Sustainability refers to the ability to meet the needs of the present without sacrificing the ability of our future generations. Sustainability is not a new concept and it has been there for a while and has evolved over a period of time. However, in the last decade, its phase of evolution has accelerated given the significant regulatory developments such as Sustainable Development Goals (SDGs), Paris Agreement 2030 and EU Regulations on Sustainability etc., Simultaneously, there has been a drastic shift in investors’ preferences to Green Investing. While on the other hand, the recent pandemic has reiterated the need for sustainability and underscored the importance of reducing the carbon footprints by businesses. Having said that, Environmental, Social and Governance (ESG) aspects have now become one of the most important topics in the Board room of many companies across the world.
Environmental aspect refers to the compliance to the environmental laws and the carbon emissions, pollution and the control of unethical practices towards the environment to navigate sustainability and leave the world as a better place than we inherited it. It places emphasis on the use of the current resources, without having to compromise with the needs of the future generations. Lately, Organizations and Governments have been under the radar for this non-financial practice that is deeply intertwined with their financial performance.
Social practice refers to organization’s behavior towards its employees, supply chains, inclusivity in the workplace and the diversity that they are incorporating. This also includes workplace safety, implementation and observation of child safety and human rights laws for its operation. It is difficult for an organization to thrive and justify its actions, solely based on its financial performance and that is when the Social aspect of ESG comes into the picture. The ideas of equality, humanity and social inclusion have long lingered, but the same have gained more traction as more of such malpractices have surfaced.
Governance aspect addresses the Board structure of the organization, business ethics and the transparent practices that are expected of the employees and the senior management. How an organization performs depends heavily on the functions of the senior management and the ethical practices that they follow. Sharing the clear picture with the auditors, complying to tax laws and anti- corruption laws, while also communicating the same with the stakeholders are an important pillar of ESG and sustainability.
Sustainability reporting is something that will solidify with time in all countries, in addition to the already existing mandatory requirements in a few countries for the larger organizations. However, ESG Compliance is something that has to be given utmost importance to gain a competitive edge in the present market to ensure stable profitability and viability of the businesses.
Appropriate ESG and sustainability practices can lead to an enhanced image of the organization that would set the bar for the industry peers. All along, alliances with unsustainable third parties has been harmful to the organization and has even damaged their reputation, to the extent that it has affected the operations. Suitable compliance can portray the organization as the flag bearer for sustainability and make it an attractive partner.
The stakeholders include investors, supply chain partners, potential investors and the current investors. Complying with the appropriate ESG and sustainability practices can give the organization a competitive advantage and attract the right kind of talent. When the individual partners and employers are assured of appropriate social practices, they will be encouraged to join and continue with the organization. Whereas, mutual funds investors and fund managers will also be encouraged to invest in the company.
Adhering to the ESG Sustainable practices and publishing reports shows the Environmental, Social and Governance efforts of the Organization that would make them noticeable in the public eye and help them form partnerships with other organizations that are willing to work and contribute in the similar manner and are willing to take responsibility.
Voluntary ESG Reporting will protect the organization. ESG Reporting and Sustainable Performance Management acts as a shield and validates the organization’s efforts, protecting it and forming an image that is rock solid on the basis of Sustainability and ethical practices.
The trustees of the IFRS foundation announced the formation of the International Sustainability Standards Board (ISSB) on November 3, 2021 at COP26 in Glasgow, following the universal market demand for its establishment. This Standard is expected to make the ESG Sustainability and Performance Reporting for the organization easier and to avoid the double reporting as well and set up a climate related disclosure by Q2 of 2024. While there are no mandatory ESG reporting laws in most countries, this is a need of the hour to bridge the gap between the demand for ESG information by investors and the supply of same by the firms.
Task force on climate related Financial Disclosures (TCFD) is an advisory board set up by the G20 to bridge the gap and cater to the disclosure of the climate related risks and opportunities for business and inform the investors about the way in which the organizations are being governed and their sustainability practices.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022and The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 are the two ESG disclosure laws that have been mandated in the UK.
The Non Financial Reporting Directive (NFRD) is a reporting directive set up in the EU, that certain large companies must disclose their reporting under.
The Sustainability Accounting Standard Board is an independent, not-for-profit organization established in 2011 based on the feedback from companies, investor and other market participants to set up standards for transparent reporting of the ESG Reporting and Sustainability Performance Management.
The Sustainable Development Goals (SDGs) 2030 by UNDP lays emphasis on affordable and clean energy generation, decent work and economic growth, reduced inequalities, ensure responsible, sustainable consumption and production patterns and to take urgent action to combat climate change and its impacts.
The Paris Agreement often referred to as the Paris Climate Accords, is an international treaty on climate change that was negotiated by 196 parties and as of 2023, 195 members of the UNFCC are parties to the agreement, that pledge to have a stronger response to the danger of climate change by impacting to the adverse change and build climate resilience and low greenhouse emissions.
Taxonomy Regulation set up by the EU that includes mandatory requirements on attaining the objective of climate change mitigation, adaptation and transition to circular economy. It allows the market participants to rely on and invest in sustainable assets.
According to the recent report from Bloomberg Intelligence Global ESG assets are expected to cross $41 trillion by 2022 and $50 trillion by 2025. It is nearly one third of the projected total investments under management globally. One of the market survey conducted in May 2023 revealed that 73% of the survey respondents have made a carbon-neutral commitment or are working towards one while 2/3 of respondents want their organization’s CEO and Board to increase the time they allocate to ESG-related issues. Companies driven by the present market dynamics – regulatory initiatives, changing consumer behavior and investor preferences for green economy- are now very keen to adopt Environmental, Social and Governance (ESG) factors as an integral part of their business operations and make voluntary disclosures on their Sustainability to differentiate themselves from their competitors and set benchmarks in the market for the peers, stakeholders and the beneficiaries.
Though sustainability reporting has not yet become mandatory in most major countries, ESG adoption and Sustainability reporting have not been perceived by the business as mere regulatory check box requirements rather they look at ESG adoption as a holistic approach to create long term value for their stakeholders such as employees, customers and to the society at large while pursuing their business objective of stable revenue generation to their shareholders.
The changing dynamics and priorities of the environment require the organizations to keep up with the need for Sustainability management and take more informed decisions on the management front for the safeguarding of the environment. The inclusive social norms and practices need to be observed that would protect the rights of the employees, as well as the citizens associated with the organizations. The transparency and reporting on ESG and Sustainability performance will enhance the stakeholders’ confidence on the business and boost the company’s reputation.
Sustainability performance management requires companies to design, develop and integrate ESG objectives as part of their business strategies and embed the sustainability framework into their operations to proactively identify, measure, mitigate and report ESG risks in order to optimize its stakeholder values.
Director Projects & Value Chain @ SAM Corporate LLC is an ex-banker having 20+ years of professional experience.
His domain expertise includes Credit Structuring, Risk Management (Basel, ISO 31000: Risk Management, COSO - Integrated ERM, Rating and risk Modelling), OCEG Capability Model, Internal Audit, Finance, IFRS, CBUAE Banking and financial market regulations including DFSA, ADGM & SCA regulations and ESG & Climate risk management.
Prior to his current engagement, he worked as Risk Manager of a bank based in UAE. His previous major appointments include, Audit & Account Consultant, Senior Accountant and Trainer & visiting faculty.
He holds distinction in Master of Philosophy (MPhil) in Commerce, Master’s degree in Financial Management and PG Diploma in Personnel Management & Labour Law. He also holds PRM, GRCP, GRCA, CRCMP and CBiii Pro. Certifications.
