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Discover Your ESG Alpha

By November 2, 2021No Comments

A move towards robust stakeholder engagement is driven by increasingly sophisticated societal, investor and inter-governmental expectations, requiring the articulation of ESG value creation within an organisation. The integration of ESG into business processes is also shown to impact shareholder value. These drivers are shifting reporting standards towards balanced reporting on financial returns and non-financial capitals. This is guided by globally recognised ESG disclosure requirements.

For formal annual reporting, such as integrated annual reports, reference is made to the International Integrated Reporting Framework and Sustainable Accounting Standards Board (SASB), while sustainability reports are governed by standards such as those outlined by the Carbon Disclosure programme (CDP), the United Nations Principles for Responsible Investments (UNPRI), Task force for Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).

Governments and regulators are also requiring minimum levels of ESG disclosures for financial institutions, as demonstrated through the Sustainable Finance Disclosure Regulation (SFDR), promulgated by the European Commission, which imposes a minimum level of ESG disclosure for investors effective as of 10 March 2021. Additionally, the US Securities and Exchange Commission has recently indicated their desire to require disclosures on Climate and ESG issues.

The Business Case for Strategic ESG Communication

How does an organisation demonstrate ESG integration into day-to-day processes? How is data collated and analysed to inform management decisions? How are insights provided to readers on how well a business manages intangible risks?

How organisations leverage business value through strategic ESG communication can differentiate them from their competitors. For example, listed companies demonstrating how their strategy was formulated and their consideration of ESG aspects particular to the business engenders confidence that the management team has the ability and know-how to manage these risks when they manifest, thus protecting existing value created. When deciding on the purchasing of shares in listed companies, comparison of reporting disclosures of competitors often informs share purchase decisions for that business.

Additionally, if not managed adequately, these types of risks can also have a negative impact on the enhancement or protection of existing financial performance, through the lack of planning or poor response to unforeseen incidents, both internal and external to a business.

ESG Power of 3

EBS Advisory has shown our clients how to articulate their ESG Alpha, and how to enhance this value creation to increase financial performance and operational efficiencies. This includes the selection of correct media channels to articulate value add, and the creation of collateral aligned to the business’s corporate identity branding, profiling their credentials.

Profiling a business’s ESG credentials facilitates the opening of dialogues and decision making amongst key stakeholders, such as discerning customers who are increasingly making choices about products and services on offers based on the management of intangible assets, such as the workforce, sourcing of supplies, carbon footprint, energy and waste disposal activities. An established track record in communicating a business’s ESG credentials also facilitates the attraction of strategic partnerships, which can grow and strengthen the business. Leveraging these benefits can help a company differentiate themselves from competitors and strengthen a business’s level of brand recognition.

Quality Partnerships

By building relationship capital through the implementation of robust ESG frameworks and proactive reporting mechanisms, our clients may access an expanded choice in sources of capital.  An example is Letshego Africa, a pan-African micro financial services provider who has been successful in leveraging its ESG Framework to further diversify its funding base with global development funding institutions.

Enhancing Financial Performance

At EBS Advisory, we show listed and unlisted companies, as well as financial institutions, how to view ESG through a commercial lens.  This converts ESG from a cost line item to a driver of enhanced performance. There are differences in the value created in listed companies and financial institutions when viewing and communicating ESG in this way.

For listed companies the linkages between the six organisational capitals are realised, as well as their interdependencies (Financial, Social, Human, Intellectual, Manufactured, Natural Capitals).  Leveraging these inter dependencies and understanding the tradeoffs between these capitals, enhances financial performance within the business.
The three-fold impact achieved is:
  1. Retaining existing shareholders,
  2. Attraction of new shareholders,
  3. Enhancing share price.
Investors receive re-assurance through reporting that an organisation:
  • is deploying funding responsibly,
  • has systems in place to manage risk,
  • has means to maintain its existing capital pool,
  • is transparent about risks facing the business and how these will be mitigated.
As non-listed companies and Financial Institutions demonstrate their understanding of ESG and how ESG affects their business or portfolio, they are able to leverage process efficiencies to:
  • reduce operating expenditure,
  • innovate new products,
  • differentiate themselves from their competitors,
  • facilitate expansion into new markets, and
  • develop innovative new business models.
Reporting on ESG across a company or portfolio showcases the businesses track record and ability to create value over time. This further attracts and maintains:
  • investment pipeline,
  • strategic partnerships, and
  • new forms of capital.

Goodwill Anchors Stakeholder Trust

Adequate ESG disclosure for mandatory internal reporting is as much about boldly declaring the business triumphs as it is about informing investors of lacklustre performance.  Creating trust and goodwill also requires showing accountability for mitigating the latter. There is a high reputational risk linked to inadequate ESG disclosures. We have seen companies neglect required disclosure of poorly performing aspects of the business, resulting in a loss of funding from lenders, becoming blacklisted, and suffer irreparable damage to their reputation.

The ability to mitigate poor ESG performance in a business is evidence of adequate planning and processes which, when implemented, improve business performance in the short to medium term and protect financial returns. Our clients derive value from quarterly internal ESG reporting as a management tool to drive operational performance. This requires an internal ESG reporting process to facilitate regular data collation, facilitating the consistent tracking of ESG and commercial targets, empowering informed decision-making.

Tightrope of Reputational Risk

Listed companies which fail to see the value of a balanced approach to ESG communications are walking a tight rope of external reputational risk. Consumers are becoming more ESG savvy, selecting products and services based on their ESG credentials. The onus is on businesses to provide transparent reporting on areas of importance to their customer base.  This may include carbon footprint, how raw material inputs are sourced, or gender parity and employee well-being. To understand these needs, a business can employ bespoke Know Your Customer protocols. This is undertaken through customer surveys utilising SMS, email or one on one interfaces through branch networks or phone calls.

Woolworths, a high-end retailer in South Africa, is renowned for investing in building social license across its supply chain through strategic ESG communications.  This created the foundation for goodwill which stood it in good stead when accused of plagiarizing the locally made soft drinks brand Frankie’s. Despite the high-profile media coverage and the negative ruling of The Advertising Standards Authority of South Africa, the retailer retained market share as well as its customer base during this process.

This is in stark contrast to companies which have neglected to build upfront social license to operate through their ESG credentials. The much-publicised case of the Chevron oil spill in February 2021 off the coast of California led to drop in share prices by close to 12%.

ESG is no longer the exclusive domain of environmental and social activists.  It is shown to be increasingly important in retaining market share and the stability of share price. Consistent ESG reporting includes a roadmap towards addressing ESG risks. A business does not have to show that all risks are mitigated; the reader is more interested in knowing that key decision makers are aware of these risks and have a plan in place to manage these and mitigate the impact of these risks over time.

South Africa the Pacesetter in ESG Communication
South Africa was the first country to mandate Integrated Annual Reporting as a pre-requisite for listing on a stock exchange in 2010. This requirement for companies to qualify for listing on the Johannesburg Stock Exchange (JSE) was to instil investor confidence in the financial performance of listed businesses and has contributed to continued foreign direct investment in the country. South Africa has earned seven first place rankings in auditing and reporting standards in the World Economic Forum’s Global Competitiveness Report. EBS has over twenty years’ experience in unlocking the ESG Alpha for organizations.