Why an ESG Strategy is a Must!

Understanding Corporate Responsibility

The past 18 months have seen considerably increased momentum for socially responsible investment and strategy. The growing demand for companies to address environmental and sustainability concerns has surged. Investors, corporate partners, and international trade relations increasingly measure and compare corporate performance by environmental, social, and governance (ESG) criteria. Public discourse, local and external pressures in supply chains, and evolving regulatory environments are progressively calling for Boards and business leaders to disclose their strategy for responding to ESG risks and opportunities created in their business’ ecosystems.

Investment is Forcing Change

Leverage agile frameworks to provide a robust synopsis for high level overviews. Iterative approaches to Financiers and trade partners are more regularly seeking companies and their directors to drive change from the top down, requesting and more so nowadays requiring implementation of effective ESG frameworks as “ticket to play”. Shareholders worldwide are forcing enhanced and regulated ESG disclosures by increasingly directing their investments to those companies with evidenced and sophisticated ESG thematics. As companies are being increasingly made aware of the risks of doing very little or nothing, and how this directly impacts their reputation and financial performance, it has spurred the actions of many to address ESG quantifications and planning, urgently. Shareholders of large public and private companies are beginning to elect to remove Board Directors who do not appropriately address climate change issues and the risks greenhouse gasses pose to the planet. In response, there has been overwhelming attention directed towards ESG education with a view to better understand how to formulate strategies that turn ESG into ESV derivatives.

A Legal Perspective

Capitalize on low hanging fruit to identify a ballpark value added activity to beta test. Override the digital As stated by McCullough Robertson Lawyers, Australia does not currently have a specific regulatory framework requiring ESG disclosure or standards for such disclosure for companies and their directors. At present, ESG disclosure obligations are regulated indirectly through companies’ reporting obligations, the ASX listing rules, the enforcement of directors’ duties, and the impact that not having a robust ESG framework can have on a company’s market perception, financial performance, and ability to attract investors and trade partners. Compared to Europe, Australia lags in policies requiring carbon accounting to become part of yearly accounting practices, especially for publicly listed companies. Indirect means of enforcement lean heavily on the responsibility of business owners to enact their own carbon strategies to address planet issues. The lack of policy presents both risks and opportunities for Australian companies. ESG considerations are becoming fundamental requirements for operating a business as customers and consumers become more concerned about purchasing sustainable products with traceable origins. As ESG compliance and reporting obligations continue to grow and evolve in Europe, Australia is anticipated to follow in the short-term.

Economic Impacts of Change

Paving the road toward carbon neutrality requires short and long-term planning that can be measured, and dynamically adjust to changing disclosure regulation as and when needed. It is imperative to note that there will be instances where short to medium-term profit may outweigh environmental action (as explained in the previous article, Going Black to go Green). Boards, aware that climate change will or is likely to have an adverse impact on a business or trade ecosystem, do not necessarily have to advocate for change if they have a reasonable foundation for the inaction – namely the demands of their shareholders. The example of mining companies required to mine considerably more rare earth metals to support the transition to green is a prime demonstration of cations that could be noted as a must now to drive exponential change later.

An ESG informed risk analysis covers businesses and their shareholders from blindly following previous assumptions when change is upon the world. An honest, factful reporting regime that underpins informed decision-making will allow C-Suite executives and company Directors to demonstrate the reasoning and responsibility behind their actions.

Legal Guide Rails

Nevertheless, the ASX Corporate Governance Council introduced its Corporate Governance Principles and Recommendations (CGPR) in 2003. These principles have provided guidelines for listed companies to both adhere and respond to climate change and ESG reporting. The requirements (under Listing Rule 4.10.3) are to disclose in as such in a Company’s corporate governance statements. The extent to which corporates have adhered to the CGPR is required as part of these guidelines. Closing requirements must also address where companies have strayed from said guidelines, specifying how and why. Significantly, CGPR recommends disclosing environmental and social risks, including a plan as to managing the risk. These reporting standards are unfortunately not keeping pace with consumer and international demands for more detailed and data-based reporting but are anticipated to become more stringent in the short-term to align with global best-practice standards. Therefore, a robust ESG mechanism must be in place to ensure that Directors are not at fault when steering companies. ASIC is also closely watching the ESG space to deter and punish activities that go against a business’ moral and ethical principles, including falsifying actions in climate change when actions differ from published materials – a common (but declining) trend in the absence of standardised reporting regulation.

Direct and Indirect Impacts of Climate Change

Global warming, inflation and supply chain disruptions are immediate concerns that further warrant adequate ESG discussions, plans and preparations on a sliding scale toward carbon neutrality. However, global hunger, homelessness, sickness, and disease, coupled with ageing populations and lack of medical assistance and capital, will impact thousands of businesses. Whilst climate change undoubtedly directly and indirectly affects public and private organisations, it is the response to change that matters most.

Deterring Exploitation

The push to be more accountable, trusted, and responsible for climate matters is forcing more substantial strategic thought and governance mechanisms into business ecosystems. The demand from consumers for more sustainable products and ESG-conscious companies has seen a disturbing rise in fraud. The type of fraud described is, in practice known as ‘greenwashing’. As an example, greenwashing is often evident on products found on supermarket shelves and purchased online that claim to have socially responsible logos, or trade makes, which prompt buyers to pay more for environmentally or socially ethical products, with claims often being entirely unfounded or misrepresented. When a company exaggerates its environmental credentials or brings superficial processes to the fore, it can receive falsified monetary and reputational gain from misrepresented actual value – notwithstanding the significant risk in doing so. 

A company’s carbon or ecological footprint must be measured and not guessed to have factful accounting. The industry seeks factful mechanisms that blockchains can resolve to create trust in these environments. Companies caught greenwashing or cheating on emissions tests face significant penalties, with the interconnectedness of world trade also impacting trade relationships and negotiations.

Honesty is the best policy, and the realisation that entwined relationships can help foster more reliable and sustainable partnerships is an advantage to quicker action that has a real impact in a positive way. Greenwashing may breach misleading or deceptive conduct prohibitions in Australian Consumer Law, the Corporations Act, and the ASIC Act 2001 (Cth), and expose directors to risks, including shareholder backlash and more importantly, prosecution. Therefore, it is critical to act and not react to the risks and exposures of climate change.

Formulate Measurable Strategies

Ocean Blocks works with various industries to quantify and formulate measurable strategies that are environmentally and socially focused as well as locating value in the transition toward carbon neutrality. Reduce your exposure and risks of climate change by accurately quantifying your approach to carbon neutrality with Ocean Blocks.

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