Mark Aquilina, Managing Partner, NOUV
Any investor’s main objective will always be to achieve further success and growth in the company they invest in, which simply means “maximise the return on their investment”.
Until recently, sustainability reporting was more of a niche, and those companies who chose to report this information did so voluntarily and purely to improve their reputation.
Today, however, an increasing number of factors are leading investors to consider those companies who not only achieve growth and success but who also do so in a sustainable manner; to the extent that today, more and more companies are expected to provide sustainability reports that centre around the environment, human capital and social matters, and governance, more commonly referred to as ESG.
We know that more and more companies are being expected to give due attention to ESG because this is today acknowledged as an essential part of effective risk management. It reduces the risk of interruptions in the supply chain caused by environmental disasters or social unrest.
For example, the world’s largest institutional investor—BlackRock—has threatened to vote its shares against any portfolio company that doesn’t fall in line with carbon reporting.
Governments are also making their voice heard on the matter. New Zealand is set to become the first country mandating “climate risk reporting” from the financial sector. This was announced by James Shaw, Minister for Climate Change.
Lower ESG risk also means lower financial risk, and this not only leads to more stable and higher long-term returns for investors but makes companies more attractive to potential investors.
In Europe, ESG disclosure has been required for more than five years. Therefore, as consultants servicing different industries and sectors, we feel duty-bound to push for more sustainable operations not only for the betterment of the industry but also as we think that in so doing, we would be assisting these companies in fulfilling their social obligations and commitments to the community in which they operate.
Nonetheless, when we meet our clients, they question why reporting ESG milestones should be considered a priority for them and businesses in general.
In my opinion, the first and probably the most important reason is that more and more investors are increasingly paying attention to ESG scores when they come to decide which companies to invest in. Investors and major suppliers look at ESG ratings compiled by rating agencies based on how well a company is doing in various ESG aspects and how well they report those facts.
This self-reporting then needs to be supported by additional third-party information such as media references and information published by NGOs.
Bottom line: companies are being rated whether they want to or not! The less transparent they try to be in their reporting and assessments, the lower their score. The worst-case scenario here would be that major shareholders might decide to divest themselves from their investment. In the case of New Zealand, it can be the case of the regulatory not renewing licences to financial institutions or issuing massive fines.
Companies need to be proactive in the way they communicate their ESG commitments so that their efforts are not only recognised by shareholders, investors, and stakeholders alike. Still, they will also lead to a score that truly reflects that company’s sustainability efforts.
In fact, locally, through the sustainability reports we have been compiling for some of our clients at NOUV, it is already becoming apparent how companies who have started to build a solid ESG record are already increasing their chances to get favourable commercial conditions when dealing with foreign organisations.
When clients approach us, we explain how companies with a high ESG score carry lower chances of risk, so they will also be able to secure contracts or improve their credit terms.
A good ESG management strategy is also opening doors to new financing avenues. Companies who are considering environmentally focused projects can finance these projects through so-called green bonds, which are again rated by rating agencies and incorporated into other green financial products. In this regard, The Malta Stock Exchange introduced “The Malta Stock Exchange: Green Market”.
Of course, as with everything, there are issues. One such issue is the lack of comparability. Until now, companies have been free to choose which ESG issues apply to them, and which do not. But this only contributed to a jumble of data that turned out not very useful.
New proposals being put forward in Europe now seek to minimise this approach. Rather than companies making these decisions, it should be the Regulator to select a set of ESG topics and require all companies to report on them. This will help with data comparability from company to company.
Companies and all the community are set to benefit from good ESG reporting. There is a need for action in the business community, and it is essential that all companies, listed and non-listed, start communicating their contribution to a sustainable future. ESG reporting is no longer an excellent add-on to financial reporting. In successful and forward-thinking companies, the two go hand in hand.
This is, after all, a global trend where the primary aim is to achieve more sustainable industries. Malta, we should be part of this movement.
