The growing importance of ESG

The growing importance of ESG

The growing importance of ESG

Author: Liqueo Advisory Practice

 

ESG stands for Environmental, Social and Governance. For a financial organisation, it involves assessing ESG factors when making investment decisions, leading to more investments in sustainable projects and companies. For those projects and companies, it involves ensuring they have a sound ESG strategy.


In the ever-evolving world of ESG and its associated jargon and terminology, firms on both sides of the investment divide don’t always fully understand ESG. They can struggle with what ESG means and how to embrace it to implement an effective ESG Strategy. 


Transitioning organisations to ESG


The complications in transitioning to a corporate structure covering ESG often yield several difficult governance issues. These include stewardship, evolution of governance structures and practices as well as scalability, delegation, and staff training. Firms need to be aware of these areas and avoid any PR gaffes leading to allegations of ‘Greenwashing’ (attempting to make people believe that your company is doing more to protect the environment than it really is). 


Expert guidance in how these fields relate to ESG is required. Some crucial areas where the Liqueo Advisory Practice provides expertise are:

Commitment to ESG (Leadership and Culture) 

  • Corporate Governance 
  • Code of Ethics or Conduct 
  • Corporate Governance Officer 

Structure & Functioning of the Board of Directors 

  • Board Independence 
  • Board Diversity  
  • Diversity in Senior Management 
  • Audit Committee 

Other areas requiring experienced Advisory input may include:

  • Control Environment (Internal Control System, Internal Audit Function, Risk Governance and Compliance)
  • Disclosure Verification and Transparency
  • Governance of Stakeholder Engagement
  • Marketing and Disclosures Review
  • Annual ESG Compliance Review
  • Policies & Procedures Development

The investment side of the divide


On the investment side of the divide, ESG funds have been a point of focus. Their importance is twofold: not only for the returns over the last 10 years but also for the social and environmental aspects that have strengthened in the light of the pandemic. However, solving the data and reporting challenges posed by ESG is no simple exercise. The pending changes associated with TCFD (Task Force on Climate-related Financial Disclosures) are likely to compound any existing structural, procedural, and processing challenges.
The FCA has made it clear that stricter rules on climate risk reporting (likely mirroring the TCFD recommendations) are coming in 2023 and with even tighter requirements likely in 2025. Likewise, the Trustees of the International Financial Reporting Standards (IFRS) Foundation are working towards a common internal reporting standard - as data vendors face the issue of standardisation in the calculation of ESG scores. 


What does this mean?


All this uncertainty exacerbates the need for Asset Managers to ensure they can provide the Investment teams with accurate, reliable and transparent data. This is fundamental, as without it, managing the ESG process, look-through structures and complex reporting is likely to increase overheads in terms of both people and time.  


Whether dedicated or integrated investment ESG teams are employed, the data needs to be shared and available. This ensures that all proprietary portfolio construction and stock selections are cognisant of ESG risk levels, that monitoring is in place, and performance contribution is accurately measured.


In summary


ESG integration is still a challenge for many, one that is compounded by the uncertainty of the reporting roadmap ahead. At Liqueo we are confident that we can meet this challenge and guide our clients toward the best choices for sustainability and return on investment.


To get in touch with us today, contact us via info@liqueo.com 

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