ESG Risk Management: Driving companies for more responsible corporate behavior

By Davit Mikeladze, Manager of the Project "Leadership for Sustainable Development," CiDA and Global Compact Network Georgia

When analyzing the World Economic Forum's global risk report, EY highlights that in 2020, for the first time, the top five global risks were related to climate change. Hence, no one doubts anymore that sustainability issues are a source of financial risks. Sustainable finance is considered to effectively respond to these risks at both the global and local levels. It refers to how the financial industry supports the economy through sustainable actions. European Commission defines Sustainable finance as the process of taking due account of environmental and social considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities. Commission also believes that all three components – environmental, social, and governance (ESG) – are integral parts of sustainable economic development and finance.

Katie Abbott and Beth Richmond, associates at BSR, argue that failing to manage environmental, social and governance (ESG) risks can lead to material business impacts, including missed profits, operational results, and loss of license to operate. A growing number of markets also recognize climate risk as a stand-alone factor affecting the performance of lenders and borrowers, and ESG risk management standards are carefully considered when making investment decisions by international financial institutions worldwide. Hence, it is natural that ESG risk management becomes an essential part of the sustainable financing process.

It is interesting to see what is done for encouraging sustainable finance practices in a lower-middle-income country, like Georgia. The National Bank of Georgia (NBG) supports strengthening the role of the financial sector in the sustainable development of the country and, for this purpose, develops a framework for green, social, and sustainable finance. The Roadmap for Sustainable finance in Georgia has been created in cooperation with the IFC and SBN (Sustainable Banking Network). The Roadmap consists of 4 main pillars:

1. Increasing awareness, providing guidance, and building the capacity of the market on sustainable finance;
2. Driving more capital flows to sustainable sectors and investments to achieve a green and socially inclusive economy;
3. Embedding ESG management into risk-assessment frameworks and decision-making processes of financial institutions and corporations;
4. Ensuring greater transparency and market discipline through minimum ESG disclosure requirements for financial institutions and corporations.

Successful implementation of the Roadmap requires close collaboration and coordination among the different stakeholders, where the business sector, would it be a large corporation or an SME, play a key role. Nevertheless, it should be stressed that it is not an easy and straightforward process. It requires hard work, strong coordination, long-term commitment, and continuous awareness-raising among the wider society. For example, Gerald Podobnik, Chief Financial Officer of the Corporate Bank (a member of Deutsche Bank Group), claims that Deutsche Bank had done more in sustainable finance than people have given them credit for. To avoid any ambiguity and be more effective in the future, he suggests that crystal clear definitions with no room for misunderstanding or misinterpretation what makes a company green or ESG friendly would be needed to make more significant strides in sustainable finance; in other words, a regulatory-driven system that encourages greater ESG friendly deployment of capital will be beneficial for all.

Before we get a regulatory definition of an ESG friendly company, it is helpful to look at various rankings recognizing business efforts worldwide. Among the most credible rankings, we can indeed consider the Global 100, revealed at the World Economic Forum annual meeting in Davos, Switzerland, and compiled by Canadian research firm Corporate Knights since 2005. The list ranks corporations with revenue over $1 billion based on key metrics of sustainability, among them carbon footprint and gender diversity. Probably it is not a surprise that 3 Scandinavian companies top the 2020 list. However, some might be curious to see rounding out the top 3 for the second year in a row is Neste Oyj, oil refining and marketing company. Established in 1948 as the state petrol company of Finland, Neste represents an admiring model of how the company managed to transform its core business operations and become the world's largest producer of renewable diesel and renewable jet fuel refined from waste and residues. Company self-declares that it is in the business of combating climate change and driving the circular economy, helping transport and cities, as well as customers in the aviation, polymers, and chemicals sectors, make their business more sustainable.  The third component – Governance is also at the center of the company's focus, with 38% of the company's board made up of women.

There is a strong drive that "more for more" concept encouraging companies to do business more sustainably will gain broader support around the world, and the companies will realize the benefits of a more responsible corporate behavior not only from the moral values but from an efficient financing stimulus perspective. In this regard, a crucial initiative is the European Green Deal presented by the European Commission last December, aiming to make Europe the first climate-neutral continent by 2050. As part of the Green Deal, the European Green Deal Investment Plan will mobilize at least €1 trillion of sustainable investments over the next decade. It will enable a framework to facilitate public and private investments needed for the transition to a climate-neutral, green, competitive, and inclusive economy.

This article has been published within the Swedish Government funded project "Leadership for SDG in Georgia."