepreneurship (SE) aims at creating an enterprise with societal benefits at the center. Others, such as corporate social responsibility (CSR), adopt a broader approach at getting enterprises to take a role in environmental and community impact. The finance industry developed a series of initiatives with attractive names such as ‘Impact Investing’ and Socially Responsible Investing (SRI) as entire new classes of investments. All these different initiatives have confused both the public and private enterprises alike, not to mention investors.

The United Nations (UN) Sustainable Development Goals (SDGs) have brought together the objectives under one notional umbrella. This is significant not just because it is a better way to manage them, but a fundamental realization that these goals are all connected and need to be viewed in a systematic and holistic manner and not just as the sum of the parts.

It is useful to view ESG as an umbrella approach to achieve a ‘global optimum’ on the full spectrum of initiatives vs. ‘local optima’ delivered by point initiatives.

ESG holistic approach
Source: www.esg8.eu

 

The burning platform - both urgent and important

ESG is an urgent issue — a recent EY survey of senior executives shows that compliance and risk management are driving issuers to report ESG performance and that public relations and marketing have become less compelling reasons. In another poll, Bloomberg highlighted that executives view ESG as a primary risk driver in their businesses, in terms of compliance and regulation.

ESG compliance and risk management
Source: EY Consulting

 

ESG is an important issue — according to PRI, over $80 trillion has flowed into ESG AuM, including funds of asset owners themselves, a trend clearly indicating that this is an important issue that warrants further investment and exploration. This $80 trillion represents a 10x growth in importance over a 15-year period.

ESG assets under management
Source: Principles for Responsible Investment

 

Conclusion of Part 1, and prologue to Part 2

ESG is both urgent and important and must be acted on now. Companies need to take it seriously because we are at the nexus of three critical issues that we will further explore in Part 2 of this series:

  1. Consumers are demanding greater visibility into the provenance of materials that are being used to deliver the products that they buy, wanting them to be sustainable and the companies they buy from to embody the purpose that they share and are aligned with;
  2. Authorities and regulators are rolling out new frameworks for deeper and broader governance, transparency and reporting; and
  3. Financial markets are using ESG metrics to guide their decision-making on interest rates, loan eligibility, portfolio inclusion and myriad other positions, as part of their risk analysis exercise.

About the author

Dr. Deep Parekh, Managing Partner, Epistemy BV

Dr. Parekh is a serial entrepreneur and currently serves as the Managing Partner of Epistemy BV, a Belgian firm dedicated to developing sustainable strategies.

Deep has served in executive leadership roles at Please Platform BVBA and Triamant NV in Belgium at the intersection of digital transformation and life, health and social technologies, and helping to shape Belgian legislation on the on-demand work economy. Prior to this, he co-founded an investment and advisory firm Asteroidea AG in Switzerland. Deep also co-founded and served as Managing Partner of management consulting and advisory services firm Equus Group in the US and Latin America. Prior to his journey on the course of serial entrepreneurship, Deep held executive advisory positions at various companies, including Unilever, Ernst & Young, Booz Allen Hamilton and IBM.

This article series is a result of a recent webinar titled ‘Powering Your ESG Ambitions through Data’, hosted by Juvo, a professional services company in Belgium that specializes in making data profitable, and ESG8, a Belgium-Netherlands based ESG advisory services firm.