Mon, Nov 22, 2021

Incorporating Carbon Audits Into a Holistic ESG Approach

Previously one of the world’s leading industrial centres, Glasgow has once again been under the global spotlight as it hosted COP26 (or the 26th UN Climate Change Conference of the Parties to give it its full name), which began on October 31. International concern about the impact of climate change is making its influence felt in the investment community and is reflected in increased scrutiny of environmental, social and governance (ESG) metrics. Vast numbers of professionals, and huge troves of data, are involved in evaluating the ESG ratings of funds and listed businesses. In making these assessments, fund managers and investment firms would be wise to ensure that they have their own houses in order. And a sensible, pragmatic, yet frequently overlooked, starting point for this is understanding and looking to reduce one’s own carbon footprint, itself a vital component of ESG performance.

Last year, we looked at the rise of ESG metrics and reporting in Asia. ESG ratings recognise that factors beyond pure financial reporting can have a big influence on the future performance of a business. Looking at issues such as how a business treats its workers in geographically-dispersed supply chains, how it responds to climate change, or the provenance and sustainability of raw materials, ESG factors represent both commercial risks and opportunities.

All of Asia’s major stock exchanges have ESG reporting requirements. Indeed, The Stock Exchange of Hong Kong updated its guidelines last year, and we anticipate that the drive for increased transparency on ESG performance will continue, in response to demand from both the public and investors. This makes sound commercial sense too - study after study demonstrates that businesses and funds with high ESG ratings tend to outperform the market. Between March 2020 and March 2021, S&P Global Market Intelligence found that 19 of 26 ESG funds analysed outperformed the S&P 500.

The world of ESG metrics is vast in scope. MSCI ESG ratings assess more than 680,000 equity and fixed income securities globally to create ESG scores for around 53,000 mutual funds and exchange-traded funds globally.

From November next year, the Securities and Futures Commission in Hong Kong will require licensed asset management companies to collect and disclose greenhouse gas emissions data of their investment portfolios. In early 2022, the Monetary Authority of Singapore will enhance its regulation around ESG disclosures for retail funds. Such moves present a good opportunity for asset managers, private equity funds and other investment houses to have a holistic strategy and framework, which considers not just the investments, but their own operations - particularly in light of a direction of travel that entails an ever-greater scope of disclosure.

One of the many indicators in ESG scores is the associated carbon footprint of the organisation. Measuring the carbon footprint is an essential component of any sustainability strategy. It’s impossible to formulate a plan to reduce an organisation’s impact on the environment without an understanding of its default performance and the key metrics that feed into that.

The process of calculating an organisational carbon footprint begins with the preparation of a report - in line with the relevant International Organization for Standardization standards and Greenhouse Gas Protocol guidance - on the energy consumption patterns and carbon emissions for the previous financial year. With that assessment made, the next step is developing a strategy for reducing the level of emissions along with a wider sustainability framework. This looks holistically across the business at all aspects of carbon impact, including food waste, supplies, water management, etc.

To give an example, food waste is a particular problem in cities across Asia with a widespread tendency for restaurants to serve lunches to city workers in disposable, plastic containers with single-use cutlery. The hygiene measures caused by the pandemic have exacerbated the situation. Solutions to these issues include separate bins for different types of waste, and initiatives to reduce the use of disposable items. In the high-rise commercial premises of Asia, businesses are likely to have to work with building management. Organisational culture plays an important role in reducing carbon footprints and senior executives must be prepared to lead by example.

There are similar considerations, and appropriate remedial strategies and tactics, for all the areas of a business that play a role in carbon emissions. The key is to address each area in a systematic manner with clear identifiable steps and measurable goals.

For those businesses yet to start the process, there have been questions about the merits of beginning now, given that staff have been working remotely for much of the pandemic - which could potentially skew the initial evaluation of energy usage. Our view is that the situation makes for perfect timing. You can assess the carbon footprint prior to the pandemic, and during it. The latter measure gives a baseline to aim for as we move into the realms of the hybrid office, and the evaluation of the carbon footprint on an ongoing basis.

COP26 takes place in a year that has seen catastrophic floods in parts of China, deadly heatwaves in North America and wildfires across the globe. We are hoping for some constructive and positive steps to come out of the gathering. If humanity is to successfully mitigate the most severe consequences of climate change, we are all going to have to play our part. If your business hasn’t done so already, implementing a carbon audit is a simple and effective place to start, and we’d be happy to talk through your options with you.

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