ESG is a challenge for many companies. Is the paper-thin approach to CSR enough? Are investors serious about demanding tangible evidence of a commitment to sustainability, integrity and good governance as well as strong financial performance?
Fund managers are not investing in building ESG teams to tick boxes or review paper. The ESG teams are performing analysis alongside their financial analyst colleagues in executing investment strategies. They are looking for substantive progress in the areas of sustainability, integrity and good governance because this represents progressive, good management. The identification of risk, its mitigation and active management is an indicator of good management.
We have been working with a number of companies on ESG related issues and speaking at a number of ESG events and it is clear that the last 18 months has seen a step change in interest in ESG. This raises the question as to whether companies have actually understood the opportunity that ESG investors may present.
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 and it is on a journey.
It has developed comprehensive policies indicating its interaction with key ESG issues such as environmental impacts, water usage, pollution and also how it’s tackling bribery and corruption, human rights and its symbiotic relationship with local communities. It is in a strong position: its products make a huge positive impact on agricultural activities and communities in developed and developing territories.
Yara also realises there are challenges that it must recognise, and put in place plans to mitigate or improve the way it addresses these challenges. The company has designed its ESG assessment framework which draws on good practice from a number of sources, including the GRI, IFC Performance Standards and GoodCorporation frameworks. It has just completed its first trial of the assessment and local management in the assessed entity reacted very positively: the framework helps them identify their weaknesses and points to potential solutions or mitigation. This is regarded as HQ empowerment of a constructive engagement with their local stakeholders. There are multiple benefits in terms of staff motivation and productivity, customer engagement leading to better sales prospects, suppliers developing policies that respect the environment and worker welfare and many more.
The next step for Yara is for this assessment to be rolled out to other operating divisions internationally. In due course there should be a mixture of internal and independent third- party assessments so as to provide verification of the substantive embedding of good ESG practices throughout the group’s operations.
In adopting this approach, Yara’s management is demonstrating to the financial markets that it recognises that long-term financial performance is interlinked with sustainability, integrity and good governance. As such, fund managers should be able to find the evidence they need to track the sustainable value enhancing strategy upon which Yara has embarked. It is early days, there will be those that feel threatened, or who feel ESG can be superficially addressed. But the evidence from the capital markets is that financial performance PLUS ESG performance is here for the long term.
Posted by Gareth Thomas – Director of GoodCorporation – November 2018
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