ESG commitments stall due to lack of knowledge

In light of global challenges and opportunities, there is an increased focus for individual companies to minimize their environmental impact and foster healthier communities while also benefiting from pursuing sustainable development goals (SDGs) as part of their day-to-day business practices. 

During the COP26 in November 2021 (The UN Climate Change Conference in Glasgow), over 2,000 major companies committed to net-zero carbon targets, and nearly 200 countries agreed on rules and guidelines in carbon markets, which will have a major impact on future carbon emissions.  

For the first time in history, the global intention is genuinely there. But is the biggest threat to saving the planet a lack of knowledge of executing ESG initiatives strategically?

ESG knowledge gap

With mounting pressure on companies to meet ESG goals, an increasing number of companies are putting sustainability on the agenda of business goals for next year. But according to a recent BCG study, 40% of the board of directors don’t know how to execute it. 70% said they were either moderate or ineffective at increasing board oversight on ESG, and 30% reported a lack of commitment to ESG initiatives.

The concept of ESG is still young. According to a report made by Capital Monitor, a mere 13% of senior management at the world’s top 100 largest banks and asset management firms have an education or a degree connected to ESG. 

ESG-focused companies outperform

Most companies are struggling to bridge the gap between climate initiatives and business impact. Research by BlackRock has, however, established a correlation between sustainability and traditional factors such as quality and low volatility, which indicate resilience. As a result, they expect sustainable companies to be more resilient during downturns. They also saw that, in a crisis, companies with a record of good customer relations or strong corporate culture demonstrate resilient financial performance.

Some stats for the non-believers to consider:  

• According to the Morningstar U.S. Sustainability Leaders Index - representing the 50 U.S. companies with the best ESG scores - returned 33.3% for the year of 2021, beating the broader U.S. market by more than 8%.

• According to Nordea Equity Research, from 2012 to 2015, the companies with the highest ESG ratings outperformed the lowest rated firms by as much as 40%.
• According to Bloomberg, roughly 90% of bankruptcies in the S&P 500 between 2005-2015 were by companies with poor ESG scores.

There is evidence of a positive correlation, but it needs to be made visible to a higher degree and at a bigger scale. There is a need for more data and capabilities to break the barriers of a more effective ESG oversight. Setting proper goals and having transparent reporting of SDGs will accelerate the learning curve and give the necessary incentives many companies are lacking. 

ESG investments are soaring

Bloomberg reports that global ESG assets are on track to exceed $53 trillion by 2025, and as much as 1 of every 3 dollars is invested in ESG strategies. Global venture funding is flooding into the space at an exponential rate. According to PWC’s Global Investor ESG Survey for 2021, no less than 82% of investors say “companies should embed ESG directly into their corporate strategy.”

The ESG revolution will shape the environmental and social future, and there might be no megatrend of greater importance to portfolio performance over the next decade than ESG.  

Transforming the world with green-tech

According to Paul Donofrio, Vice Chair of Bank of America, the private sector and financial institutions play a crucial role in driving more investment in sustainable, low-carbon solutions, which scales net-zero business operations and the economy as a whole. It’s time for companies to overhaul their corporate governance and strategy, putting ESG at the core of business operations. 

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