For quite some time now, ESG (Environmental, Social and Governance) has been spotted in different business sectors. Industrial ESG is developed towards adding to the benefits within the industry. By gaining a deeper insight of these measures, the major drivers for the implementation of an ESG strategies are the social, environmental, and economic impact they can generate.
Learn more about Industrial ESG benefits, in this article.
- Description of ESG
The concept of ESG is growing in popularity. It first appeared in the mainstream media in the early 2010s when, while taking investment decisions, some actors began considering more factors than just profitability and risk management. The acronym “ESG” was coined because it summarises several of the main objectives that investors may have. For the last 20 years, it has become quite common to see more pressure exerted in achieving better standards involving business practices. A good example of it is the implementation of corporate governance codes in the form of legal requirements for companies.
It was then that governments, investors, and consumers were made aware of the impact of their power in shaping entities’ sustainability challenges. ESG is increasingly used as a framework to assess an organization’s business practices and performance on various sustainability and ethical issues. Part of the reason for the success of ESG is that these considerations bring together around the same table stakeholders with common interests: society at large, employees and shareholders.
- What is ESG, what is relevant for energy and why?
In corporate terms, the application of ESG principles impacts a company’s financial performance. For example, environmental regulations and image reputation can cause a loss of the attractiveness of a company but also an improvement of its market standing. In the industrial realm and especially in that of structural investment, the term has matured into a specific set of principles. Financial considerations are not the only drivers of ESG: the improvement of operational efficiency, risk management, and employee engagement are some other attributes involved in ESG strategies.
The biggest influence of ESG in the energy sector is the potential impact on the energy transition process. The aim of the energy transition is the decarbonization of the energy value chain. Currently, becoming net neutral (net-zero greenhouse gas (GHG) emissions) is a European priority to be completed by 2050. Thus, there are 3 main ways for ESG to show its potential in energy transition:
- In relation to GHG emissions: industrial activity needs to report its emissions on an annual basis and is required to buy EU ETS allowances to offset the former.
- Generation of renewable energy: its main role in the energy transition is clear, i.e., reducing environmental impact and using environmental-friendly input sources (hydropower, solar, wind, geothermal).
- The energy efficiency improvement processes: reducing energy consumption to reduce carbon footprint.
Despite the impact of the E indicator of ESG, the implementation of a precise ESG framework helps identifying, organising, analysing, and prioritising according to diverse business risks. These capacities help to get quick acknowledging to. In addition, the impact of investing (known as one of the major ESG strategies of investing) focuses on a certain category of considerable positive impact. As an example, renewable energy companies move into energy transition and a positive environmental direction. This type of investments brings environmental social and financial return.
Modern strategies are currently small, just a fraction of what the industrial sector development aims to develop. Nevertheless, a fully integrated ESG strategy within the industry may generate a global understanding of the major priorities that need to be improved and stimulate growth towards a similar industrial trajectory whereas risks and potential can be better perceived. It is important not to misuse ESG for greenwashing purposes but rather view it as a whole range of opportunities to increase investment potential and economic growth.
- What economic impact is there in an ESG strategy?
The central goal of following an ESG path is sustainability, the ability of a company to have a continued and profitable existence. The implication is that the health of a company depends on the well-being of its key stakeholders: communities, employees, and shareholders. Therefore, the ESG transition, expressed in economic terms, can be viewed as involving the protection of investments. Moreover, to avoid financial risks associated with climate change, work disputes, human rights issues, poor corporate governance, and any resulting litigation, ESG becomes a means of protecting investors.
In HES experience, energy efficiency measures generally bring immediate economic returns. Thus, the focus of investing in energy efficiency strategies creates a positive feedback loop of savings and newly generated revenues. Diverse actions such as eco-design, the efficient use of resources for energy production and self-consumption and other tailor-made added source of value can be developed for greater energy efficiency.
- How can ESG benefit shareholders?
The value of the equity is generally based on the discounted cash-flow of all potential future dividends, whether such dividends are reinvested in a specific year or not. As such, sustainability measures help increase the time horizon of a company and the number of years it can pay dividends, provide employment, and contribute to community welfare. Moreover, sustainability measures can also incur medium- and short-term benefits, in the way that efficiencies are achieved, namely through energy sourcing and uses, in the motivation of workers, and in the likelihood that new talented workers will join the company. All these measures, therefore, translate into increased dividends. These benefits are expressed as a protection of the company’s financial performance and reputation, enhancing company value.
- In which form can these benefits be identified on industrial ESG?
Improved environmental performance of an industrial activity can be beneficial in several ways:
- The improvement of material and energy use: The implementation of energy efficiency measures is correlated with an increase in suitable conditions of industrial installation and energy optimizations.
- Higher efficiency meeting higher standards. This compromise calls on “big fish” companies and sets the industry standard in terms of requirements and the rating of the improved system for the consumer.
- The application of these measures decreases the vulnerability of the customers to the volatility of energy price and cost of materials.
- Why do shareholders want to invest in ESG?
Frequently shareholders’ interest in investing in ESG is driven by 6 main reasons:
- Undertaking climate action
- Creating sustainable companies, thus securing long-term profitability
- Motivating stakeholders: employees, the board of directors and suppliers
- Increasing customer loyalty
- Regulatory compliance
- Economic savings along the supply chain and increased resilience
These are all reasons why higher ESG performance correlates with higher returns, lower risk, and long-term business sustainability.
- How can shareholders start a sustainability journey?
Starting a sustainability journey with ESG strategies does not mean immediately satisfying all ESG requirements. Especially in the industrial sector, investments and policies take years to implement. However, a proper analysis of priorities can ensure that measures are taken in order of priority based on the financial benefits the company wishes to receive. Normally, a mix of profitability, ease, and speed is considered when preparing an ESG implementation plan.
The first step is a consultation amongst shareholders and with the board of directors to understand what objectives are reachable to create consensus on key points. A consultation with employees and stakeholders is needed to discover anything potentially requiring a re-evaluation of the strategy based on the innovative insights of employees. The next step is for the board of directors and management to express the shareholder’s consensus in a company draft policy. Throughout this process, advice and analysis can be brought by firms specialised in ESG services. The drafting of the final policy and operational implementation thereof are often the phases when external help is relied on the most. The central challenge is often to build the organisational foundation to carry out sustainability initiatives.
This process can be renewed periodically, as a whole or in part, throughout the years, to review, modify and implement new objectives.
Cheyenne Rueda Lagasse & Enea Albertoli