Reete Rool
Sustainability Analyst
The brief history of ESG
ESG is certainly becoming a difficult trend to ignore. Investment continues to shift towards companies with good ESG performance, and policy makers are starting to introduce regulation mandating disclosure on ESG-related issues. According to Morningstar, investment in sustainable funds grew by 53 per cent last year, reaching $2.74tn[i]. As a result, companies are putting more focus on improving reporting on their Environmental, Social and Governance (ESG) impacts.
However, despite the fact that the pressure to disclose is greater than ever and company reports are now littered with words like “ESG risk management”, there is still relatively little understanding around what can be considered “good” ESG performance. There are as many definitions for “good” ESG performance as there are ESG standards, ratings, and frameworks – the number of which was last estimated to stand at around 600[ii]. In fact, one of the only things we all seem to agree on in the ESG industry currently is that ESG stands for environmental, social and governance considerations – trying to go more in-depth than that leads to diverging opinions. In order to make sense of the current ESG landscape and understand how we got here it helps to look back on how ESG came to be.
The origin of ESG
ESG is at its origin rooted in socially responsible investment practices. The term “ESG” was coined in 2004, in the UN’s Global Compact Report Who Cares Wins: Connecting Financial Markets to a Changing World, which aimed to develop guidance for integrating environmental, social and governance consideration into asset management. The central idea of the report was that investors could “do well by doing good” – by investing in socially responsible companies, they are benefiting the society as well as themselves since they can earn higher financial returns from lower risk investments.
However, the practice of ESG investment was considered relatively niche until the financial crisis of 2008. The crisis created a turning point as investors realised that a company’s future performance cannot be predicted only on the basis of their financial reporting, as they do not operate in isolation of wider societal factors. This idea was further reinforced by the growing understanding of the negative economic impacts of global warming, leading to the conclusion that mismanagement of ESG issues can pose a threat to the company’s long-term financial performance.
As a result, investors started demanding companies produce non-financial reports discussing their ESG risks to accompany traditional financial reporting. ESG began to be considered as “enhanced investment analysis”. However, what investors did not account for was the sheer complexity of sustainability data analysis. Drawing comparisons between companies’ financial reports is relatively straightforward as financial reporting is highly standardised, but ESG reporting is more appropriately described as the Wild West, with companies disclosing whatever information they find most pertinent, seeing as no standards or regulations were in effect at the time (the situation has improved now, but only slightly and not enough to drop the Wild West reference).
The rise of the ESG ratings and standards industry
The investors’ struggle to make sense of companies’ ESG data created space for a new industry - that of ESG ratings and standards. In an effort to simplify investors’ decision-making, ESG rating agencies and standards provide companies with a score based on their management of ESG issues, rendering comparison of ESG performance across industries considerably easier. Some of the most widely used ratings and standards are Sustainalytics, MSCI, Ecovadis, Dow Jones Sustainability Indexes, to name just a few.
In addition to the ratings and standards, various reporting frameworks have emerged to guide companies in their effort to improve ESG performance. As with ratings and standards, there is a variety of frameworks to choose from with some of the most popular ones being TCFD, CDP, UN Global Compact and GRI. The frameworks aim to create a standard methodology for reporting on ESG considerations and reduce the reporting demands on companies.
However, whether the emergence of this industry indeed provides a solution to the issue it set out to solve – how to evaluate a company’s ESG performance? – is debatable. Considering the high number of different ratings and standards that more often than not come to different conclusions, meaning a company’s score can vary significantly depending on the rating used, then it could be said that the ESG ratings industry creates as many problems as it solves.
Obstacles for the Industry
There are quite a few issues the industry needs to find solutions to, before it can achieve its full potential:
It is in all of our interest that solutions are found to these problems and rather urgently, as otherwise ESG could end up being considered no different from greenwashing. That would be a setback to furthering the climate agenda as there is actually enormous potential in this industry. It is estimated that achieving the Sustainable Development Goals (SDGs) would require a financial contribution of around $2-3 trillion a year, and considering the budget constraints of nation states, private investment needs to play its part for us to have a chance at reaching the SDGs by 2030[iii]. Finance can drive sustainability and ESG investment could be an effective vehicle for this. Not to mention, there are a multitude of benefits for companies who integrate ESG considerations into their business strategy, so hold off on discarding ESG just yet – more on the benefits of ESG in the following blog post.
[i] https://www.ft.com/content/8891c299-7609-4cd5-9008-7e62b07b1993
[ii] https://www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/sustainability-ratetheraters2020-report.pdf
[iii] Ghosh, S. and Rajan, J., 2019. The business case for SDGs: an analysis of inclusive business models in emerging economies. International Journal of Sustainable Development & World Ecology, 26(4), pp.344-353.
What is this?
Sharing your sustainability progress isn’t only a way to engage staff, customers and suppliers. It can be a powerful PR tool. It can help you stay one step ahead of your legal requirements. And it can help you with other ESG ratings like CDP, EcoVadis and Support the Goals. We’ll help you spread the word about the good you do.
Sustainability reporting
Our standalone Reporting service gives you a comprehensive 20-page (approx.) report to share with staff, customers, investors and the press. Comprising your priority goals, commitments, case studies and more, and designed to match your corporate branding, it’s the simplest way to bring all your sustainability work together.
What is this?
You’ll want to measure the results of your actions to assess progress towards your commitments. But what should you measure and how should you do it? When you don’t have the in-house tools, capabilities or expertise, we do.
Our support package can help
It’s not always easy to measure the impact of sustainability actions. There’s a clear formula for carbon reporting, for example, but how do you assess social impact? Where should the data come from? What are the accepted reporting standards? And how should you display your results to ensure people understand it? We and our partners can help you measure the impact of the actions you take.
What is this?
You take the next steps on your sustainability journey. We’ll provide the guide and the map.
Our support package can help
It’s not easy figuring out where to go next on your sustainability journey, or how to get there.
With a TBL support package, you get the expertise, the tools and the guide, and you follow a road we’ve already travelled – many times. It makes setting a direction easier. You follow established best practice so there are fewer dead ends. And with our tracking tool, you’ll always have a clear view of progress made and next steps.
What is this?
Once you’ve identified the sustainability goals that matter most to you, you’ll want to do something about them.
Commit is about setting measurable targets for meeting your highest priority goals. It’s about making the credible, impactful, achievable commitments everyone can buy into. And it’s about agreeing governance, so the right people are accountable for achieving the commitments you agree.
What might this look like?
For example:
• Gender Equality (Goal 5): 50/50 gender split at board level by 2025
• Affordable and Clean Energy (Goal 7): Use only clean energy to power offices by 2030
• Climate Action (Goal 13): Net zero across the value chain by 2035
Our support package can help
A TBL support package gives you access to expert advice that can help you set environmental and social commitments including net zero and science based targets.
If we want a more sustainable world, everyone needs to get involved. That includes your employees. Our experts help you do that in a way that builds understanding and encourages involvement.
We will:
What is this?
How do you know which sustainability/ESG issues to target, and which to tackle first? Identify is about exploring the issues that matter most to your organisation and finding where your actions can make the biggest impact.
How we’ll support you
Our lively half-day workshop explores the issues through the lens of the Global Goals. You’ll end the session with a clear, visual presentation of low, medium and high priority sustainability goals, and get clear guidance on what to do next.
If we want a more sustainable world, everyone needs to get involved. That includes your employees. Our experts help you do that in a way that builds understanding and encourages involvement.
We will:
A circular economy model designs out waste from your business, keeping products and materials in use. Operating a circular economy model can cut costs. Many organisations are now using it to create entirely new revenue streams.
Our experts will show you how, by adapting your processes, you can be part of the circular economy – and do it in a way that’s the right ‘fit’ for your organisation.
For compliance. To meet the standards of a ratings agency. Or simply to be a responsible business. When you need the right sustainability policies and standards, we’ll help you develop ones that are engaging, easy to understand and relevant to your business.
If we’re to create a more sustainable world, everyone needs the skills and understanding to be able to play their part.
Every day, our advisers are helping senior teams understand sustainability within their organisation. They’re teaching suppliers to buy more sustainably or building the skills of new in-house sustainability managers. And they’re helping your employees become more carbon literate so they understand what carbon is and the personal difference they can make in work and at home.
Build the skills and understanding of your people.
Reporting the environmental and social impact of your business is an essential part of governance, openness and transparency, but with so many frameworks, it can be difficult to know which should demand your focus.
Our experts will help you meet the mandatory requirements of regulatory frameworks like SECR. They’ll help you prepare for soon-to-be-mandatory frameworks such as the Task Force on Climate-related Finance Disclosure (TCFD).
And when you’re exploring new, voluntary accreditations with ESG, DJSI or Sustainalytics, or want to improve your ranking with a supply chain framework such as EcoVadis or Support the Goals, they’ll help you choose the framework best suited to your business, boost your rating and gain the badges.
Setting science-based emissions reduction targets consistent with Paris agreement-aligned pathways is how your organisation moves closer to net zero. We’ll help you establish your current baseline, then help you set the targets (including Scope 3) that give your actions direction and purpose.
And as always with our experts, we’ll make the journey easy.
For any large organisation, reporting your Scope 1 & 2 emissions is a regulatory requirement. You meet that requirement by making a Streamlined Energy & Carbon Reporting (SECR) statement part of your annual report.
Our experts can help you with that – and they can help you go further. Our simple, powerful dashboards will make understanding your carbon footprint easy (whether you’re required to report on it or not). And when you want to take the next step in understanding your indirect (Scope 3) emissions, we’ll help you do that too.
Increasingly, your clients and customers demand sustainability not just from the way you operate but from the materials you use.
Our experts in materials and packaging help you understand how sustainable your existing products are. Then we recommend alternatives that deliver improved sustainability whilst protecting production costs and product quality, and keeping customers happy.
A circular economy model designs out waste from your business, keeping products and materials in use. Operating a circular economy model can cut costs. Many organisations are now using it to create entirely new revenue streams.
Our experts will show you how, by adapting your processes, you can be part of the circular economy – and do it in a way that’s the right ‘fit’ for your organisation.
Increasingly, your clients and customers demand sustainability not just from the way you operate but from the materials you use.
Our experts in materials and packaging help you understand how sustainable your existing products are. Then we recommend alternatives that deliver improved sustainability whilst protecting production costs and product quality, and keeping customers happy.
Setting science-based emissions reduction targets consistent with Paris agreement-aligned pathways is how your organisation moves closer to net zero. We’ll help you establish your current baseline, then help you set the targets (including Scope 3) that give your actions direction and purpose.
And as always with our experts, we’ll make the journey easy.
For any large organisation, reporting your Scope 1 & 2 emissions is a regulatory requirement. You meet that requirement by making a Streamlined Energy & Carbon Reporting (SECR) statement part of your annual report.
Our experts can help you with that – and they can help you go further. Our simple, powerful dashboards will make understanding your carbon footprint easy (whether you’re required to report on it or not). And when you want to take the next step in understanding your indirect (Scope 3) emissions, we’ll help you do that too.
Reporting the environmental and social impact of your business is an essential part of governance, openness and transparency, but with so many frameworks, it can be difficult to know which should demand your focus.
Our experts will help you meet the mandatory requirements of regulatory frameworks like SECR. They’ll help you prepare for soon-to-be-mandatory frameworks such as the Task Force on Climate-related Finance Disclosure (TCFD).
And when you’re exploring new, voluntary accreditations with ESG, DJSI or Sustainalytics, or want to improve your ranking with a supply chain framework such as EcoVadis or Support the Goals, they’ll help you choose the framework best suited to your business, boost your rating and gain the badges.
If we’re to create a more sustainable world, everyone needs the skills and understanding to be able to play their part.
Every day, our advisers are helping senior teams understand sustainability within their organisation. They’re teaching suppliers to buy more sustainably or building the skills of new in-house sustainability managers. And they’re helping your employees become more carbon literate so they understand what carbon is and the personal difference they can make in work and at home.
Build the skills and understanding of your people.
You know you need a sustainability strategy – but what next? What’s right for the size and nature of your business? And how can you ensure it drives the right actions?
We’ll help you set a strategy that’s robust and comprehensive because it uses the Global Goals as a framework. And we’ll ensure it’s a good ‘fit’ for your organisation, helping you align people, planet and profit.
For compliance. To meet the standards of a ratings agency. Or simply to show you’re a responsible business. When you need the right sustainability policies and standards, we’ll help you develop ones that are engaging, easy to understand and relevant to your business.
Your social impact is the effect your organisation has on people and communities as a result of its activities and policies.
You’ll already be doing good things in your community. Measuring the effect of your charitable work, volunteering, community outreach projects and more is important because it’s how you explain the difference you’ve made to your employees, customers and investors.
We help you understand how to measure and improve your social impact.
Almost 90% of your environmental and social impact exists not in your operations, but in the goods and services you buy from your suppliers. So if you want to make a real impact with your sustainability efforts, your supply chain needs to be involved. Our advisers can help. They will:
You’ve done great things. Now you need to share them. Communicating your successes is a powerful PR boost for your brand. It’s often a simple way to improve your ratings framework score. And it can help others to understand the importance of the work you’re doing and inspire them to get involved.
Our brand, marketing and communications specialists will help you spread the word with a standalone sustainability report that brings all your ESG efforts together in one document. In addition, we can help you with:
You know you need a sustainability strategy – but what next? What’s right for the size and nature of your business? And how can you ensure it drives the right actions?
We’ll help you set a strategy that’s robust and comprehensive because it uses the Global Goals as a framework. And we’ll ensure it’s a good ‘fit’ for your organisation, helping you align people, planet and profit.
Your social impact is the effect your organisation has on people and communities as a result of its activities and policies.
You’ll already be doing good things in your community. Measuring the effect of your charitable work, volunteering, community outreach projects and more is important because it’s how you explain the difference you’ve made to your employees, customers and investors.
We help you understand how to measure and improve your social impact.
Almost 90% of your environmental and social impact exists not in your operations, but in the goods and services you buy from your suppliers. So if you want to make a real impact with your sustainability efforts, your supply chain needs to be involved. Our advisers can help. They will:
You’ve done great things. Now you need to share them. Communicating your successes is a powerful PR boost for your brand. It’s often a simple way to improve your ratings framework score. And it can help others to understand the importance of the work you’re doing and inspire them to get involved.
Our brand, marketing and communications specialists will help you spread the word with a standalone sustainability report that brings all your ESG efforts together in one document. In addition, we can help you with: