ESG:The sustainable business in a climate changed world (1 of 6)
Best practice
- Scenario based analysis
- Task Force on Climate-related Financial Disclosure (TCFD) aligned
- Consideration in line with SDG’s and UN Global principles
Importance of good reporting
- Millennial employees & customers are cognisant of the business’ impact on “social and environment”
- Investors are focusing on companies assessing the business’ ability to survive in a climate changed world
Some Prominent ESG Factors:
Environment
- Climate change
- GHG emissions
- Resource depletion (incl.water)
- Waste & Pollution
Social
- Working conditions
- Local community
- Health & safety
- Employee relations & diversity
Governance
- Executive pay
- Bribery & corruption
ESG funds & finance
- To meet the significant investor demand, asset managers are creating
- ESG funds at a rapid pace, up more than 30% from 2019 to 2020.
- Assets under management in ESG funds have increased to $1.05 trillion at the end of 2018 from $655 billion in 2012, according to Morningstar.
- funds have increased to $1.05 trillion at the end of 2018 from $655 billion in 2012, according to Morningstar.
- Demand for ESG products has boomed in recent years and shows no signs of slowing down.
Strategy
- To be more energy efficient is not enough anymore
- The real impact is in the GHG emissions with an impactful reduction target (that includes the supply chain)
Meaningful metrics & targets
- Science-based targets aligned with a prevention of global mean temperature increase above 1,5°C is required.
- Task Force on Climate-related Financial Disclosure (TCFD) alignment.
- Consideration in line with SDG’s and UN Global principles.
ESG Alignment; why is it important? (2 of 6)
Humanity has wiped out 60% of mammals, birds, fish and
reptiles since 1970. Scientists say we are in the midst of the Sixth Mass extinction, the first to be caused by humans.
Lack in commitment
- According to the results of the 2019 Deloitte European CFO survey, a little less than 10% of companies say they have set targets in line with the Paris Agreement.
- 27% of companies have set autonomous carbon emission reduction targets.
- One in two companies have not set any target at all.
Securing the business
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- Access to well structured finance
- Attraction of investors and customers alike
- Securing business’ sustainability in a climate changed world
- Circular economy development
‘what did we do once we knew’? “We are the first generation to know we are destroying our planet and the last one that can do anything about it,”
-WWF UK Chief Executive Tanya Steele
Climate change offers business opportunities
- Firstly, improve resource productivity (for example by increasing energy efficiency),
- Secondly, climate change can spur innovation, inspiring new products and services which are less carbon intensive or which enable carbon reduction by others.
- Thirdly, companies can enhance the resilience of their supply chains, for example by reducing reliance on price-volatile fossil fuels by shifting towards renewable energy.
Together, these actions can foster competitiveness and unlock new market opportunities
ESG alignment; why is it so important? (3 of 6)
ESG Dimensions
Environmental
- Climate change and opportunities & risks
- Greenhouse gas (GHG) emissions
- Environmental policy
- Natural capital/energy, water & waste
- Environmental management system
- Products & services
Governance
- Compensation policy
- ESG reporting standards
- Board level oversight
- Governance policy
- Governance risk assessment
- Board structure
- Responsible Business practices, codes & programmes
Social
- Benchmark the business
- Research the future of the specific business and how it will be influenced
- Understanding the impact of the 4th industrial revolution
- Financial and commercial positioning and security in the changing and already changed world
- Get and keep the business ahead of the curve
ESG Future proofing your business (4 of 6)
If the business is a listed entity, it will be reviewed and rated by the ESG rating agencies whether the information is publicly disclosed or not as they use company websites, news articles, etc. to execute the rating and a non structured approach will therefor leave the company in a compromised position
ESG: The Financial Realm (5 of 6)
The Need:
- Overwhelming need to advance sustainable investing
- Steep targets – 40% reduction in GHG emissions by 2030 on 1990 levels
- ESG initiatives are prioritized by the younger generations
- Over the past 4 years sustainable finance grew 15 times
What is sustainable finance?
- Green bonds or loans – can only be used for “green” projects
- Sustainability Linked Loans (SLL’s) for general corporate purposes, but linked to sustainable performance targets (SPT’s)
Factors driving growth:
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- The need
- EU Taxonomy is driving uniformity and SA government is aiming to adopt their approach
- SLL and Green Loan principles were developed by LMA(EU), APLMA(Asia) & LSTA(US)
Pricing & Role-players:
- Green loan or bond is typically fixed
- SLL’s have a margin ratchet aligned with meeting or exceeding SPT’s
- The sustainability coordinator assess the ESG level of the borrower and develop/assess appropriate SPT’s and might execute ongoing monitoring of the borrower’s progress reports
- SLL’s usually require independent verified achievement of SPT’s
Typical SPT’s:
- Energy, water and waste efficiency improvements
- GHG emissions reduction
- Renewable energy
- Affordable housing
- Sustainable raw material/supply
- Circular economy
- Sustainable farming
- Conservation and protection or reinstatement of biodiversity
- Improvements in ESG rating or recognition or certification of certain levels – i.e., star rating on building or zero waste to landfill, etc.
ESG Finance: The role-players (6 of 6)
Lender/Financier/Investor
- Identify the client.
- Technical due diligence - Some questions that might be relevant to investor:
- What is a realistic target/KPI for ESG funding?
- What is a realistic timeline?
- What is the realistic CAPEX/OPEX requirement for pure Environmental and some of the Social dimensions identified?
- What should be part of the KPI’s?
- What are the risks in meeting or not meeting a KPI?
- Is the company strategy sound?
- Is the strategy appropriately resourced?
Client/Borrower
- 2x types of clients could be at the table, the one being presented by Financier and the other by Motsu.
- The clients might be at different levels of maturity in the programme, from a perspective of resourcing, goal setting, strategy, resourcing, etc. Motsu could assist in determining the return on investment associated with the money planned to be spend.
Motsu Consulting
- Motsu could identify a potential client and introduce the client to the financier. In this instance the technical due diligence would have been done.
- In the instance where the Lender/Financier/Investor is identifying the client, Motsu could assist with the technical due diligence as set out under the Financier slot.
- Motsu could assist the less mature client to develop the required programme or refine it such that it could answer to the bank’s due diligence.