Essential ESG: Episode 1 – The meteoric rise of ESG

Phoebe Wynn-Pope, Head of Responsible Business and ESG

Kate Gill-Herdman, Special Counsel, Responsible Business and ESG

Phoebe: Welcome to the first instalment of Corrs’ Essential ESG podcast, which is coming to you from the lands of the Wurundjeri people of the Kulin nation. In this series, we’ll be providing deep dives into topical issues in the evolving landscape of ESG in Australia and beyond. I’m Phoebe Wynn-Pope, Head of Responsible Business and ESG and my co-host today is my colleague Kate Gill-Herdman, a Senior Counsel in our Responsible Business and ESG Group. Hi Kate.

Kate: Hi Phoebe. As most of our listeners are probably aware, in the last few years ESG has become the hot topic dominating the market and the media. Today we are going to set the scene for this podcast series and discuss the almost perfect storm of social, economic and political developments that have contributed to this meteoric rise of ESG. We’ll also look at why it is necessary for organisations big and small to understand the issues, manage the risks and take hold of the opportunities.

I suppose getting back to basics for a moment Phoebe, what do we mean by ESG?

Phoebe: ESG is an umbrella term about the environmental social and governance issues that impact on a business. It comes from a long line of sustainability and responsible business initiatives including things like the triple bottom line and the concept of corporate social responsibility, but there is a distinguishing feature about ESG because it is not only about addressing the risks that your business may face from climate change, and that might be things like stranded assets and so on, or from human rights or social impacts so we talk a lot about risks of modern slavery at the moment with the Modern Slavery Act and the required mandatory reporting, but ESG is also about being a responsible business and where possible thinking about how your business impacts on the environment and on people so we are thinking more and more about how to build and put forward renewable energy and resources, build strong and engaged workforces, have committed customers not by profiting from the environment and from people but by profiting them, by benefitting them and making a positive contribution and this goes back to much of what has been said and written about businesses with a higher purpose and that purpose can be linked to profit. So where businesses are thinking about their place in the world and what they can contribute to the world they have been shown to be more sustainable, more productive and often more profitable. Some of this is an acknowledgement that we are moving from shareholder capitalism to stakeholder capitalism and there is a whole range of stakeholders in every organisation that should be considered in the organisation’s operations and also in their supply chains and it means that it is critically important for organisations to be thinking about their ESG impacts and opportunities and to really be embedding that into their strategy going forward.

Kate: Well there have definitely been a few key trends that are built on this idea over the last couple of years. So we’ve had the #MeToo movement, Black Lives Matter, we had COP26 last year and the IPCC’s reports on climate change so I guess that’s the broader context and then when we look at markets specifically we are seeing things like regulators, investors and lenders insisting on greater transparency and leadership on ESG issues. In particular what they are also saying is the strength of an ESG program is often being seen as a good proxy for management. We’ve got our consumers, who are becoming more socially conscious and aware, who are more inclined to vote with their wallets so to speak, so businesses really do have to rethink their purpose, their products and their workforce practices and come back to looking at the holistic approach to purpose and profit. We have also got quite a bit of shareholder activism going on in Australia rallying for net zero policies and pushing companies to adopt transition plans and I suppose holding the board to account on those, so there’s definitely a move towards more robust management of climate related financial risks across the short, medium and long-term horizons.

Phoebe: The question of this focus on climate and the move to net zero by 2050 and a lot of pressure on organisations to bring their carbon reductions down very quickly over the next ten years has been a real focus hasn’t it for lots of organisations?

Kate: Yes I agree with that Phoebe and I think now we are starting to see I suppose the governance aspect be imposed across the E and S together whereas I think previously they had probably been treated a bit separately in the E being prioritised. But certainly now with the big push to de-carbonise business operations I think the S is probably coming to the fore and being seen as a key area of governance for businesses particularly because of the factors we’ve just talked about so socially conscious consumers, shareholder activism, so that’s only going to continue.

Phoebe: And a whole generation of employees, right, who want to work for organisations that are responsible, that share their ethical frameworks and their values and there’s a whole range of kind of human capital reasons why being a responsible business and having a good ESG strategy is really going to benefit organisations going forwards. It is interesting to see the level of regulation now moving as well, like there has been a very big strong market push and often consumer driven and investor driven push to change behaviour across and to encourage business to be responsible across the environmental, social and governance kind of framework. But there’s also this regulatory shift isn’t there?

Kate: There is. If we look domestically in Australia we have APRA and ASIC rewarding companies and the ACCC they will be looking at businesses transition plans, climate transition plans, they will be looking at greenwashing claims to make sure that businesses are actually doing what they say they will do and what they say they will commit to. We’ve got the SEC in the US now putting out proposed regulation around climate disclosures and we’ve got in Europe, which is probably the furthest advanced, we’ve got the green taxonomy I suppose which is looking how you allocate capital towards a more sustainable future at a particularly high level. That’s really around the E.

Phoebe: And on the S side we are also seeing a lot of regulation, right, because we’ve got the Australian Modern Slavery Act which is requiring reporting entities to actually look at the risks of modern slavery in their supply chains and their operations and it strongly uses the United Nations Guiding Principles on Business and Human Rights as a framework and applies that, but more importantly what we are seeing in Europe is a shift not only for modern slavery reporting and due diligence but human rights due diligence so organisations are increasingly being required – so in Germany and Norway it is already mandatory and the European Union has issued a directive to the effect that they are going to introduce mandatory human rights due diligence. So this regulation, this idea that standards that have been voluntary for responsible businesses are going to become mandatory is a real trend that we are seeing and organisations that want to get ahead of the trend and be prepared for the future need to be thinking about these things.

Kate: Yes Phoebe and I think as well for those who aren’t positioning themselves to be keeping up with all the regulatory trends that we’re seeing, we’ve just talked about. I think there is probably a risk of litigation, we’re seeing several categories of ESG related claims emerging so there’s rights and duty based claims particularly against governments for lack of action on climate issues. But we’re also seeing actions against major greenhouse gas emitters particularly around representations that they make about their transition plans and goals. We’re seeing challenges to project approvals associated with a significant increase in greenhouse gas emissions and we’re also seeing actions against companies, directors, advisors, about the fulfilment of their fiduciary duties or the disclosures that they make. Broadly that’s what we’re talking about when we use the concept ‘greenwashing’. So I think this trend will only continue.

Phoebe: So in terms of managing ESG and working towards a future of responsible business and good ESG management and meeting the expectations of the regulators and of your investors and of your shareholders and your customers across the board there is quite a lot to be done isn’t there in terms of just building the ESG into strategy, understanding properly the types of issues that come under this and managing them effectively and bringing in the appropriate expert advice where that’s necessary, because often ESG issues have sat in different parts across the business and have been dealt with in a very isolated and siloed way but bringing that all together integrating the assessment and building the appropriate controls and management mechanisms is going to be really an important role for organisations to do throughout the future and I think that that’s a big part of our podcast series is to help people think about some of these issues and the way they need to manage them going forward.

Kate: That’s right Phoebe in this podcast series I suppose what we are really hoping to do and we hope that this is what you take away from it is that we break down ESG, we provide some 101 guidance to some of the key concepts, explain current developments and some of the long term trends we’re seeing. We are going to deep dive into tricky problems, invite some subject matter experts to discuss legal and reputational issues and provide some examples of best practice to help guide you in your ESG program if you are a listener who is involved in your company’s ESG program. So I suppose all that is probably a long way of saying what we really hope to do is just get you thinking about what ESG means for you. If you are an individual listener or for your organisation if you are listening on behalf of an employer.

Phoebe: Yes thanks Kate. It has been really terrific having you on the podcast and looking forward to many more to come. You have been listening to Corrs’ Essential ESG podcast and if you have enjoyed it don’t forget to subscribe wherever you listen to your podcasts so that you get notifications of future episodes.