Putting the ‘e’ in ESG: What should Aussie businesses be looking for during the COP26 summit?

As we get closer to the gathering of governments, climate experts and industry leaders at COP26, Australian businesses are grappling with the need to respond to a changing environment. 

Not only will the conference likely see governments set more ambitious targets to curb emissions, it will be an opportunity for the world’s biggest businesses to demonstrate their own progress — putting pressure on smaller businesses to commit to change.

The focus on COP26 reflects the growing importance of the environmental aspect of ESG in the business landscape, which will shape boardroom conversations for years to come.

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What is ESG?

ESG is a quick way of describing the focus on the environmental (E), social (S) and governance (G) performance of a business, as well as how that performance might be tracked, measured and reported. 

The term is broader than just talking about sustainable business practices, or corporate social responsibility, and builds on the convergence of a range of big and important societal issues that have led consumers and investors to focus more closely on the actions and practices of the businesses they interact with.

These include the environmental impacts of climate change, being seen through events like the Australian and Californian bushfires and the European summer floods, the social impact of movements like #MeToo, awareness of racial inequality, and human rights abuses in the supply chain, as well as governance concerns over profit-shifting and offshoring of funds, behaviours such as those exposed in the Pandora Papers. 

While each of these aspects of ESG matter, those associated with the environment will likely require the greatest effort on the part of business to address. 

Why is the COP26 Summit a big deal?

The COP26 meeting in Glasgow — more properly the 26th UN Climate Change Conference of the Parties — will be a critical moment for discussions around mitigating climate risks, as it will give government leaders and key stakeholders a chance to review progress against the Paris Agreement and the UN Framework Convention on Climate Change, both of which demand concrete action. 

For bigger business, it will be a chance to talk up the actions they are taking to reduce emissions in their practices and supply chains. 

There’s been a growing movement of the world’s largest companies towards strong, earlier targets designed to avoid any punitive measures based on their emissions, as well as using these announcements to promote their public ESG stance. 

The goal for multinationals is to counteract the combined risks of reputation damage, shareholder activism and even the withdrawal of investor or financier funds.

What does this mean for Australian business?

While our federal politicians have tended to downplay the need for urgent action, businesses are increasingly global and have witnessed the corporate and structural changes taking place offshore, whether that is among corporate competitors, or peers responding to the regulatory stance of governments overseas. 

That means more business owners, investors and people will be wondering how they will need to adapt their operations to continue to buy, sell and compete in this new context. 

If COP26 sends a message to business that greater urgency is needed for offsetting emissions and transitioning to cleaner fuels, Australian business will need to act, even if politicians don’t. 

Indeed many of our clients are already actively pursuing or seeking to understand the steps they will need to undertake to ensure they stay at the forefront of their industries in an ESG-aware world.

What should businesses looking towards the conference be considering?

1. Firstly, understand where their peers on the international stage are heading, as an indicator of what Australian business can expect. 

   I’m reminded of a quote attributed to Bill Gates, that people tend to overestimate the amount of change that will occur in the short term but underestimate the amount of change that will occur over the next 10 years. 

   For some, those changes will start with understanding what their actual emission footprint really is. The earlier that conversation begins at an executive level, the sooner mid-size businesses can start to identify the data and information they need to map and measure their emission footprint. 

   For most Australian middle-market businesses, regulatory frameworks have not been enforced as yet, but there will likely be supply chain pressure for voluntary action, so that the bigger businesses they supply can meet their own obligations. 

2. Secondly, gauge the reputational impact of businesses and governments that emerge from COP26 without a plan for action — whether that is the disapproval of Prince Charles for Australia’s reluctant showing or a negative response from customers, staff and the community. 

   The immediate potential risks of poor ESG performance include a loss of opportunities for renewing contracts or gaining new work, lower company valuations, constraints on lending, a higher cost of capital and higher insurance premiums. 

   Less measurable but just as real is the hit to reputation that can come with bad press, social media criticism and a reduced opportunity to attract and retain talent. 

3. Finally, the third thing to look for at COP26 will be opportunity — particularly for businesses able to transition faster than their competitors, deliver services or goods that support a low-carbon future, or demonstrate a commitment to ESG through robust reporting. 

   Besides differentiating your business from your competition, that first mover advantage can allow you to capitalise on a megatrend expected to shape economies and business activity for decades to come.