ESG can be a challenge for many companies. As the flow of capital into ESG funds continues to rise, investors have been building teams to look for tangible evidence of a company’s commitment to sustainability, integrity and good governance as well as strong financial performance. This case history showing how an effective ESG strategy can be implemented, explores to role of investors in driving ESG and the steps that need to be taken by companies to respond to their demands.
Investor teams are focussed on analysing corporate ESG goals in depth, looking for evidence, not just of a commitment to ESG, but of substantive progress in key areas of sustainability and non-financial risk management. Investors are increasingly attracted by the ability of companies to identify their non-financial risks, viewing their capacity to actively mitigate and manage these risks as indicators both of long-term corporate viability and strong, progressive management. Furthermore, there is no doubt that the data they are looking for must be equal to that provided as evidence of financial performance.
Increased focus from investors on ESG matters
Having worked with a number of companies on ESG related issues and spoken at several events, it is clear that the last two years have seen a step change in interest in ESG. As recently as 2019, businesses reported that while much was being written about ESG in the financial press, investors rarely asked about ESG matters in face-to-face meetings. This is no longer the case. Investors now routinely raise ESG matters, ask detailed questions and expect companies to demonstrate a clear understanding of their material ESG issues.
One of the companies that has grasped the importance of these developments is Yara International. The company is a fertilizer multi-national that was spun out of Norsk Hydro that has publicly committed to fulfil its vision for a sustainable future.
Yara’s stated aim is to feed the world responsibly and protect the planet. It is transitioning from being a commodity producer to a crop nutrition solutions provider, working in collaboration with farmers worldwide to deliver climate-neutral food production.
Identifying ESG impacts as part of an effective ESG strategy
This ambitious aim is borne out of the recognition that agriculture is a major source of greenhouse gas emissions, but that by improving land use efficiency it is possible to grow more on less land, thereby preserving more hectares as natural carbon sinks. To support these aims, Yara has developed comprehensive policies that specify how a wide range of ESG issues such as environmental impacts, water usage and pollution will be managed. It is also evidencing its approach to tackling bribery and corruption, human rights and its symbiotic relationship with local communities.
Yara comes to this from a strong position. Its products make a huge positive impact on the agricultural activities and communities in developed and developing territories where it operates. Yara also realises that when there are challenges, these must be faced not buried. Problems are acknowledged with clear plans put in place to mitigate any negative impacts and improve the way the company works.
Developing an ESG framework
The company has designed an ESG assessment framework drawing on good practice from a number of sources, including the GRI, IFC Performance Standard and GoodCorporation frameworks. Using this framework, which GoodCorporation helped to shape, Yara undertook a series of assessments of its local operations. Local teams were closely involved, reacting extremely positively to the findings, even where weaknesses were identified. Helping local management to identify possible solutions and mitigation measures was seen as a positive form of head office empowerment. Such constructive engagement with local stakeholders had multiple benefits, including staff motivation, increased productivity and better customer engagement. This led to better sales prospects, suppliers developing policies that respect the environment and improved worker welfare.
Demonstrating a commitment to ESG goals
Demonstrating its commitment to its ESG goals, Yara has sought to identify appropriate metrics and KPIs to measure performance meaningfully and track improvement over time. The company has also obtained independent third-party verification of a number of its practices and procedures. Human rights have been a particular area of focus. The company considers safe and responsible operations to be the backbone of its business. Respecting human rights is integrated into the company’s compliance programme and its risk management process, engaging independent companies such as GoodCorporation to assist with its human rights programme.
Through this approach, Yara can demonstrate to the financial markets, and increasingly to regulators, that they understand that sustainability, integrity and good governance are integral to long-term financial performance. They can also provide fund managers with the qualitative data they need to evidence that their core ESG issues are understood and are being actively mitigated and managed.
As regulators and the finance sector become more closely aligned as to the governance, strategy, risk management and measurement metrics required as viable indicators of long-term sustainability, it will become easier for companies to provide the evidence needed to support ESG capital allocation. In the meantime, those organisations such as Yara, already at the vanguard of ESG management are leading the development of ESG best practice.
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