December 2022

A strong ESG proposition can create value for organizations and their shareholders, help facilitate top-line growth and reduce costs.

The business landscape has evolved and today, consumers and investors prefer to do business with companies with strong ESG performance as compared to companies whose environmental, social, or governance practices may pose a greater financial risk.

While ESG is increasingly gaining popularity, it is imperative to implement an ESG strategy for a business to stay competitive.

Here are ways ESG can create value for an organization.

Efficiency & cost savings: ESG fosters cleaner and more efficient practices that drive down the organization’s operating costs substantially as well as environmental footprint.

Maintaining & heightening business reputation: An organization’s reputation determines the interest, and investment received from investors, stakeholders, employees, customers and the general public. The ESG engagement information forms opinions of an organization and makes all involved build trust and loyalty. Today, customers are willing to pay more for products from reputable and socially responsible companies.

Fostering innovation: Future markets, policies, and social systems will demand for cleaner and healthier products and services. Effective ESG engagement and relationship building encourages sharing of knowledge, expertise, and values that nurture future innovation.

Attract investment: Organizations with poor corporate sustainability disclosures may often be seen as risky investment propositions. Overall, investors consider ESG investments safer and more stable bets.  Investors are looking for ways to generate returns from socially and environmentally responsible companies, so disclosing data around your organization’s impact is a great way to attract interest from investors.

Alignment with industry standards: ESG is quickly gaining popularity with investors and the general public therefore placing so much importance on environmental issues.  ESG is becoming the standard and adapting is the next obvious thing to do for businesses.

Integrating ESG into your business strategy

Consumers, shareholders, and investors are demanding greater transparency in business operations hence businesses have to demonstrate open communication and accountability.

Integrating ESG into your business operations is an opportunity to revisit your organization from the ground up and ask those fundamental questions of responsibility, resourcefulness, and community. Not because consumers are emotionally invested in them, but also because it is the right thing to do.   

Here are five ESG insights and actions to help you integrate ESG strategies into your organization’s DNA and create a purpose-driven brand.

Embed it into your strategy: While the strategy must retain a level of flexibility, it must also be actionable and measurable to stay on track. Define your ESG priorities with associated objectives, time-bound targets, and key performance indicators to evaluate performance and develop a robust strategy that is integrated into the overall business strategy for the organization.

Get your data right: Having the right ESG data is key to transparent and meaningful sustainable finance. Gather the right information for ESG strategies so as to derive more value by collaborating across a business ecosystem. Build an ESG data strategy in alignment with the business data management policy focusing on data quality and transparency.  

Tell your story: Communicate your ESG vision clearly to win consumer, shareholder, and investor support. Develop a method to monitor ESG matters in accordance with a standard reporting framework to stay transparent to ease the journey of those following your sustainability journey.

Be innovative: Organizations should look for ways to transform business models and innovate market-making solutions to move toward the goal. Strengthen operations that can lower carbon emissions by adopting new technologies and sustainable practices.  

ESG has quickly gathered momentum in the past years and great strides continue to be made. Businesses must now act to embed ESG into their strategies if they hope to remain ahead of public and regulatory expectations.

By: Meiraj Hussain, Group Head of Support Services, Al Masaood Group, Abu Dhabi

We live in the era of that three-letter acronym ESG, and yet governance is the issue that is spoken about the least. I want us to change this. The good news is that governance is a subject that is very much top-of-mind, at least with company executives and their shareholders. Over the past decade, I have seen how governance has moved from being an unavoidable but unpopular necessity to a function that is highly valued, especially by governments, business leaders, and investors.

This change is long overdue, especially as it relates to how the region’s business environment is perceived. The aim of any governance function should be to ensure that any organization complies with all relevant laws, that its employees follow minimum standards of behavior, and that there’s a sense of accountability for all actions taken.

The drive to make governance fundamental to how we operate is bearing fruit. Today, I’d argue that the regulations companies in Saudi Arabia must adhere to are on a par with best practices from many other regulatory environments. Disclosures have been widened to include both environmental and social issues, as part of a push for ESG-related transparency. And there’s a strong demand for governance professionals among Saudi firms, both large and small.

Let’s go beyond the legal reasons why governance matters, and talk about why governance is fundamental for how we operate as organizations. As individuals, we look to deal with those we trust. Trust is based on a number of simple truths. These include, firstly, repeated interactions with others. These interactions must be honest and transparent. Finally, you build trust and reputations through doing what you promise.

This is why governance matters so much for the other two letters, E and S. Governance is the beginning of the journey to become more sustainable. Governance ensures that we are behaving in a way that is, at a minimum, acceptable and is transparent. Without these values, organizations would flounder to achieve any of their environmental or social goals.

Let me spell this out in practical terms, with an example from the Kingdom. Last year, the country’s stock market regulator, Saudi Tadawul Group, issued guidelines for ESG disclosure best practices. The aim was simple enough, namely to help the Kingdom’s publicly-listed companies adopt and stay up to date with the latest ESG practices. The regulator added that it would keep updating this guide, to ensure that it would become a “catalyst for sustainable and inclusive growth”.

The approach taken here has been to build on good governance practices and widen the focus to both environmental and social practices, and help entities understand how these areas are both interrelated and relevant to their businesses.

This type of approach makes sense for business leaders, for investors, and for governments. Going forward, I hope that good governance gets just as much attention as any other topic. If we are going to talk about anything and everything related to ESG, we must begin with getting governance right. 

By: Ahmed Abdullah Al-Ahdal, Head of Governance and Board Secretariat, Ceer

As central banks tighten monetary policy, dozens of climate-vulnerable, highly-indebted countries teeter on the edge of a financial abyss. To address the confluence of economic and environmental disasters ravaging the Global South, the international community must provide immediate debt relief in exchange for green investments.

November was a busy month of climate-change politicking. As policymakers tried to make progress at the United Nations Climate Change Conference (COP27) in Sharm El-Sheikh, Egypt, world leaders convened in Bali, Indonesia, for the G20 summit. While neither summit focused on the confluence of environmental and debt crises currently ravaging much of the Global South, both achieved some progress toward providing developing countries with the financial support they need to weather the current storm.

In Bali, the leaders of the world’s biggest economies mostly reiterated their previous positions on the debt crisis, with only minor adjustments. But at COP27, smaller countries were able to make their voices heard and underscore the need for international action on debt relief. Barbadian Prime Minister Mia Mottley, for example, pleaded with the international community to assist climate-vulnerable countries. Her “Bridgetown Agenda” proposes a three-step plan to address the developing world’s crisis, including emergency liquidity injections by the International Monetary Fund, enhanced lending by multilateral development banks and new financing mechanisms.

Mottley was not alone in making a case for addressing the growing liquidity crunch. Colombian President Gustavo Petro, for his part, proposed that the IMF initiate a debt-for-investment swap program that could help accelerate climate adaptation and mitigation projects in developing countries. With the support of the UN’s Economic Commission for Africa, Egypt launched a sustainable debt coalition. And civil-society groups affiliated with the Debt for Climate movement called for canceling the debts of the world’s poorest countries. But, ultimately, the biggest breakthrough of COP27 was the decision to create a loss-and-damage fund that aims to help developing countries mitigate the worst effects of climate change.

But how did debt become the most talked-about problem at a conference on fighting climate change? Russia’s invasion of Ukraine has disrupted energy and food markets, fueling a surge in prices around the world. But while developed countries have struggled with the effects of high inflation, energy-importing developing countries have been hit the hardest. Their foreign-exchange reserves have been depleted rapidly, stretching public finances – already battered by two and a half years of COVID-19 – to the breaking point. Rising energy costs have made electricity rationing and blackouts increasingly common, worsening lower-income countries’ economic plight.

Compounding these countries’ problems further, the US Federal Reserve’s aggressive interest-rate hikes have strengthened the dollar and forced other leading central banks to follow suit. For struggling developing countries, managing the fallout of climate-related environmental disasters such as floods, droughts, and severe storms has never been more difficult, and much of the economic and social progress of the past few decades is being reversed.

Through no fault of their own, lower-income countries are teetering on the edge of an economic abyss. According to the IMF, more than a quarter of emerging economies have either defaulted or had bonds trading at distressed levels. Among low-income countries, over 60% are in or at high risk of debt distress. Governments’ failure to invest in climate adaptation and resilience measures has also worsened sovereign risk and driven up the cost of capital, creating a vicious cycle that will further cripple public finances and debt sustainability.

The G20’s Common Framework for Debt Treatment, which aims to provide debt relief to struggling countries, has not delivered effective and timely action. Moreover, it excludes middle-income countries and lacks a mechanism to ensure private-creditor involvement. Of the three countries that have applied for debt treatment – Chad, Ethiopia, and Zambia – only Chad has reached an agreement with its creditors, and only after a grueling two-year negotiation and without receiving any write-off. The experience of these three countries will likely discourage other distressed countries from seeking debt restructuring.

Much of the debate about climate change and debt focuses on debt-for-climate (also known as debt-for-nature) swaps, which enable countries to erase some of their debt in exchange for funding domestic climate projects. While such arrangements represent a welcome funding source for critical conservation efforts, their high transaction costs and limited volume make them unsuitable for addressing a debt crisis of systemic proportions.

Placing vulnerable countries on a path to climate resilience and green development would benefit debtors and creditors alike. That is why the international community, and the G20 countries in particular, must agree on a comprehensive debt-relief initiative that would enable distressed countries to fund green projects in exchange for partial debt forgiveness.

Now that it has formally assumed the G20 presidency, India should establish an independent review of the G20 debt agenda and make recommendations for reform. Highly-indebted countries, which typically have no voice at G20 summits, must be part of the process, too. At the end of 2021, the V20 Group, which represents finance ministers from 58 climate-vulnerable countries with a combined population of 1.5 billion people, proposed a debt-restructuring scheme that features practical solutions for funding low-carbon projects. The world’s wealthiest countries should seriously consider supporting it.

Another compelling suggestion, supported by French President Emmanuel Macron at COP27, is to convene a high-level panel of experts to grapple with how to ensure longer-term debt sustainability and enable debtor countries to mobilize investments.

The international community must avoid repeating the mistakes of previous debt crises. Doing too little too late would result in cascading crises across dozens of developing countries, threatening social and political stability and further derailing the international climate agenda. To ensure an equitable, climate-resilient future, we must first avert the looming debt disaster.

——————————————————————————-

By: Shamshad Akhtar, a former under-secretary-general of the United Nations; Anzetse Were, Senior Economist at Financial Sector Deepening Kenya; Kevin P. Gallagher, Director of the Global Development Policy Center at Boston University; and Jörg Haas, Head of International Politics at the Heinrich Böll Foundation,also contributed to this commentary.

© Project Syndicate, 2022. www.project-syndicate.org

The recent COP27 climate conference in Sharm El-Sheikh was a disappointment on many counts. But by securing the developed world’s acknowledgement that it bears some responsibility for the global costs of climate change, this COP could one day be remembered as a major turning point.

Many have dismissed last month’s COP27 climate conference as a failure, owing to the lack of progress on pledges made at the COP26 summit last year, and to the absence of clear commitments to phase out fossil fuels. More broadly, the COP process itself has been criticized as inadequate and ultimately unworkable, given its reliance on unanimity among all the parties.

But COP27 did produce one notable breakthrough: the world’s advanced economies, including the United States and the European Union, finally accepted some responsibility for the “loss and damage” caused by climate change. In the bureaucratic language of the final communiqué, they agreed “to establish new funding arrangements for assisting developing countries that are particularly vulnerable to the adverse effects of climate change in responding to loss and damage.” A special committee comprising 24 countries has been established to determine how the new fund will be financed, managed, and distributed. Their conclusions are due at the COP28 summit in the United Arab Emirates late next year.

Yet, given that the Republicans will soon have control of the House of Representatives, it is hard to believe that the US will be putting much cash on the table. There is also uncertainty about whether China will be a major contributor. Although it is now a leading source of emissions, the United Nations still considers it a “developing” country. Finally, while the EU has accepted, in principle, that the countries most responsible for climate change should help bear its costs, it is heading into a recession, which will most likely limit Europeans’ contribution.

China’s involvement is especially important. Not only does it generate almost one-third of global emissions, but the EU has made Chinese contributions a condition for its own participation. Hence, former British Prime Minister Gordon Brown warns that we could end up with a “fund without funders.”

But as real as that danger is, it should not diminish the importance of what governments agreed to at COP27. The developed world’s acceptance of responsibility for the impact of climate change establishes grounds for reparations, and indicates a degree of liability that will now be tested in courts around the world. “Climate justice” will evolve from a powerful slogan into a live legal issue. If climate change is the result of emissions – past and present – and if it is driving the increased incidence and severity of extreme weather, that means this year’s flooding in Pakistan and creeping desertification in North Africa can be attributed to those who caused the emissions.

But who, exactly, is liable? The developed world’s governments have accepted that they are partly accountable. But responsibility, and therefore liability, might also be attributed to the companies that have produced, sold, and profited from the sales of the products that generated the emissions. Energy companies can try to argue that until the 1980s and 1990s, there was no scientific consensus on the adverse climatic effects of burning hydrocarbons. But from the 1990s onwards, that defense cannot stand.

The age of potential liability thus began around 30 years ago, when the Intergovernmental Panel on Climate Change and others started creating a body of credible scientific research. And now, the age of real climate liability is upon us. For the companies involved – particularly those subject to the laws and political decisions of the advanced economies – such liability is an existential threat. It is analogous to the Master Settlement Agreement that resolved the conflict between the tobacco industry and 46 US state attorneys general over responsibility for the medical costs associated with smoking.

But whereas that settlement required the companies to pay a total of $206 billion over 25 years, climate change and its associated costs are much bigger. The risks are global, and they are still growing, because emissions continue to rise. In fact, the worst is yet to come, and the potential costs are almost beyond calculation.

There will be a ferocious legal battle, to be sure. But simply by accepting responsibility for the global costs of climate change, in principle, the parties to the UN Framework Convention on Climate Change have let the genie out of the bottle. Fossil-fuel companies and their investors will not be able to claim that they weren’t warned.

True, COP27 left many participants and observers disappointed. Climate scientists, activists, and others are understandably dismayed that the urgency of climate change is being ignored, and that more immediate issues such as the cost-of-living crisis and Russia’s war in Ukraine are crowding out the attention of policymakers and the public. But the reality is that COP27 will likely be remembered as a watershed moment. Now that the developed world has finally accepted a degree of financial responsibility for the loss and damage caused by climate change, the broader climate debate will henceforth turn on the question of liability. And that, in turn, could fundamentally change the main protagonists’ incentives.

By: Nick Butler, a visiting professor at King’s College London, is Founding Chair of the King’s Policy Institute and Chair of Promus Associates.

© Project Syndicate, 2022. www.project-syndicate.org