Sustainable practices are activities aimed at protecting the environment, conserving natural resources, and reducing the impact of climate change on the lives of people. Sustainable practices are important for the future of our planet and for the safety of the coming generation. The benefits of sustainability practices are not limited to improved air quality, reduced water pollution, increased biodiversity and increased resilience to climate change. Sustainability practices also save businesses money and improve the health of individuals and communities. Government, businesses and organizations are responsible for sustainability practices. Since 1994, the UN has been bringing together almost every country on earth for global climate summits known as Conference of the Parties (COPs). 2022 marked the 27th annual summit, or COP27.
The term “ESG” refers to the Environmental, Social, and Governance evaluation standards that businesses use to monitor and assess non-financial performance and sustainability practices. ESG is not only a component of a comprehensive corporate social responsibility (CSR) plan, but it more specifically refers to the sustainability measures and targets that investors assess as part of their ESG investment strategies.
ESG practices are becoming more and more crucial for businesses and organizations. ESG practices can aid companies in lowering risks, enhancing their image, and luring in new clients. In addition, customers, investors, and other stakeholders are seeking out companies that are dedicated to ESG.
The Growing Trend of Investor Preference for ESG Compliant Companies
Over the past two decades, interest in ESG investments and the top ESG businesses has grown significantly around the world. As a result, investors are more knowledgeable about assessing the ESG performance of corporations and identifying the top ESG company leaders deserving of ESG investments. The Forum for Sustainable and Responsible Investment (US SIF) reported that investors’ assets in sustainable investments in 2022 amounted to $8.4 trillion, or about 12.6% of all U.S. Assets Under Management (AUM). This means that $1 in every $8 U.S. investment is in a sustainable fund. Sustainable funds fall into 3 major categories: Socially Responsible Funds, ESG funds and Impact funds. Sustainable funds seek to create tangible progress toward sustainable goals in areas of climate action, healthy ecosystem, resource scarcity, basic needs and human development.
Climate change, a push for a global net-zero greenhouse gas emissions future, and concerning social issues are major factors that are fueling the investors’ interest in ESG compliance. Investors are increasingly seeking investments in renewable energy and investments targeting Sustainable Development Goals (SDGs). There is also a growing perception that companies that address environmental concerns, employee welfare, and ethical governance are better equipped to navigate volatile markets and changing regulatory landscapes. As companies incorporate sustainable practices and address social concerns, investors are convinced of their ability to manage physical and reputational risks while building towards long-term value creation.
The growing popularity and demand of ESG investments has further attracted the support of government authorities in the last decade and even in recent times. In April 2023, President Joe Biden used his first veto to preserve a Department of Labor rule allowing employers to select ESG options for their retirement savings and investing plan otherwise known as 401(k). On 30 March 2023, the government of the United Kingdom also known as the HM Government (HMG) published its 2023 Green Finance Strategy. The strategy is aimed at reinforcing the UK’s position as a world leader on green finance and investment. Particularly, the strategy focuses on increasing private investment in the green economy, ensuring financial stability and alignment of global financial frameworks with nature and climate objectives. The UK government also plans to publish a series of net zero investment roadmaps and nature investment roadmap.
The growing acceptance and interest in ESG investing is still faced with a number of challenges. The first one is the absence of sufficient accurate data to show a positive correlation between ESG compliance and financial performance of companies. As a result, some investors abandon ESG investing and invest in funds or businesses that are certain to produce the best returns. The second challenge is the prevalence of greenwashing. Greenwashing is a marketing spin where a company makes an unsupported claim in order to lead consumers to believe that its products, processes and policies are environmentally sustainable or have a higher positive environmental impact than they actually do. Examples of greenwashing includes: claiming a product is carbon neutral when it is not, using ambiguous language without providing specific details, omitting important information to overshadow the company’s involvement in environmentally damaging practices and, using environmental imagery or symbols to create a false impression of environmental friendliness. On one hand, the prevalence of greenwashing is reducing the trust of investors and making them hesitant to invest sustainably. On the other hand, greenwashing has made investors more knowledgeable on sustainability to be able to accurately assess a company’s involvement in ESG practices. The development of a firmer regulatory framework would lead companies to be more transparent in disclosing their ESG practices and would increase the confidence of investors.
Europe continues to lead the ESG charge and boasts of the highest percentage of ESG investors. This is a reflection of the more mature European ESG market and regulatory framework. Although regulations and adherence to ESG practices differ from region to region, ESG-oriented investments globally are projected to rise significantly in the nearest future. It might indicate that ESG is finally having a significant impact on the economy as a whole, motivating the switch to renewable energy, resilient infrastructure, and social equity.
Defining the Right ESG Strategy for Fundraising and Investor Retention in Nigeria
ESG and sustainability considerations vary across organizations and sectors. Finding and filling ESG gaps in business operations will lead to continuous advancement in sustainability practices and create longlasting corporate success.
First step in crafting an ESG strategy is asking the right questions. It is important for Nigerian firms to ask pertinent questions such as:
- What impact does our business activity have on the environment, individuals, and society?
- What essential components of our company model need to change in order for it to be sustainable?
- What opportunities and threats do sustainabilityrelated issues present for and to our company?
- How should our strategy be modified and adapted into core business operations?
- What resources are needed to implement the ESG strategy?
- How do we align our corporate governance model to implement our sustainability strategy?
- What targets, objectives, rules and action plans should be put in place as we implement our sustainability strategy?
Although there is no sole regulator of ESG standards for corporate entities in Nigeria, there are a number of laws and regulations impacting on ESG and several initiatives adopted by the private sector relating to ESG. It is important for Nigerian firms to develop the right strategy and maintain consistency in implementing ESG action plans towards a sustainable and socially upright future for Nigeria and the world at large.
- How can we track the progress and the success of our action plans in meeting sustainability targets?
- How do we ensure that the whole organisation, from top to bottom is actively involved in our sustainability action plans?
The next step is setting practical and realistic actions plans towards ESG commitment. While the list of potential ESG Key Performance Indicators (KPIs) is nearly endless, there are certain indicators that are peculiar to Nigeria.
Energy demand and consumption, water demand and consumption, greenhouse gas emissions, and resource efficiency are only a few examples of environmental indicators. An example of resource efficiency is the growing trend of individuals and companies making use of solar systems and batteries to generate and store electricity sustainably without depending on the grid. In case of excess electricity generated from the solar system, the electricity can be sold back to the grid. Social indicators take into consideration concerns like worker safety, gender equality, diversity inclusion measures, human rights, and labor laws. Board diversity metrics and executive compensation among others are addressed through governance indicators.
Consistency is key in developing and implementing an effective ESG model. The optimal approach for Nigerian companies would be:
- Identify the most relevant ESG KPIs to the business operations
- Develop a realistic action plan towards sustainability.
- Implement the action plan and scale from relatively small ESG projects to ESG projects of considerable national and global significance.
Although ESG commitments is gaining popularity in all sectors, ESG disclosure regulations is slowly gaining more in the Oil and Gas sector. Other sectors where ESG commitments are gaining momentum include Manufacturing and FMCG, Infrastructure and Construction, Energy and, Financial Services.
ESG compliance has transcended its role as a mere trend, evolving into a fundamental consideration for investors and businesses alike. It is no longer a choice but a necessity for sustainable growth and responsible investing. ESG compliance is now at the center of fundraising plans and investor retention initiatives due to the convergence of financial returns with beneficial societal impact. As the world navigates complex global challenges, the importance of ESG compliance will only continue to grow, reshaping the financial landscape for the better. Although there is no sole regulator of ESG standards for corporate entities in Nigeria, there are a number of laws and regulations impacting on ESG and several initiatives adopted by the private sector relating to ESG. It is important for Nigerian firms to develop the right strategy and maintain consistency in implementing ESG action plans towards a sustainable and socially upright future for Nigeria and the world at large. In drafting the accurate ESG strategy for fundraising and retention, financial advisers can help firms align business operations with ESG strategy and identify opportunities for sustained corporate success. Source- Mondaq.com