An Interview with Dr. Michael Nates

Linked In: https://www.linkedin.com/in/michaelnates/

Email: michael@Multiverseconsultants.co.uk

In a rapidly evolving corporate landscape, the emphasis on Environmental, Social, and Governance (ESG) principles is no longer a choice but an imperative. As companies wrestle with integrating these principles into their operations, the importance of guidance and leadership becomes paramount. In this fascinating interview, Michael explains how, as a seasoned executive coach with a mechanical engineering background, he guides executives through their transformative ESG journeys.

Michael, how has your journey in executive coaching intertwined with the increasing emphasis on ESG principles in today’s corporate landscape?

My motivation for training as an executive and leadership coach came out of my recognition that organisational transformation is heavily premised on the CEO’s and leadership team’s perspectives, values and beliefs. If the head of the organisation is looking in one direction while the organisation is trying to move in another, then progress is unlikely. In my experience, the vast majority of senior leadership and board members are significantly ill-prepared and ignorant of the consequences that global warming, climate change and the resulting environmental and social changes are going to have on their businesses. For example, during a recent training session with board members, 20% of them thought that coal was a renewable resource. Coaching creates a safe space for discussion of difficult topics, including environmental, social and governance (ESG) issues. A coaching session that focuses on ESG may initially be more of a mentoring session that lays the foundation for the executive to deepen their understanding and enable more sustainable options and decisions

Are ESG and sustainability one and the same concepts, as they are often used interchangeably?

ESG and sustainability are two distinct concepts and should not be used synonymously. ESG has its origins in a United Nations’ Principles for Responsible Investment (PRI) publication from 2005 that used ESG as the basis for a risk management and due diligence process to assess the ESG risks faced by an organisation that could materially impact its value. Sustainability first emerged in the 1980s and addresses the impacts of an organisation on the external environmental, economic and social dimensions. Sustainability is often summarised as the triple bottom line of people, planet and profit. Counterintuitively, an organisation could meet ESG risk criteria while still being unsustainable, while the reverse is unlikely.

How do you perceive the role of ESG in change management and transformation?

All organisations, and I mean all, are going to be impacted by climate change and the resulting changes in economic markets and  global society. Organisations that actively engage with these risks and opportunities will be better prepared to survive and thrive in the years to come. By way of an example, the younger generation Z entering the labour market are giving preference to organisations that can demonstrate their sustainability credentials. This younger cohort understand that climate change is existential and do not want to work for misaligned organisations, so the fight for talent is becoming linked to your ESG credentials. Organisations that choose to ignore ESG considerations as part of a transformation programme will face greater challenges and performance headwinds.

Can you describe a pivotal moment in your coaching career where ESG principles significantly influenced the direction or outcome of a transformative process?

Part of the social dimension of ESG is diversity, equity and inclusion (DEI). During a recent project initiation meeting, I noticed that the team lacked diversity. Understanding the importance of diversity and the benefits it brings through different viewpoints and challenges, I encouraged the client to augment the team with a broader range of ethnicities, gender identifications and neuro-diversity. The larger range of experiences and backgrounds necessitated additional team meetings and engagements, but the outcome was a much richer insight into the problem, with the resulting solutions being more widely accepted and easily adopted.

What are executives’ most common challenges when integrating ESG principles into their strategic transformation agendas?

Most corporate decision-making processes and decision-makers are almost totally based on financial criteria. Their decisions lack consideration of environmental and social issues. This is exacerbated by the lack of understanding (at both an organisational and individual level) of the importance of environmental and social issues in the outcome of longer-term strategy and planning. The significant obstacle is the lack of executives taking up leadership positions to move the organisations forward towards a more environmentally and socially responsible operating model. However, as noted above, most do not have a functional understanding of the issues and how they would positively benefit the organisation. So, the central challenge that needs to be addressed is the upskilling of executive decision-makers on the opportunities that ESG has to offer while simultaneously revising decision-making processes to include sustainability considerations. These two changes will fundamentally transform an organisation.

Conversely, where do you see the most credible opportunities for companies to leverage ESG principles as catalysts for change and transformation?

Besides changing decision-making processes to include non-financial criteria, organisations should consider three other fundamental changes. The first is to include sustainability considerations in the procurement of all goods and services. Responsible procurement will have an impact up the supply chain that will benefit organisations directly and indirectly. The second is to include sustainable culture and values in the recruitment process. This will have twin benefits of signalling to prospective candidates that sustainability is a core value, and it will enable the organisation to have the human capital necessary to meet and address the coming economic and societal changes. The third area for action is to ensure that anything that leaves your organisation be it goods, services or advice, embodies your organisation’s sustainability ethos. By way of an example, professional consulting firms should be offering their clients insight into how the proffered advice could be augmented to make the outcomes more sustainable or future-proofed for foreseeable climate change impacts.

How do Multiverse Consultants assist clients in balancing profitability with ESG responsibilities?

The key issue is helping clients understand that profitability is a short-term perspective while thriving in the changing world is a longer-term imperative for shareholders and stakeholders. What an organisation may lose in short-term profitability it will make up and recover in longer-term performance and efficiency gains. We help clients understand and make room for decisions that are longer-term rather than short. Part of this process is openly and transparently engaging with the Board of Directors, shareholders, and stakeholders to build trust and explain how the long-term plans will ensure future success. Trust is fundamental to ensuring reputation and brand value.

How do you approach executives needing clarification or support to integrate executive coaching strategies?

We simply listen. All journeys and relationships start with deeply listening to each other’s
backgrounds and contexts as a first step to building a shared reality. I do not have a preconceived outcome or expectation for these first sessions. What I hope will emerge is mutual trust and respect and a commitment to addressing, in an open, honest and collaborative manner, whatever may arise. What I propose is that we establish a professional partnership where we support each other in delivering the organisation’s ESG goals. I bring the sustainability content knowledge, hold a safe space for challenge and reflection, while the executive brings their organisational culture and understanding so that together we innovate and create practical ideas and opportunities.

How does your background in mechanical engineering help inform your work as an executive coach?

My engineering background enables me to understand at an operational level how things are made and how businesses function. I have a deep and technical understanding of, for example, how carbon emission reduction plans need to be developed and implemented. My understanding is of an industrial nature, which is exceedingly useful as compared to an ecological or  environmental science background. Secondly, coaching is quite emergent and complex, requiring lateral vision and spaciousness, which can lead to a lack of structure and focus. My engineering nature grounds my approach and brings the sessions back to actions and plans.

Do you foresee any potential challenges or pitfalls for companies superficially adopting ESG for branding or image rather than genuine commitment?

There is a very old saying; “the truth will out”. Attempting to short-circuit or greenwash an organisation’s ESG image will (as has been seen repeatedly) lead to the product and services being rejected by the customers when they come to understand the actual underlying facts. My advice to organisations is to put all that effort and energy into understanding and preparing their organisations for the environmental and social opportunities that are emerging all the time.

Renewable energy sources such as solar, wind and hydropower are becoming increasingly popular, and businesses are now starting to embrace them as a way to reduce their carbon footprint, save money and generate revenue.

In this article, we will discuss the ways in which renewable energy can financially benefit businesses, including reducing energy costs, generating revenue and enhancing corporate social responsibility.

Renewables Asset Management

While renewable energy offers numerous financial benefits for businesses, it is essential to remember that these investments require careful management to ensure long-term financial viability. This is where renewables asset management comes in. Renewables asset management involves the strategic management of renewable energy assets to maximise financial returns and minimise risk. This includes managing the operational and financial performance of renewable energy assets, identifying and mitigating risks and developing and implementing strategies to optimise the value of the assets over time.

Renewables asset management is critical to the success of renewable energy investments, as it helps businesses maximize their returns and ensure the long-term financial viability of their investments. By partnering with a renewables asset management firm, businesses can benefit from the expertise and experience of professionals who specialise in managing renewable energy assets.

Reducing Energy Costs

One of the most significant benefits of renewable energy for businesses is the reduction in energy costs. By investing in solar panels, wind turbines (from developers such as Simple Power), or hydropower systems, businesses can generate their own energy and reduce their reliance on grid-supplied electricity. This can result in significant cost savings, as businesses are no longer subject to fluctuating energy prices and are not exposed to the risk of energy price increases.

Moreover, the UK government offers financial incentives to businesses that invest in renewable energy, such as the Feed-in Tariff and the Renewable Heat Incentive. These schemes provide businesses with a steady income stream by paying them for the energy they generate and feed back into the grid.

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Generating Revenue

Renewable energy can also provide businesses with a new revenue stream. By generating their own energy and feeding any surplus energy back into the grid, businesses can earn money through the Feed-in Tariff and other similar schemes. This can provide a steady income stream for businesses and the revenue generated can be reinvested into the company, further driving growth and profitability.

In addition, businesses can also generate revenue by selling renewable energy credits (RECs). RECs represent the environmental benefits of renewable energy and are bought and sold on the open market. By generating renewable energy, businesses can sell RECs to other companies that want to offset their carbon emissions and demonstrate their commitment to sustainability.

Enhancing Corporate Social Responsibility

Renewable energy can also help businesses enhance their corporate social responsibility (CSR) efforts. As consumers become more environmentally aware, they are increasingly demanding that companies operate sustainably and reduce their carbon footprint. By investing in renewable energy, businesses can demonstrate their commitment to sustainability and position themselves as socially responsible companies.

Moreover, businesses can use their investment in renewable energy as a marketing tool to attract environmentally conscious customers. By promoting their use of renewable energy, businesses can differentiate themselves from competitors and appeal to a growing segment of consumers who are willing to pay a premium for environmentally sustainable products and services.

In the 2022 Forrester/Dun & Bradsheet study of over 260 decision-makers across the UK, US and Canada, four out of five (97%) respondents stated that their company’s current ESG strategy created a significant or transformational increase in revenue. In comparison, 81% of participants said their company had experienced negative consequences by failing to meet their ESG goals, the most common being increased operational risk (43%) and increased financial risk (38%).

With an increased drive towards sustainability and reaching global net-zero goals, companies must find the right balance of investing in their ESG strategy to drive long-term value, against short-term economic turmoil.

The business case for ESG

It’s crucial that companies recognise the direct value of focusing on ESG in their markets. In order to tackle material environmental and social issues, companies need to scale up their investments supporting these areas. This requires a clear understanding of not only the environmental and social benefits but also the associated financial benefits.

For instance, the NYU Stern Center for Sustainable Business examined the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020. They found that companies were 76% more likely to experience a positive or neutral correlation between a long-term focus on ESG and improved financial performance.

ESG helps illustrate where companies’ expenses are going and where they can improve their resource efficiency. In relation to identifying operational inefficiencies, companies can use ESG-related data to see where they may be spending more money than necessary to clean up their pollution and waste. They can then look into more cost-saving waste reduction strategies. Additionally, many businesses may have untapped financial benefits of ESG strategies that they’re currently not tracking such as avoided cost, where ESG-related data can help identify instances where less money is needed to be spent.

Access to consumers can also be dependent on how companies are demonstrating their ESG efforts. In fact, a 2021 PwC ESG consumer intelligence study revealed that globally 57% of consumers say companies should be doing more to advance environmental issues (e.g., climate change and water stress), 48% want companies to show more progress on social issues (e.g., D&I and data security and privacy) and 54% expect more from companies on governance issues (e.g., complying with laws and regulation and addressing widening pay gap). As a result, ESG reports that successfully meet customer standards can improve the chances of both retaining existing customers and expanding customer base.

Employees are also increasingly concerned about their employers' ESG efforts. For example, a 2020 Reuters survey of workplace culture found that of 2,000 UK office workers, 72% of multigenerational respondents expressed they were concerned about environmental ethics, while 83% of workers said their workplaces were not doing enough to address climate change. With there being significant costs associated with recruiting and retaining talent, it’s important that as with consumers, companies put the effort in meeting employee standards.

Focus on material ESG issues

Companies may be tempted to cover the universe of ESG issues, but this is not the best approach. Instead, they should understand which ESG issues are likely to have a substantial impact on enterprise value and finances of the company as well as the demand for its presence from stakeholders (i.e., material ESG issues).

ESG issues, such as business ethics, greenhouse gas emissions and community relations can be dependent on a company's sector, size, geographic location, among other factors and so it is important that executives understand which areas make the most sense to put their focus and resources into. For example, a company within the oil and gas industry will be focused on methane emissions while a company within the technology industry will not.

Understanding what the material ESG issues for a company are, begins with conducting an ESG materiality assessment. This is where companies can gain input from a broad range of stakeholders as to which ESG issues matter most -or are material. After gaining this input, and understanding connectivity to financial data, the company should obtain consensus with a cross-functional committee of leaders, management and the board.

There is greater value in focusing on doing the best work when it comes to material issues and related performances that matter most to a company and its stakeholders, as opposed to simply doing an okay job at everything. A study from Mozaffar Khan found companies focused on material issues would have a 6% outperformance on stock prices while those that focused on immaterial ESG issues or no ESG issues at all would underperform the market by -2.6%. Overall, it’s in the company's best interest to focus on material ESG improvement.

Data transparency and one source of truth

While ESG can allow businesses to identify cost-saving avenues, they need the right data to provide insights and help inform their decision on new opportunities. The future of ESG reporting will enable connectivity to financials and help companies calculate the impact of ESG efforts as opposed to merely reporting metrics.

To achieve this, companies can harness cloud-based technologies, providing a single source of truth for all financial and non-financial data. This means the data collection and reporting takes place within one central location, where everyone can collaborate in real-time in the same workspace with everything tracked, and everything linked between financial and non-financial.

In fact, Workiva’s 2022 survey found that globally, three out of four respondents expressed that technology was important for compiling and collaborating on ESG data, as well as validating data for accuracy (80%) as well as mapping disclosures to regulations and framework standards (85%).

Propelling ESG reporting into a transparent, innovation-friendly, actionable and dynamic environment will streamline the steps needed for a company to make informed decisions.

Nothing happens in a vacuum

Currently, the recession, geopolitical conflicts and other factors are taking place alongside ESG. This is why it is important that companies effectively weigh where priorities should lay to successfully navigate through uncertainty.

Dedicating efforts to ESG enables a greater understanding of risk and opportunities that can be cost-saving and opportunity-generating. Even amongst economic turmoil, businesses will need to continue to walk the talk when it comes to climate commitments, advancing social issues and addressing corporate governance.

Through effective ESG reporting, having one source of truth will bring together the financial and non-financial data to best inform decisions. With clear and transparent insight across the company, the particular ESG issues that are most fitting can be determined, and this will support in standing up to both existing and future scrutiny.

Mark Mellen is the Director of ESG Enablement at Workiva, the world’s leading platform for integrated regulatory, financial, and ESG reporting. Workiva simplifies complex reporting and disclosure challenges by streamlining processes and connecting data and teams. Learn more at workiva.com.

These shifts have prompted investors in key markets – Europe, the US, UK and Australia, among others – to ask questions of the companies in which they invest and the firms that manage those investment activities. Throw in high levels of liquidity (albeit impacted by recent tightening in monetary policy) and discretion on the part of these investors, and a high-pressure, competitive environment is created for corporates and investment managers to operate in.

Add to this a regulatory domain that is seeking to keep up with rapidly changing requirements – and the potential risks it presents – and the complexity of the operating environment increases even more. This is all before you consider the complications that current geopolitical tensions bring for all these stakeholders.

Participants in this system tend to move at different speeds, and the divergence in these timelines creates great tension as a result. Large, public companies need time to contemplate questions around sustainability and resilience, to allocate the necessary resources to drive those strategic choices, while also remaining profitable. Regulators also need time to consult the industry, draft and deliver policy and then implement.

In parallel, investors act with discretion to promptly reallocate capital to companies and fund managers that match their current investment goals. By extension, fund managers and advisers need to move at pace to compete with their rivals in attracting these funds, often by creating and promoting new products that seemingly match the investment mood of the day.

Short-term fixes, however, do not always align with long-term planning. The regulatory environment and associated reporting requirements are playing catch up with new demands; and while ESG vocabulary remains open to definition, and therefore interpretation, companies and fund managers will remain under pressure to protect their existing investor base or attract new clients. “Greenwashing” is but one early symptom of this gap and, therefore, enforcement agencies must respond.

This is not a new or unique trend. The Foreign Corrupt Practices Act in the late 1990s – a law originally passed in 1977 – was prompted by a period of global economic growth and feelings of an uneven playing field in terms of business practices. The Act, when it was enforced by the SEC and DOJ, sparked an overhaul of the anti-corruption and anti-bribery landscape. Overnight, behaviours that had previously been deemed appropriate were forced to change as the role and size of legal and compliance functions were given more resources.

Learning from history, it is important that we resolve the common pull felt between fear of missing out (FOMO) and risk management.

In a similar vein, the global financial crisis of 2008 exposed practices that had been disguised by economic growth, and several infamous Ponzi schemes became emblematic of that era’s excesses. Those fraud cases, in conjunction with important global security incidents, provoked a seismic change and strengthening of anti-money-laundering and terrorism financing rules and standards, with Know Your Customer (KYC) checks taking on new meaning.

These periods, where favourable economic conditions ebb and/or regulatory agencies catch up with new trends or products, suggest that ESG-related litigation and enforcement risks will rise for companies and fund managers alike, regardless of whether it was a marketing misstep, confusion over new and evolving reporting requirements or deliberate slanting of data and evidence to lead an audience to a false conclusion.

Learning from history, it is important that we resolve the common pull felt between fear of missing out (FOMO) and risk management. Executives that give sales teams an objective to grow, to secure market share, to aggressively pursue profits will always run the risk of people evading or bending the rules – especially if those rules are vague and their enforcers are seen to be catching up. But recent developments from regulators in the US, Europe and the UK surrounding greenwashing, climate-related disclosures, transparency, due diligence, accountability – among many others – all reflect the direction of travel.

Today’s operating environment is complex, to say the least. However, for as long as compliance and risk management are perceived as constraints to innovation and growth, their potential as enablers of sustainability and resilience may not be realised.

The debate over ESG will continue for some time while we determine what it represents, how it is measured and how related activities are enforced. It should not distract, however, from certain fundamentals. Sustainable, resilient, profitable companies consider risk in its entirety – not just the ESG subset – and on a continual basis.

They determine their risk appetite and design structures that align with that threshold. Their policies and procedures provide parameters for their employees to operate within and safeguards for the organisation. And they regularly and routinely review their risk exposure to ensure they adapt to changing market conditions.

Robust risk management may not be the most exhilarating of topics, but it should make for a compelling story to investors, an endorsement of a company’s values – key to employee retention – and, ultimately, a good night’s sleep for company leadership.

CFOs are starting to be seen as “co-CEOs,” reliable leaders who navigate economic uncertainty and low consumer confidence, securing overall business stability. While CFOs aren’t expected to lead on all fronts of business operations, they are expected to widen their professional remit to be involved in areas traditionally covered by other business functions - such as ESG or managing investments to link disparate tech systems. 

Recent research we conducted in partnership with Deloitte, surveying 700 CFOs and senior departmental leaders globally, found that CFOs’ self-perceptions are not aligned with the rest of the business. For example, CFOs are seen as “inspiring” by others – a characteristic that many CFOs didn’t see in themselves: only 10% of CFOs consider themselves as such vs. 37% of their colleagues. So, how can CFOs look to take charge of business leadership, and exercise the potential they have, whilst carving out a unique scope within the business to tackle what may seem challenging but exciting business priorities?

Realigning self-perception and expectations

85% CFOs compared to 86% of their colleagues believe they can help solve business problems. But when it comes to human skills, there is a clear divide between how CFOs are perceived and how CFOs see themselves. CFOs tend to over-credit themselves when it comes to actively coaching others across the organisation (27% CFOs vs. 12% colleagues), but at the same time, CFOs don’t give themselves enough credit for being empathetic (18% CFOs vs. 29% colleagues) or strategic (32% CFOs vs. 45% colleagues).

The trend of undervaluing their own leadership efforts holds across a variety of business challenges. It’s especially noticeable regarding tech-related efforts like facilitating hybrid work (81% vs. 93%) and ensuring effective cybersecurity measures (82% vs. 90%), although these duties traditionally fall to CIOs. It seems that ongoing global disruption has helped businesses understand the importance of the CFO in ways they themselves have yet to realise let alone capitalise on. 

Transforming the role of the CFO

Today’s business environment requires leaders to be confident in their ability to quickly adjust plans according to ever-changing realities. CFOs are often the first in the room to dissect the impact of a particular challenge, mitigating risk and determining the best next step. With this visibility, they’re in a unique position to observe and navigate the boundaries between different departments and look forward, rather than back. But where exactly should they be moving? 

Our research found that 86% of CFOs and 81% of business colleagues agree that improved 'processes' - to make workflows more efficient, less burdensome, etc. – are important for businesses to become more agile. At the same time, 82% of CFOs vs. 86% of their business colleagues agree the challenges they’ve been facing in the past 2.5 years could have been improved with stronger communication between departments. Keeping in mind the business needs, it’s essential that CFOs, uniquely positioned to become the link to every corner of the business, implement a revamped approach to planning, making it a process that would connect all business units and enable greater transparency. 

Enabling cross-departmental digitisation through connected planning

Connected planning refers to the technology-enabled process of business planning that joins together people, data, and plans to help accelerate better business performance. Traditional planning approaches lack the collaboration, insights, and predictive, self-learning capabilities necessary to inform strategic decision-making. This process breaks down information silos to eliminate any inefficiencies in financial, corporate, and operational planning.

Connected Planning will be key to agile and influential CFO leadership as this role requires heightened strategic vision. 40% of business colleagues would like to see their CFOs provide a stronger strategic vision and 38% would like to see stronger planning & growth orientation from their CFOs. With such planning tools, all the departments will have a single source of truth to refer to, and the ability to quickly adjust plans based on performance or during unforeseen circumstances. 

This approach allows businesses can stay ahead of any future disruptions and pivot as needed, providing CFOs with the data to support the relaying of their vision, collating data from employees, analysing it, and acting based on data-driven insights 

Ensuring success of ESG initiatives

Our research also found that CFOs see ESG as a fifth item of priority on their list, whilst 85% of senior colleagues consider ESG to primarily be the CFO’s concern. ESG has undoubtedly risen on the corporate agenda, and it is now imperative that organisations look at how they can pivot the operations they already have in place, so they are more sustainable. 

Clearly, there is a real opportunity for CFOs to expand the role of managing their organisation’s ESG initiatives and embrace it as one of their core priorities. CFOs’ active involvement can help bring more visible, significant improvements in this realm. 

Championing the CFOs unique role

The business landscape will continue to evolve and there is an urgent need to be even more proactive and forward-looking. To thrive in this new dynamic, CFOs need to take ownership of new business priorities and drive them forwards. 

Be it in the delivery of agile planning or ESG initiatives, success will largely depend on whether CFOs are able to evolve with time. It can be challenging to positively pivot the role and responsibilities – but it also brings exciting new opportunities to drive organisational success and become a more strategic leader across many business functions. 

About the author: Victor Barnes is the Senior Vice President at Anaplan.

With institutional investors banding together to promote investment in sustainable companies, regulators on the verge of demanding auditable numbers from firms to prove that they are meeting their often public commitments on reducing environmental impact, and consumers increasingly intolerant of anything that smells like greenwashing, the best time to start working on your environmental, social, and governance (ESG) strategy and reporting capabilities was yesterday.

Since yesterday isn’t an option, you had better start now. The general consensus we hear among our contacts in the regulatory world and the 150 clients in our account-to-report advisory programme is that ESG reports in the foreseeable future will face the same level of scrutiny that financial reports have always received – with similarly swift and onerous consequences for weak results, obfuscations, and mischaracterisations.

Within two to five years, we expect major companies in many jurisdictions will be required to file ESG reports that include auditable numbers. European regulators are leading the way on this, but the SEC is close behind. They will likely begin with reporting requirements that are built on the Task Force on Climate-Related Financial Disclosures (TCFD) which recommends 11 disclosures across governance, strategy, risk management and metrics. The initial focus is on climate change but this will likely expand in scope to include other environmental concerns such as biodiversity, as well as wider social themes such as inclusion, diversity and equality.

Finance to the rescue

This combination of regulatory and institutional investor scrutiny is part of why the logical clearinghouse for ESG data in most companies – when they recognise the need to operationalise this – won’t be a sustainability task force or procurement office, but the same people who have always provided regulators and investors with the numbers they need: the finance function. 

One reason why there has been a degree of wait and see and perhaps some apprehension is that it is still a little bit early to consider what the operational steady state of this process will look like. ESG reporting standards are still going through consultation phases and the final interpretation of these into detailed accounting is going to take time to fully evolve. But one thing is for sure… it is definitely coming.

The messaging we are hearing is these sustainability standards will take shape faster than traditional accounting standards. The new standards are built on some pretty strong foundations, as there has been a large investment over many years by bodies like the Sustainability Accounting Standards Board (SASB), Climate Disclosure Standards Board, Global Reporting Initiative (GRI) and the GHG Protocol, so the thinking is already very well evolved and thus it is easier to have a good idea of what we are likely to see in the years ahead. 

Chief financial officers (CFOs) will need to play a role wider than just the custodian of the delivery of disclosures but also will need to help coordinate the integration of environmental concerns into the larger business strategy. This will include a reboot of enterprise risk management, strategic planning, and investment appraisal.  Perhaps, most importantly, it will be necessary to redefine the performance management processes to reset incentives to guide management behaviour toward ESG priorities. A further area requiring the attention of finance is the need to address additional accounting. As we enter a transitional phase, companies are needing to manage their carbon footprint via the purchase of energy attribute certificates and may also invest in carbon offsets, and engage in emissions trading activity. It is also likely that there will be additional taxes and regulatory reporting requirements at the country level.

Finally, it is worth underscoring that transparency, honesty and integrity are going to be incredibly important. Companies that appear to not be acting in good faith will likely see an impact on shareholder value. If a lack of rigour and diligence in the accounting is discovered, the punishment is likely to cause a severe dent in shareholder value and also have reputational impacts that will be difficult to recover from. 

The first three steps

Although most major companies at this point have made ESG-related resolutions, few have been clear about how they are going to make good on those promises. Fewer still are clear about how to report on their progress. At a minimum, you need to do three things: 

1. Implement the recommendations of the TCFD. The TCFD framework is built on four pillars - governance, strategy, climate risk management, and metrics and targets. It provides specific guidance via 11 disclosure recommendations. At a minimum, your organisation should seek to ensure that each of these is being adhered to.

2. Be aware of developments that will affect your carbon accounting. If you follow US GAAP, you should monitor what the SEC and Financial Accounting Standards Board are saying. If you observe International Financial Reporting Standards, you should look at your country’s regulatory position and the position taken by the European Union and in particular the European Financial Reporting Advisory Group’s work on the refreshed Climate Sustainability Reporting Directive. On top of that, you will also want to review the ISSB draft standards and monitor their progress through consultation phases, become familiar with the GHG Protocol corporate accounting and reporting standards, and drill into the work completed by standards bodies like the GRI and SASB. 

3. Remind your colleagues that you will need to walk the talk. If you made a public sustainability promise, such as going carbon neutral by 2030, be sure you have an actionable plan to pursue it. You will need to have a detailed road map with achievable milestones that can support those earlier promises – and, most importantly, you will have to hit those milestones.

About the author: Stephen P. Ferguson is the leader of The Hackett Group’s Account-to-Report Advisory Programme in Europe – an advisory service that includes members from 150 major companies.

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The rise of the CSO

As part of our mission to help financial institutions and fintechs adapt to today’s requirements, we at TISAtech partnered with our ESG ratings partner The Disruption House to survey decision-makers across UK financial institutions and found that 76% of them were looking to make a permanent in-house hire to lead their ESG activity. For many, this will mean the appointment of what is becoming a mainstay in financial C-suites across the world- the Chief Sustainability Officer, or CSO.

According to Deloitte, the CSO’s role is threefold- they help organisations make sense of the wider environment, they determine how their business strategy can align with societal and regulatory trends, and they communicate and implement these changes throughout the firm. The CSO is needed when the external environment is changing faster than the internal, minimising future risk and disruption, and ensuring a future ‘licence to operate’.

For many firms, these considerations are still within the CEO’s remit. Therefore, the appointment of a CSO is more than a publicity stunt. When empowered, the addition of a specialist for whom ESG is their sole focus ensures these initiatives are prioritised- even with the best intentions, the CEO only has so much capacity. 

A particular set of skills

As the importance of ESG has risen, so too has the calibre of candidates and the competition for their services. The Financial Times notes that whilst deep climate expertise used to be the main criteria for the role, modern CSOs are now also expected to possess elite strategic business thinking and technical skills. They now must be able to handle the legal, strategic, and operational implications of their recommendations, whilst retaining the credibility and expertise of one genuinely passionate about sustainability. 

This specific expertise sets them apart from the rest of the C-suite and is crucial if they are to effectively ‘make sense’ of the landscape, sell a vision, and drive meaningful cultural change. The growing responsibility of the role is evidenced by research from PwC, with 2020-21 seeing the appointment of more CSOs than in the previous 8 years combined. 

This combination of core C-suite skills and genuine sustainability credentials is rare. As a new, fast-growing discipline, there is a wider ESG talent shortage, and in Asia, research shows that ‘Head of Sustainability’ roles remain the toughest to fill, with most candidates having communications backgrounds. With time this will change, as a new generation of young leaders develop into the CSOs of tomorrow- but for now, top candidates remain a rare (and expensive!) breed. 

Alternatives to the CSO

Despite the clear benefits, appointing a CSO requires careful thought. There are considerations to make before deciding if it’s the right move for your company. Firstly, smaller and mid-size firms should consider alternatives. Cost-effective ‘ESG tech’ tools can help growing businesses manage risk and improve on ESG in a far more cost-effective manner than competing for expensive talent or hiring specialist consultants. 

This is especially true considering that ESG regulation such as SFDR does not apply to smaller firms, whilst young companies are less at risk of activist takeovers. For these firms, it is most important to understand how you can position yourself for the future, and improve your ESG organically by looking into SaaS ratings providers and tools. 

But for the largest financial institutions, the trend is clear- the CSO is here to stay. With net zero increasingly non-negotiable, the calibre of transformative candidates, and the competition for their services will only rise. 

About the author: Gary Bond is the CEO of TISAtech. He has held numerous roles across fintech and financial services, including as CIO and head of European change for Fidelity International, as well as senior positions in venture capital firms. At TISAtech, Gary works to accelerate the adoption of fintech innovation in financial services by benchmarking, improving, and connecting fintechs with the financial institutions that most need their solutions. 

Among other social issues, climate change awareness has increased significantly in circles of investors, and institutions are taking notice. Indeed, the extent to which a company is recognised for its environmental, social and corporate governance (ESG) has emerged in recent years as a key criterion for investment, and this is clearly more than a fleeting trend. Today, sustainable investing, also known as ESG investing, is a significant market force. 

As a result, institutions have begun implementing ESG goals in their portfolios. While these goals have rendered previously profitable investment sectors no-go zones (tobacco, fossil fuels), new sectors are emerging as potentially lucrative hotspots.

One of these sectors is the supply chain. Massive investment in supply chain visibility has increased efficiency. A side-effect of this investment has been greater control over emissions. Coupled with reduced waste and the potential for greater emission controls, investors stand to gain significantly.

Here's how supply chain visibility can help you achieve your ESG and broader portfolio goals.

A better understanding of Scope 2 and 3 emissions

The supply chain world is a complex one, with multiple entities interacting to produce results. This web of interdependencies makes tracking emissions a tough task. For instance, a manufacturer might use sustainable raw materials and environmentally-friendly production techniques. Yet, if its logistics partners rely on unsustainable sources of energy, the manufacturer's ESG efforts are moot.

Traditional reporting has targeted Scope 1 or direct emissions. These days, ESG guidelines prescribe measuring Scope 2 and 3 emissions created by indirect consumption. For instance, emissions generated through the purchase of utilities such as electricity and water fall under Scope 2. Emissions generated in a company's value chain (such as last-mile emissions) are considered part of Scope 3.

Data visibility in the supply chain is a function of interconnected systems. A logistics company's technical infrastructure integrates with a manufacturer's, allowing everyone access to shipment information relating to locations and conditions. As a result, manufacturers can measure delivery time and track emissions generated per delivery.

Insight into these datasets gives stakeholders a chance to plug ESG leaks. For instance, how well are vendors performing? Are they adhering to ESG guidelines or greenwashing performance? Data allows stakeholders to educate their partners and prioritise ESG goals while maintaining margins, thereby increasing their firm’s attractiveness to investors.

Revisiting product recyclability concepts

Sustainable consumption is becoming an important value among shoppers. As fast fashion companies are increasingly discovering, consumers are not afraid of voting with their wallets. The food and healthcare sectors have felt this impact as well, as moves towards local produce and vegan lifestyles attest.

Manufacturers can leverage supply chain data to understand consumer needs and design reusable products. Data relating to product returns, purchase frequencies, and product damages provide stakeholders with key information regarding product life cycles.

In the past, manufacturers maximised profits by creating fragile products that would inevitably need replacing within a few years. However, as consumer behaviour changes, this manufacturing trend will likely be replaced by a move towards longer-lasting goods. 

Multiple supply chain datasets generated via condition monitoring, inventory, manufacturing line IoT instruments, and customer returns help manufacturers understand their products' life cycles so they can curb waste. Greater visibility also gives manufacturers insight into the impact green materials have on their sales.

By developing interconnected systems, manufacturers can correlate the use of sustainable materials with retail sales and returns. Powerful analytics platforms can detect changes in consumer preferences as they occur, helping manufacturers redesign their processes as needed.

Supply chain visibility data can also be passed on to consumers, offering them ESG validation. For instance, medical packaging in the EU comes with a QR code that gives customer information on product sources and ingredients. Similar moves in retail and food are underway, giving companies the ability to use ESG as an edge in the markets.

Better routes for freight and last miles

Delivery route design is an intricate process, with logistics companies balancing several variables. For instance, vehicle capacity, technology, weather, geopolitical conditions, and infrastructure en route are a few variables that need balancing. They’re also under tremendous market pressure to deliver products on time and in optimal condition.

It's easy to believe that ESG will take a backseat, given these variables. However, supply chain visibility data naturally boosts ESG by reducing waste in the delivery chain. For instance, optimal route design automatically reduces waste caused by improper storage and good handling. 

Automated alerts generated by IoT devices attached to shipments prevent goods from falling out of ideal conditions while in transit. These datasets also reveal the state of infrastructure along delivery routes, allowing companies easy route evaluation.

Given the sophisticated nature of these models, adding a layer of ESG-related goals is relatively straightforward. For instance, designing routes with fewer emissions while balancing other variables is simple thanks to advanced technology such as smart contracts and AI.

Sophisticated route modelling techniques also allow stakeholders to model deliveries before executing them. Thus, emissions and related ESG data can be projected in the scenario planning phase. Any deviations from these expected levels can be examined and addressed to create even more efficient systems.

Better visibility, more sustainability

Visibility data is giving supply chain stakeholders the chance to create efficient processes. A direct result of these efforts is better net margins thanks to reduced costs and waste. Investors stand to gain significantly from these advances while meeting their portfolios' ESG goals.

Daniel is a member of the Charities SORP Committee, which oversees the financial accounting and reporting rules for charities across the UK and Ireland. He is also Chair of the Institute of Chartered Accountants
in England and Wales (ICAEW) Charity Committee and a member of the Chartered Institute of Public Finance and Accountancy (CIPFA) Charities and Public Benefit Entities Forum.

Daniel volunteers as a Trustee and the Honorary Treasurer of UK Youth, a national youth charity. He also leads PwC’s Charity Trustee Network, an internal community to support people at the firm who hold charity trustee roles or are interested in becoming charity trustees. He is particularly keen to encourage more young people and people from a diverse range of backgrounds to become charity trustees.

What are your views on the current state of the charity sector?

Charities come in all shapes and sizes and work across different parts of our society. While the charity sector is not homogeneous, and each charity has its own context and circumstances, they exist first and foremost for the public benefit.

With an ever-increasing need for charities and no signs of there being any less demand going forward, it is important to recognise the vital role that they play in society. The inspiring work of charities has become more visible and it is important that this continues to be clearly communicated with their stakeholders.

With a challenging funding environment, a higher degree of regulatory oversight and greater scrutiny by the media, there is increased debate about their role, how they are regulated, the services they provide and the trust placed in them. It is critical for charities to be purpose-led, resilient and innovative.

What have charities learned throughout the pandemic?

The pandemic has been challenging for many charities, with some very difficult decisions that have needed to be taken, particularly when faced with higher levels of demand but lower levels of resources.

Charities have shown their agility and ability to adapt which has given greater confidence within charities themselves to successfully deliver change. Many charities are continuing to look at how they can drive greater innovation, internally within the organisation as well as in collaboration and partnership with others. A culture of continuous improvement is healthy for organisations to stay resilient.

Charities - and, in particular, the people involved - have demonstrated immense resilience and resolve to get through the situation together. But, it is recognised that always being in crisis mode is not sustainable and cannot go on indefinitely. There has been an increased focus on looking after their people.

The way in which charities have responded to the pandemic can also be characterised as a period of accelerated change, not least in terms of working practices and the use of technology. Charities have needed to examine their business model to ensure that it is focused on delivering their charitable purpose and fit for the longer term. Some charities have taken this step which has led to strategic organisational change in order for them to focus on and prioritise where they can make the biggest difference, reallocate resources where needed and be innovative in what they do. Connected to this is the importance of clearly defining, measuring and reporting of the impact.

All of this plays to the importance of continuing to do the right thing and reinforcing trust through having a positive impact on beneficiaries and demonstrating this to their stakeholders. Charities should continue to do what they do best: place their charitable purpose at the heart of everything they do, adapt and respond to challenges as they arise, maintain financial resilience, disrupt and innovate, collaborate and partner, challenge and be vocal about their cause.

What are some key issues for charity trustees and leaders?

Charitable purpose, reputation and public trust remains a key area of focus. This is at the heart of what charities do and this needs to remain at the forefront of their minds. A number of charities have refreshed their strategy, and it’s helpful for us to really understand how they plan to deliver for those they exist to serve over the short, medium and longer-term. And the reputation of charities, overall, has seen a bounce during the pandemic through the impact they have had.

Charities have faced different situations with regards to their financial sustainability - some have found it difficult to generate income with rising demand while others have conversely seen incomes hold steady but an inability to spend on their charitable activities due to the impact of the pandemic, and everything in between. And, looking forward, there will continue to be uncertainties in this area - not least pressures from inflation. For many, there is a squeeze on income while costs are expected to increase. More and more charities are specifically reflecting on their liquidity and reserves policies, and what this should look like for them going forward.

People and culture have increasingly been on the radar for charities. The turnover of people in charities is, like for those beyond the charity sector, high - including those who are leaving the labour market altogether - and this results in significant competition for talent. How it feels like to work at a charity is therefore an important element. Key is also the management of volunteers, for which there has been significant interest over the course of the pandemic. Linked to this are discussions around ways of working and use of office space. Some charities fully left their properties during the pandemic and others sub-letting the space they have. There’s a greater focus on how space can be used more effectively, and charities are adopting hybrid working in different ways. There are live discussions over the balance of how often people should come into the office, and this may differ from charity to charity.

Many charities looked much more closely at how they use digital and technology during the pandemic, and there are more charities which are actively considering how investments in this area might help their overall charitable aims. There are also more finance teams seeking to understand how systems can enable greater efficiency.

What about Environmental, Social and Governance (ESG) matters? 

ESG is high up on the agenda. This is about how charities do what they do responsibly, with a holistic lens. There is a role for everyone involved with charities to approach this with an open mind, around whether how we do things is the most responsible way that is true to the charitable purpose.

The ‘S’ in ESG is what charities inherently do. It’s about their impact and charities can be clearer about this - in their strategy, action and communications. This is an area where organisations outside of the sector could learn from charities. It is also about the way in which the charity interacts with its employees, volunteers, beneficiaries, suppliers, and the communities which they are in and support. It includes areas such as its organisational culture, diversity and inclusion and modern slavery. It is often taken for granted that a charity, by virtue of its charitable status, will operate responsibly but it is important that this is at the forefront of how charities operate.

The environmental factors will be core to those charities with this at the heart of their charitable purpose. However, it is not just those charities with charitable objects relating to environmental matters which should take this seriously, particularly with the spotlight on this given by the 2021 United Nations Climate Change Conference (COP26). All charities should be clear on how they have considered environmental factors within their strategy and decision-making. Charities should take time to consider what their impact will be on the environment and how to make positive changes to this. These considerations should also be taken into account when considering their investments, and there are now greater, and often more explicit, emphasis on ESG factors.

It has never been more important for charities to be clear about what they do, why they do it and what difference their work makes.

It is also important for charities to ensure that their governance remains fit for purpose, underpinning its values and enabling decisions to be made effectively in considering these matters. This includes the Charity Governance Code, which was updated in December 2020 with an enhanced focus on the principles of ‘Integrity’ and ‘Equality, Diversity and Inclusion’.

ESG is shifting the landscape for all organisations, bringing with it a complex set of risks, challenges and opportunities.

What should be the key considerations for charities’ financial reporting this year?

At PwC, each year, we review the trustees’ annual reports of charities in the Charity Finance ‘Charity 100 Index’ for our Reporting in Charities Award, as part of the annual PwC Building Public Trust Awards to celebrate those that tell their story in an engaging and effective way.

We saw that charities took the opportunity of using their reporting to be honest with their stakeholders about the year that they have had and the challenges they have faced. There was a clear differentiation between those charities that embraced openness in conveying the important work of the charity and their direction of travel going forward. They saw their reporting as being genuinely valuable, beyond being a mere ‘finance’ or ‘compliance’ document, as opposed to charities which had cut back on their reporting during this difficult time. There has been continued improvement in the reporting by many charities over recent years, with greater focus being placed on the impact a charity can make, as well as showcasing how good governance and strong financial management can support this purpose.

It has never been more important for charities to be clear about what they do, why they do it and what difference their work makes. It is often hard to compare given the breadth and diversity of the charity sector, particularly among the largest charities, therefore it is vital that charities invest in how they communicate their strategy and impact and demonstrate their value to stakeholders.

Reporting by charities is a key part of a suite of communications - intertwined with and underpinned by, a charity’s accounts for the financial year - to demonstrate their charitable purpose, achievements and future plans, as well as provide greater insights into their financial resilience. However, reporting is not necessarily about saying more - often, less is more - but it is about continuous improvement. If readers can’t see the wood for the trees, that is also a barrier to high-quality reporting.

Reporting that is open, balanced and authentic, and clearly communicates their purpose, strategic priorities and values in the context of the sphere in which they operate, can help to bring what the charity does to life. Charities staying true to their purpose is at the heart of building public trust, and it remains critical for charities to communicate and engage effectively with their key stakeholders in ‘walking the talk’, ‘living their values’ and demonstrating their contribution and impact to their beneficiaries and wider society.

Any final thoughts for charity trustees?

It is an exciting, albeit uncertain, time to be involved in the charity sector. I would encourage all trustees (and those who are interested in becoming trustees) to actively engage with a wide range of areas. In many respects, the issues facing charities are often similar to those in the corporate world, albeit with a different lens. While charities can learn from organisations beyond the sector, charities should also not shy away from being an example to companies in their areas of strength.

Despite the growing importance of ESG, the three strands haven’t always held equal weight. Whilst the movement generated around the climate crisis means lenders’ strategies today heavily account for environmental and sustainability considerations, for example, the social aspect of ESG has at times been overlooked.

This is the “forgotten S” – and “S” in the private debt world can mean a number of different things. Firstly, on the investment side, it means backing those who are supporting people who don’t have easy access to capital. Secondly, it means private debt companies supporting the community they operate in.

Following the 2008 financial crisis, banks and other traditional lenders withdrew from markets. New regulation saw a tightening of credit conditions, as banks needed to hold more provisions against certain types of loans. Furthermore, there was a reduced appetite to lend in areas that were seen as high risk and low reward.

By late 2009 banks had considerably tightened their belts – LTV ratios had fallen, credit card availability was cut (by early 2009, offers to households for new credit cards had dropped to around one-fifth of their count in 2006) and in the UK consumer repayments were outstripping new borrowing. Overnight, a whole section of ‘subprime’ society had essentially lost access to finance.

When traditional lenders withdrew from the market, FinТech lending emerged. They had a low-cost base and used the latest technology such as open banking to better assess creditworthiness, ensuring they were lending responsibly. Many FinTech-focussed companies saw these exciting new technologies as an opportunity to establish an alternative to traditional bank lending and ultimately democratise access to finance.

One area in which private debt companies are working to increase their social impact is by providing capital to those underserved segments in society. We have worked with a number of organisations, including auxmoney in Germany and Upgrade in the USA, to fund consumer loans to those who would otherwise be unable to access capital. Lenders are also increasingly able to apply sophisticated pricing models supported by AI to help lend to this segment.

Small business lending is another area in which private debt companies can make a real social impact.

Small businesses are the lifeblood of the British economy, with SMEs accounting for 99.9% of the business population (5.5. million businesses); following the 2008 financial crisis, however, the big banks considerably reduced their lending risk appetite, meaning small businesses have had to look elsewhere to access vital finance.

As part of the FinTech revolution, new SME lenders have stepped up, helping to plug this gap and offer new sources of capital in innovative ways. One such example of these lenders is ThinCats, who have lent more than £1.2bn to British businesses in the UK. Last year we were proud to have provided a mezzanine facility to ThinCats to support lending to SMEs affected by the pandemic. Our loan helped unlock £400m of funding to cash-strapped small businesses.

The private debt industry’s approach to the forgotten S also extends to how we operate as a company. Every business has an important role to play in bettering, and giving back to, the society in which they operate.

During the COVID pandemic, we supported two amazing causes. The first was Paperweight, a nationwide charity that helps support people with the burden of household paperwork and bureaucracy. We also partnered with a local school, many of whose families didn’t have laptops or paid-for internet. We provided both of these facilities, ensuring that children could continue learning during lockdown when the schools were shut, and teaching moved online.

We are also hugely proud of Anna, our Polish finance manager, who has been coordinating our efforts in supporting Ukrainian refugees who are arriving in Poland. Anna’s local town quickly became a base for hundreds of families, and through her incredible work she has helped over two hundred refugees.

Uniting around the S in ESG serves as a powerful reminder that private debt isn’t just about competition. Ultimately, finance underpins so much innovation and progress in the world; we, therefore, need the industry to collaborate and be moving in the same direction, rather than competing – especially around social issues. Better collaboration can help us all achieve the shared goal of making the world a better place.

The industry’s primary priority will always be there to generate steady returns for its investors, but this needn’t be at the detriment of our responsibility to the society. Generating consistent returns whilst lending to and supporting companies that make a genuine difference is not just compatible but is at the core of how the industry should approach lending.

In 2021, the focus on ESG accelerated. COP26 kept sustainability at the top of every executive's agenda, while social movements and supply chain challenges forced a dramatic rethink.

This year, as businesses continue to rebuild from the pandemic – with some having to create entirely new supply processes – the financial industry will see significant change with a deeper focus on ESG resilience, strategies, reporting and governance. In particular, three key trends will shape the finance sector’s approach to ESG reporting in 2022.

More confidence in ESG credentials

Historically, employees, customers, investors, and other stakeholders have been cynical about corporate reports on sustainability and corporate social responsibility issues. There is still a lack of trust regarding organisations’ ESG claims and a perception that companies are guilty of greenwashing or only reporting on positive progress. This is frustrating for organisations that not only understand the value of reporting accurate ESG metrics but also invest significant time to do so.

For many organisations, it isn’t entirely clear what they need to do to build that trust. Until ESG is standardised and everyone is on a level playing field, organisations need to establish how they can provide greater consistency and transparency of ESG data. Key to this is working with investors to understand what it is they want to see.

Companies recognise that strong relationships with their stakeholders will only be possible if they can demonstrate that they are reporting consistent, trustworthy data. With audit-ready reports based on a single source of truth, they can establish more confidence with their stakeholders.

Regulations that seek to mandate greater trust, transparency and accountability are on the horizon. This is one reason why stakeholders are beginning to feel that they can have more trust in the ESG data included within a company’s reports. For example, many organisations across Europe are currently issuing their first European Single Electronic Format (ESEF) filing, in line with a mandate that aims to make reports more easily discoverable and comparable with standardised tagging. Additional regulatory changes are coming into force such as the Corporate Sustainability Reporting Directive (CSRD) which will create more standardisation – and confidence – in the reporting of corporate ESG progress. Inevitably, more regulatory changes are yet to be revealed but organisations don’t need to wait for regulatory bodies and standards setters to set the pace of change within their businesses. Trust can be built now.

Companies will need to go further when sharing data, both to meet these regulatory requirements and to cater to stakeholder demands. For example, outlining the company’s gender and diversity split no longer satisfies investors. They are also interested in how executive pay links to sustainability goals. Pay gaps need to be reported on and taken into account alongside, for instance, seniority and length of time at the company.

Until ESG is standardised and everyone is on a level playing field, organisations need to establish how they can provide greater consistency and transparency of ESG data. Key to this is working with investors to understand what it is they want to see.

Organisations will also need to ensure that processes are in place to gather this data efficiently from siloed departments across the business. One way to address this is to use one centralised platform that integrates teams, processes, and workflows to make this complicated data gathering exercise simpler. With this type of technology, all data within the platform can be linked. When data is updated in one place, it automatically updates everywhere. This means reporting teams can be confident in the consistency of the data, and stakeholders can be confident in the ESG credentials being reported.

As organisations get into their stride with streamlining ESG reporting processes this year, banks and investors can expect more confidence in the ESG data that companies publish.

A collaborative approach to ESG reporting 

As regulation is changing, the ESG data that companies need to track and report on is also shifting. Annual and interim reports can be a mammoth task, involving many stakeholders across multiple disconnected teams — from the sustainability and corporate communications teams to investor relations, auditors and more. So there is a growing need for businesses to ensure that everyone involved in developing ESG reports not only buys into a collaborative, centralised reporting model but understands their role in it.

This requires education across teams. Once an organisation has identified who needs to be involved, those individuals will need access to the right reporting tools and, importantly, clear and consistent lines of communication. Efficient ESG reporting requires everyone to know the role they play and collaborate.

Critically, everyone around the boardroom table — whether an ESG leader or not — has a key role to play. The CFO in particular needs to ensure that all teams become part of the process. This is where groups such as the UN Global Compact CFO Taskforce come into their own. This task force was set up to guide companies in aligning their sustainability commitments with credible corporate finance strategies – enabling advice and idea-sharing between CFOs for peer-to-peer support.

Collaboration is key and establishing a circle of trust optimises the reporting process. Without this, organisations are more likely to continue to face challenges with ESG reporting and may struggle to gain stakeholders’ trust. This year, organisations will need to establish a clear system of ESG reporting roles to ensure those processes can be streamlined for efficient, consistent, and trustworthy ESG reporting.

Continued standardisation of ESG, and tighter regulations

Change is a constant when it comes to the demands put on the annual reporting process. For example, the CSRD proposed by the European Commission last year aims to enhance and strengthen the measures already in place under the Non-Financial Reporting Directive (NFRD) and is, in part, the result of a series of consultations that started as far back as 2018. This year, financial firms will also need to start preparing for the UK Financial Conduct Authority’s mandatory climate-related disclosure rules which are due to come into force by 2025.

As a further change to the ESG reporting landscape, the International Sustainability Standards Board (ISSB) – announced at COP26 – will provide consistent standards for organisations across the world, significantly reduce cross-framework mapping, and simplify some of the more painful elements of the reporting process. The ISSB will be pivotal to meeting demands from investors for transparent, reliable and comparable reporting by companies on climate and other sustainability-related matters.

The move towards greater standardisation, control and rigour is being driven by the need for greater transparency. This transparency fosters trust in data, and this is vital considering that ESG is now a critical business success factor.

The demand for businesses to improve the quality of the ESG information that they share with investors and the market will continue. If a company is to stay on top of the evolving regulatory requirements and ensure that it can deliver consistent, transparent reports, it will need to future-proof annual reporting processes. Bolting on solutions to a reporting framework may seem like the quick answer but it won’t deliver the sustainable, long-term value required. It will only cause delays, inefficiencies, and endemic long-term disruption. Organisations are recognising this, so we can expect to see the need to future-proof annual reporting processes become more of a priority in 2022.

ESG has moved swiftly to the top of companies’ priority lists. The driving forces behind the acceleration are clear; lenders expect greater visibility, new regulation is coming into force, and both customers and employees are increasingly values-driven. As organisations double down on tracking and publishing data that demonstrates their ESG prowess and progress in 2022, the trends above will shape their approach to streamlining the processes which make that reporting possible.

As merchant bankers focused on Financial Services and impact investing, Middlemarch Partners believes that ESG-focused FinTechs have a unique ability to achieve rapid growth, deliver ESG-focused innovation, and attract investment capital to support their efforts to improve the environment and society while generating substantial returns.

We believe that major financial institutions in their effort to adopt these ESG tenants will be compelled either to partner with these sustainable FinTech firms or to invest/acquire them to gain an upper hand with their industry peers.

VC interest in ESG-related FinTechs has surged in the last twenty-four months. MasterCard issued a report which stated that venture funds deployed approximately 2.5 times more equity into ESG-related FinTechs in 2020 relative to what they invested in 2019 (from ~$0.7B to ~$1.8B). Middlemarch believes this trend will continue as earlier stage ESG FinTechs mature (and need growth equity) and more innovative FinTechs enter the market to address unmet ESG needs in the financial services industry. 

Rise of Climate FinTechs

Climate action – addressing the damage done to the environment by human activities-- is perhaps the most talked about and researched topic among all the Sustainable Development Goals promoted by the United Nations and embraced by ESG investors and thought leaders. There is no surprise then, that Climate Tech was one of the fastest sub-sectors to emerge within FinTech. While there are many interesting segments in this space, we focus on banking and lending as well as payments, investing, trading and risk analysis. For each segment, we present unique companies that are building innovative products to tackle climate change through financial innovation.

Banking

Over the last few years, some of the largest and most influential banks globally have committed to reducing emissions attributable to their operations. They have also pledged to reshape their lending and investment portfolios to produce a net-zero carbon footprint by 2050. Although it remains to be seen how much this ‘Net Zero Banking Alliance’ can actually achieve among the largest banks, Middlemarch believes next-generation FinTechs are winning the battle for ESG-focused consumers who choose their banking providers based on the strength of their ESG-related banking products and their ability to address climate-related objectives.

One traditional financial institution that is taking action to advance ESG goals in a material way is Amalgamated Bank, a US-based regional bank. It is a great example of a traditional bank focused on sustainability. A net-zero bank powered by 100% renewable energy, Amalgamated Bank believes in supporting sustainable organisations, progressive causes, and social justice. It does not lend to fossil fuel companies, and 24% of its loan portfolio is dedicated to climate protection loans and PACE financing (e.g., financing for energy efficiency upgrades, water conservation upgrades). Amalgamated Bank has made tangible progress in aligning its long-term business to achieving Paris Climate Agreement targets. Amalgamated Bank offers a strong business case for how a bank can deliver against socially responsible investment objectives.

A compelling example of a FinTech using ESG to market as well as to address environmental issues is Aspiration Bank, a US-based, online-only FinTech that offers a ‘Spend & Save’ cash management account (CMA) where the deposits are not used to fund any oil and gas projects. It also offers a zero-carbon footprint credit card which claims to plant a tree every time a purchase is made from the card. The bank is set to go public in a $2.3B SPAC transaction later this year. With celebrity investors like Leonardo DiCaprio, Orlando Bloom, Robert Downey Jr. and Drake, a multi-million sponsorship deal with Los Angeles Clippers and a multi-billion SPAC in process, Aspiration Bank sets the tone for high-profile, ESG-linked FinTechs to disrupt the banking industry by attracting a younger and more environmentally oriented consumer demographic.

Similarly, Ando, a US-based, online banking platform, invests customers’ deposits exclusively in green initiatives like renewable energy and responsible agriculture. By allocating more than $12M of its customers’ money to green loans since launch, Ando has empowered its users to make a meaningful impact with their savings. Launched in Jan 2021, the company announced a $6M seed round in October 2021, with over 30,000 customers.

Lending

The financial services sector that has most embraced ESG-related efforts is Debt Financing. There have been many green bonds and sustainability-linked loans issued. In addition to these bonds and loans that are promoted by large financial institutions, specialised FinTech lending companies are emerging that focus on sustainability and have developed dedicated lending platforms and products to address the ESG objectives of their consumer clients.

Both Goodleap and Mosaic Inc. are excellent examples of lending platforms focused on financing sustainable home improvements. Goodleap, America’s top point-of-sale platform for sustainable home solutions, offers home upgrades with flexible payment options. With more than $9B in loans deployed through its platform, the company is valued at $12B post its recent $800M capital raise. Mosaic is a leading financing platform for US residential solar and energy-efficient home improvement projects. The company surpassed $5B in loans through its platform in July 2021 as well as closed its 10^th solar securitisation — more than any other solar loan issuer in this space. Both these platforms offer simple financing solutions for their customers and are poised to capture a critical component of the sustainable lending market in the years to come.

Carbon Zero, a US-based credit card issuer, offers a simple way for customers to offset their carbon impact. The credit card fee collected by the company is invested in industry-leading forestry and carbon capture projects instead of environmentally harmful ones. Users can automatically neutralize their carbon footprint and achieve a Carbon Zero lifestyle. Incumbent credit card provider Visa recently announced a similar card program called FutureCard which offers 5% cashback on green spending to reward consumers who demonstrate ESG-supportive purchase behaviour.

Payments

Climate FinTechs in the payments segment focus on influencing the spending and shopping behaviour of consumers to help influence them towards embracing brands, companies, and practices that both are more sustainable and help reduce their consumer carbon footprints. And while all these offerings advance ESG objectives, they also help Climate FinTechs attract a key demographic segment and sustain their transaction revenue by aligning financial transactions with ESG goals.

Ecountabl is a US-based, purpose-driven tech company that helps consumers shop and spend on brands and companies that align with their social and environmental goals. Ecountabl seeks to make consumers more aware of their spending tendencies. Users can connect their credit card or bank account to Ecountabl so that it can monitor the ESG impact of their purchases. Ecountabl achieves this by maintaining one of the largest databases in the world monitoring the level of ESG adoption for brands and employers. The company is venture-backed with funding from CRCM Ventures.

Meniga, a UK-based company, focuses on addressing the issue of carbon emissions produced by consumer spending patterns.  It offers a carbon insight platform that banks can use to inform their customers about their carbon footprint based on their spending. The platform also helps offset this emission by inviting customers to take challenges, adopting green products, participating in the bank’s CSR initiatives, or finding other ways to offset their carbon footprint. Meniga drives insights from the Meniga Carbon Index to provide accurate estimations using transaction data.

Alipay, the mobile payment app by Ant Group of China, launched an initiative called Ant Forest which encourages users to make decisions that lower their carbon footprint through the spending behaviour using the Alipay app. The resulting reduction in carbon emissions are recorded, and users are rewarded with “green energy” points which can be used to plant actual trees that users can monitors using satellite imagery. Ant Forest has helped over 600 million users plant more than 326 million trees since it launched in 2016.

All three of the examples above focus on influencing the customer to make better energy consumption choices, rather than help them offset their emission by investing in environmentally friendly projects. By putting the customer in charge of their emission behaviour, these companies help consumers focus on their own contributions to advancing ESG goals.  It appears that these firms are intent on changing behaviour and are leaving the carbon trading investment opportunity for more institutional investors who are likely to be more effective participants in that market.

Investing

Asset Management and Wealth Management are key focus areas for ESG-focused FinTechs. These companies help individual investors generate a more ESG-compliant portfolio by either offering a specialised marketplace to access ESG-friendly investments or by managing consumers’ portfolios with a focus on composing an aggregate portfolio that achieves measurable ESG goals.

Raise Green is one of the first green crowd investing portals in the US that offers investors a marketplace for local impact investing. The portal helps investors get fractional ownership in clean energy and climate solution projects. The firm is focused on appealing to the younger demographic segment which favours impact investing. The firm completed an angel round of equity financing in April 2021.

There are numerous FinTech portfolio management providers like Arnie Impact and Carbon Collective that offer personalised or pre-built portfolios which focus on sustainable investments and are aligned to the personal values and financial goals of the ESG-focused individual investor. Arnie recently completed its early-stage venture round in September 2021 while Carbon Collective completed one in January 2021. Both companies offer a new option for retail investors to build a long-term sustainable portfolio. 

Trading

Trading is a sector where FinTechs can leverage blockchain technology to lower costs, reduce intermediary involvement and at the same time establish exchanges and marketplaces that enable the trading of carbon credits to advance environmental goals while monetising that effort.

Aircarbon, a Singapore-based, global carbon exchange platform built on blockchain technology, bundles carbon credits from different projects into a single instrument that can be traded on its digital platform. Unlike the current system of carbon credits trading, where companies purchase credits linked to individual projects, Aircarbon aims to create and offer standardised carbon credits instruments via bundling of projects. This approach could enable a more standardised carbon credit economy which could catalyse large-scale, institutional commodity trading.

Climate Impact X is another Singapore-based global carbon exchange and marketplace for carbon credits jointly established by DBS Bank, Singapore Exchange Limited (SGX), Standard Chartered Bank, and Temasek. It supports trading of carbon credits created from projects involved in the protection and restoration of natural ecosystems. The company recently completed an auction of a portfolio of 170,000 carbon credits connected to eight recognised forest conservation and restoration projects located in Africa, Asia, and Central- and South America. The company aims to have such auctions on a regular basis starting in 2022. The development of an expanded carbon credit supply via auctions could help the carbon offset market reach $100B in tradable carbon by 2030.

Risk Analysis

Risk analysis is a Climate FinTech category that has seen the highest rate of exits and mergers & acquisitions based on a report issued by New Energy Nexus. Risk analysis companies focus on measuring two kinds of climate risk data: 1) transition risk, which relates to the process of transitioning to a lower-carbon economy and 2) physical climate risk, which focuses on the physical impact of climate change. Both of these risks are important to investors, and investors rely on these analytical solutions to guide their investment decisions.

Carbon Delta, a Swiss company, provides insights that evaluate climate change risk in public companies for investment professionals. A key example of a company that measures this transition risk - Carbon Delta calculates ‘Climate-value-at-Risk” which provides forward-looking and return-based valuation assessments for an investment portfolio. By offering a calculation of the value of the future costs related to climate change, the company can help influence how investors and operators can direct capital to less environmentally harmful projects. This company was acquired by MSCI in 2019.

Jupiter Intel, on the other hand, measures the physical risk of climate change at the asset level by using satellite data, artificial intelligence, machine learning and Internet-of-Things connectivity. The Climate Score provided by its platform enables users to project the effect of climate change on a portfolio of assets. Banks, asset management firms, and other financial services companies can leverage this data to manage risk and allocate capital to assets that maximise positive climate impact. The company raised $54M in Series C venture funding in a deal led by MPower Partners Fund and Clearvision Ventures in September 2021.

Middlemarch is Poised to Support ESG-focused FinTechs

Middlemarch Partners believe that FinTechs as well as traditional financial services players can use ESG to attract customers who care about changing how we interact with our environment and each other. Not only is Middlemarch Partners focused on helping capitalise on next-gen financial services companies that want to focus on environmental objectives, but we also want to help established traditional financial services companies find ways to reorient themselves towards ESG efforts.

Middlemarch Partners is also cultivating investors who want to help lead the charge in ESG-oriented financial services companies.  We know those investors are looking for those businesses that can deliver strong returns and, at the same time, advance ESG objectives. That is the winning strategy that will allow us all to do well by doing good.