ERNST & YOUNG
Q: How has the pandemic impacted the way corporates instil environmental, social and governance (ESG) practices in their operations?
A: The pandemic has been an accelerator of ESG driven approaches in the corporate world but there’s more to be done. The 2021 EY Global Institutional Investor Survey explored the perspectives of more than 320 senior decision makers around the world and identified three themes.
While the pandemic has been a powerful ESG catalyst, more should be done by both corporates and investors to assess ESG risks effectively; there is a growing focus on the transition to a net zero economy and climate change is increasingly becoming central to investment decision making; better quality nonfinancial disclosure and a clearer regulatory landscape are becoming important to realising the potential of ESG performance.
Q: How important are ESG principles to investors and corporates today especially in the light of climate change?
A: Investors are placing significant and increasing emphasis on the exposure of their portfolios to climate change.
Assessing climate risk can be challenging because it is highly uncertain, hard to quantify and difficult to hedge against.
The 2021 EY Climate Risk Disclosure Barometer, which examines more than 1,100 companies across sectors, found that not all are undertaking a climate scenario analysis and those that do aren’t consistent in their approach.
Q: How green should investment decision making be?
A: According to the survey, corporate decarbonisation is central to investors’ investment decision making. Progressing toward net zero and decarbonisation will require companies to adopt a robust approach to scenario planning, and investors will need to engage closely with organisations on their strategies.
While the transition toward a net zero carbon economy presents significant material challenges, efforts by national governments to encourage the change may also be an opportunity for investors. However, this opportunity could become a victim of its success. A potentially limited supply of suitable green investments achieving high sustainability scores from rating providers could cause the development of a market bubble.
Q: How should companies improve ESG performance transparency and analysis capability?
A: Investors will require a data management approach to process, and channel relevant and high-quality data with flexibility, cost efficiency, effectiveness, security and resilience into the investment process. However, our research shows that fewer than half (46%) the investors surveyed have a fully deployed and sophisticated approach to data management.
Corporates must improve how they collect, aggregate and manage their own data, while investors should optimise on innovations such as cloud computing and AI to help integrate ESG data into investment analysis.
Q: What are your predictions for Sri Lanka over the next six months in terms of ESG?
A: There’s a keen interest being shown by listed corporates in nonfinancial disclosure requirements based on various sustainability frameworks and standards, such as GRI, IR, SASB, TCFD and UNSDGs.
CA Sri Lanka has published a set of nonfinancial reporting guidelines, the Colombo Stock Exchange (CSE) encourages listed companies to disclose ESG information and the Central Bank of Sri Lanka launched the Sri Lanka Green Finance Taxonomy. However, in terms of non-listed entities, significant improvements in sustainability disclosures are required.
To overcome the current situation, we need to embrace ESG genuinely in our policy frameworks. We have seen leading industrial companies employing innovative sustainability practices and enjoying competitive advantages.
While increasing the use of renewable energy sources is becoming a bare minimum action for companies, true leaders are exploring emerging sources and technologies to reduce energy consumption and carbon footprints even further. CEOs have a major question to address: how can they make the business work for sustainability and make sustainability work for business?
Q: How do you support clients who wish to instil ESG practices?
A: We assist clients in communicating nonfinancial performance and responding to the development of corporate, nonfinancial and integrated reporting frameworks. We also help them identify stakeholder expectations, and assist in providing trust and confidence in the market, based on performance and the creation of long-term value.
EY Sustainability Assurance provides transparency and accountability to our clients’ stakeholders, and assurance to the management.
In addition, we offer nonfinancial reporting assurances according to the relevant industry, sector or professional standards and frameworks through an Independent Assurance Report.
Furthermore, we help clients venture beyond their independent assurance needs into other ESG-related initiatives. We advise and assist them to understand emerging sustainability, supply chain, environment, social and governance risks and opportunities, and encourage them to raise low-cost funds for ESG initiatives, which will be necessary given the current economic climate.
– Compiled by Ruwandi Perera