The topic of ESG (environment, sustainability, governance) may be soaring in popularity in the corporate world, but its rise to the top has not come without its challenges. A recent conference organized by Renaissance Capital, an investment bank focused on emerging and frontier markets, offered an interesting insight into some of the difficulties that companies face on their path to sustainability.
With around 6% of emerging market assets now run under some kind of ESG mandate, and this number doubling since 2019, it is fair to say that ESG is steadily becoming mainstream. With this, companies face growing pressure to develop their ESG equity stories and increase their disclosure of ESG metrics.
The metrics dilemma
For companies that are only just building their sustainability strategies, these new ventures can be especially daunting. Given the lack of a clear roadmap, companies can find it difficult to know where to begin navigating the ESG field. Ingrid Kukuljan, Head of Impact Investing at Federated Hermes International, advises companies to focus on the areas in which they are confident they can have the biggest impact. “Companies should be sensible about what they choose, as it is impossible to tick all the boxes”, she said. This means that mining companies may work towards reducing their carbon footprint, while retailers could aim to reduce the amount of waste they send to landfills.
Tinkoff, Russia’s largest digital financial and lifestyle ecosystem, began its ESG story in this vein. Committed to improving its ESG metrics, Tinkoff initially focused on the social aspect by increasing people’s access to financial services and creating easy-to-use and comprehensive financial products for the everyday consumer. As Russia’s leading retail brokerage platform, Tinkoff also invested in educational tools for customers to ensure they have the knowledge necessary to make well-considered personal finance decisions. On the governance side, Tinkoff was one of the first tech companies worldwide to collapse its double share class to ensure the founders do not wield unchecked power by way of super votes. The company also increased the size of its Board and the number of independent directors it includes.
As Tinkoff discovered, however, stakeholders’ expectations went further. After conducting a survey, they learned that environmental issues were a top priority for their stakeholders. Neri Tollardo, the company’s Director of Strategy, described this as a surprise: “as a bank, this wasn’t something hugely on our radar, and in the past tended to come secondary to our social and governance efforts”. The bank has since launched a new project to assess its carbon footprint and is now considering the possibility of setting new climate targets. As the Tinkoff case shows, creating an effective ESG strategy involves a careful look at all of its stakeholders.
Receiving a rating
Another hurdle that companies face on their journey to sustainability is receiving an ESG rating. Ratings agencies have yet to agree upon standardized metrics, meaning companies are left to decide which metrics to track – be they emissions or waste, water usage or share of renewables. Small and mid-cap companies face the additional challenge of raising the capital needed to measure such metrics, and even getting the approval to be assessed by the ratings agencies themselves, given the limited number of agencies and the overwhelming demand for their services. As investors increasingly establish ESG ratings as a requirement for funding, the move towards sustainability, albeit well-intentioned, presents new barriers for smaller and mid-sized companies.
Perhaps the most challenging aspect of the ESG transformation lies in effective communication of a company’s sustainability strategy. Moral issues tied to ESG are often not clear cut, rendering it difficult for investors to distinguish the ‘good’ initiatives from the ‘bad’. The experience of Helios Towers, a UK-based telecommunications agency, demonstrates this well.
As one of Africa’s leading communications providers, Helios Towers works in remote areas of the continent where mobile network coverage is still considered a new phenomenon. While the company is undeniably creating positive social change through empowering citizens with internet access, it is often forced to use diesel generators as the only reliable energy source on hand to fuel its operations.
In order to expand its operations and better serve local communities, the company essentially needs to increase its carbon footprint. In such an instance, refraining from investing in a company on account of its carbon intensiveness is likely to counterintuitively hurt long-term sustainability efforts. According to Manjit Dhillon, the company’s CFO, communicating this nuance to investors and the wider public remains a significant challenge.
Like any long-term transformation, the path to a greener future comes with significant challenges. But understanding these, and collectively working together to resolve them, will be an important step forward in the rise of ESG.