The topic of sustainability has undoubtedly gained massive traction and momentum across industries over the past years. According to Martin Weirich, ESG is more than a buzzword and a PR trick — businesses have realized the beneficial impacts of sustainable models. From this, the term ESG or Environmental, Social, and Governance has emerged — and it's here to stay in the hopes of a better future for the world.
In this episode, Martin Weirich, Partner Financial Services Management Consulting at PwC, discusses the basics of ESG. Martin delves into the regulatory aspect of ESG and how it can help make the world a better place. He talks about shifting the perspective and the future trajectory of ESG regulations. He also shares the most significant challenges companies face and how to navigate them.
Tune in to the episode to understand how ESG is changing the ways of companies and the world's future.
Here are three reasons why you should listen to this episode:
- Learn the three aspects of ESG.
- Discover the impact ESG makes on companies and the world at large.
- Find out Martin's prediction on what the ESG landscape would look like five years from now.
Resources
Episode Highlights
[01:19] What is ESG?
- ESG stands for Environmental, Social, and Governance.
- The environmental aspect includes concepts around climate, biodiversity, energy consumption.
- The social aspect concerns equal opportunities, human rights, health and safety, etc.
- Governance is about determining good governance and dealing with topics from an organizational standpoint.
[02:18] The Regulatory Aspect
- The European side has already committed politically to specific ties they want to achieve as a region by 2030.
- There’s a new required regulation influencing different sectors to support the political world to reduce greenhouse gas emissions and move toward renewable energy.
- The regulators began with the financial services sector because it deals with the orientation of capital flows.
- Achieving the requirements also requires acquiring information (financial and environmental advocacy) from investee companies.
- These are not only regulations for bureaucracy’s sake but to make the world a better place.
Martin: "I think the dimension has a prompt. It's not only doing a tick box exercise from a regulatory perspective but also thinking out 'How can my products and my services help contribute to the overarching goals that we have all set?'"
[06:26] More than Just a PR Statement
- A lot of companies used ESG as a marketing instrument in the beginning.
- However, these companies soon realized that there's also public transparency enforced by regulators, clients, investors, and associations.
- Mislabeling, such as green-washing, is a significant risk from a reputational and management perspective.
- The regulations have defined standards and metrics to make ESG initiatives comparable across different industries.
- Many companies have shifted from being very marketing-driven to producing substance first and then being vocal.
[10:10] Diversity in Companies’ Board of Directors
- A diversified board is a great step towards achieving the governance aspect of ESG.
- Many corporations have intrinsic motivation to have diverse views on the boards.
- The US is leading on the topic of diversity. The European side doesn't have a detailed discussion of what a diversified board should look like.
- There's a push to have internal discussions and debates within firms about living up to this diversity standard.
- It’s not realistic to change everything at once. It’s more about defining a transition plan towards aligning on the targets and making it public.
Martin: “The diversity element is just one element that’s really helping to spark discussions and to get corporations and leaders thinking what you can really do differently to contribute to the overarching goals.”
[13:27] The Current Social Aspect
- The social aspect is now following the focus on the environmental element.
- The focus of the debate on the European side is on taxonomy regulation. It's about determining whether an economic activity is sustainable or not.
- There are emerging discussions on what defines social activities that deserve support, investment, and improvement.
- People are exploring the topics of human health, safety, and human rights in more detail from a banking and insurance perspective.
- More companies have realized that focusing on the social rather than the environmental aspect of ESG can help them make an impact.
[16:52] Shifting the Perspective on Regulations
- ESG regulations are now more purpose-led. As such, there's momentum within the workforce to do something different because they see a meaning behind it.
- Companies used to see regulations as a burden and an additional cost factor.
[18:13] Sectors Where ESG is Most Impactful
- Almost all sectors are moving toward becoming more sustainable or producing more sustainable products.
- More regulations have triggered financial services at an earlier stage. But there’s also a growing sustainability movement in other high energy-consuming sectors.
- A growing focus on stakeholders instead of financial KPIs is a common theme across sectors.
- There’s also a focus on optimizing supply chains to become more sustainable and transparent.
- The two sides of climate risks are how the climate influences the business model and how to improve how the company is impacting the climate.
[21:17] The Challenges Companies Face
- The current greatest challenge is data and implementation.
- Another is the changing political environment outside pure sustainable topics, i.e., other current problems.
- The challenge to data access varies on the sector type. It may involve information on supply chain, loan sustainability, sustainability of investee companies, etc.
Martin: “The market is still maturing, but we are not there yet where we need to be.”
[24:40] Data Access Trajectory
- Companies will have to disclose some information publicly in a format that makes it easier to digest.
- Presently, we rely on data providers with their own cost and fee structures.
- In the future, data will be available in regulator-defined public databases and data clouds.
- It will not be enough to rely on public information in some cases. Thus, a hybrid data architecture from vendors and external experts will still be beneficial.
[26:11] Martin’s 5-Year Predictions
- ESG will still be very high on the priority list of all leaders.
- There are a lot of new market developments where small niche players will help pivot change.
- Five years from now, we still won’t have achieved what we aimed for from today’s perspective. The journey is more of a marathon than a five-year sprint.
- There will be no sector or corporation that will not focus on sustainability. There will be a lot of public pressure behind it.
- Some smaller players will struggle with the significant overhead of regulations that drive ESG progress.
[27:54] Jay’s Key Takeaways
- Attention on the subject of ESG has recently gained substantial momentum and traction worldwide.
- There's a lot of regulatory focus that is a groundswell of public and societal desire. Implementation of regulations follows a gradual buildup approach.
- ESG is aspirational for the greater good, aligned with doing good in the world using methods and frameworks and accomplishing that in measurable ways.
- New industries, products, and ideas are being created as a part of ESG.
About the Speakers
Martin Weirich is a Partner in Financial Services Management Consulting at PwC. His role is to help asset managers and banks transform toward sustainable finance. He is also responsible for helping his team implement the EU Action Plan and adapting business and operating models based on new ESG products and regulatory requirements.
If you want to reach out, can contact Martin Weirich via LinkedIn.
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