We’ve recently seen laudable initiatives to develop a universal green language such as the EU taxonomy, which provides detailed eligibility criteria for economic activities that can be called sustainable in Europe, or ICMA’s Harmonized Framework Handbook for Impact Reporting, outlining core principles and recommendations for impact reporting. However, many aspects of Environmental, Social and Governance (ESG) still remain relative and iterative. Some examples:
- The majority of ESG rating agencies focus on how a company scores relative to its broader peer group.
- Socially responsible investors are typically looking to ESG leaders and laggards within an industry.
- Many issuer engagement efforts focus on improving its ESG performance vis-a-vis the previous year.
Virtuous cycle lifts entire industry
Therefore, sustainability-conscious organisations can therefore never rest on their laurels. Maintaining a frontrunner status requires on-going policy and operational improvements such as, for example, more robust environmental risk management practices or building a more energy efficient supply chain. These continuous improvements should drive a broader "virtuous cycle" that lifts up the entire industry.
Strong opinions, lightly held
NatWest Markets clients most successful in this "kaizen" process tend to follow the adage: Strong opinions, lightly held. They consider their sustainability strategy as core to their role and responsibility as well as a key factor contributing to their broader business success. And they are willing to reflect on their strategy and to adjust it, if necessary, depending on:
- Feedback from investor, pressure groups and other stakeholders
- Developments in ESG rating methodologies
- Technological and scientific discoveries
- Competitor initiatives
- Strategic shifts (acquisitions, divestments etc.)
The below chart illustrates our process.