Translating ESG into sustainable business value

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March 2010,Translating,environmental,social and,governance factors. into sustainable,business value,Key insights for companies and investors. Report from an international workshop series,of the WBCSD and UNEP FI. A joint publication by, The Asset Management Working Group Markets Valuation Work Stream. United Nations Environment Programme The Business Role Focus Area. Finance Initiative World Business Council for Sustainable. Development,About this document, This document outlines the findings and key insights of a series of global workshops between business investors.
and stakeholders about the environmental social and governance ESG and sustainability aspects of company. performance evaluation These workshops build on the learnings of the WBCSD UNEP FI and key stakeholders. from their work on ESG and sustainability reporting and disclosure and responsible investment through the years. The WBCSD has been working with its membership of leading global companies and key stakeholders such as. the Global Reporting Initiative on corporate best practice and the advancement of sustainability reporting since. 1995 The WBCSD has also developed many tools such as the GHG Protocol and others to help companies. measure and report their management of sustainability issues to stakeholders. UNEP FI together with a range of partner organisations and key stakeholders worldwide has pioneered the work. of the United Nations with the global financial sector comprising investment firms insurance companies and. banks to integrate ESG factors into fundamental financial analysis decision making and reporting since 1992. Over the past decades the WBCSD and UNEP FI have been working with key stakeholders to articulate the. materiality of ESG factors and sustainability to companies investors and financial institutions and to advance. global reporting and disclosure guidelines in these areas In addition to the list of stakeholders consulted during. the workshops referred to in this document see Appendix 1 the WBCSD and UNEP FI would like to recognise. the work of and important collaborations with the Carbon Disclosure Project Global Reporting Initiative. International Organization for Standardization Principles for Responsible Investment and UN Global Compact. Please also see previous WBCSD reports and tools in this area. Ecosystems Valuation Initiative WBCSD 2009, The Corporate Ecosystems Services Review WBCSD 2008. Measuring Impact WBCSD 2008, Investing in a Low Carbon Future in the Developing World WBCSD 2007. Establishing a Global Carbon Market WBCSD 2007, Sustainable Procurement of Wood and Paper based Products WBCSD 2007. Global Water Tool WBCSD 2007,Eco Efficiency Learning Module WBCSD 2006. GHG Protocol for Project Accounting WBCSD WRI 2005. Beyond Reporting Creating business value and accountability WBCSD 2005. The Greenhouse Gas Protocol A corporate accounting standard WRI WBCSD 2004. Striking the Balance Sustainable development reporting WBCSD 2003. Tomorrow s Markets WBCSD WRI 2002, Please also see previous UNEP FI reports and tools in this area.
The Natural Value Initiative The ecosystem services benchmark Fauna Flora International FGV UNEP FI 2009. The Natural Value Initiative Linking shareholder and natural value Fauna Flora International FGV UNEP. The Materiality of Climate Change How finance copes with the ticking clock UNEP FI 2009. The Global State of Sustainable Insurance Understanding and integrating environmental social and. governance factors in insurance UNEP FI 2009, Fiduciary Responsibility Legal and practical aspects of integrating environmental social and governance issues. into institutional investment UNEP FI 2009, Chief Liquidity Series Issue 1 Agribusiness UNEP FI 2009. If You Ask Us Understanding corporate sustainability disclosure requests UNEP FI 2008. Human Rights Guidance Tool for the Financial Sector UNEP FI 2008. GRI Sustainability Reporting Guidelines and Financial Services Sector Supplement GRI UNEP FI 2008. CEO Briefing Human rights UNEP FI 2008, Biodiversity Ecosystem Services Bloom or bust UNEP FI 2008. The Working Capital Report UNEP FI UN Global Compact 2007. Responsible Investment in Focus How leading public pension funds are meeting the challenge UNEP FI. UKSIF 2007, Insuring for Sustainability Why and how the leaders are doing it UNEP FI 2007. Half Full or Half Empty A set of indicative guidelines for water related risks and an overview of emerging. opportunities for financial institutions UNEP FI 2007. Demystifying Responsible Investment Performance A review of key academic and broker research on ESG. factors UNEP FI Mercer 2007, Sustainability Management and Reporting Benefits for financial institutions in developing and emerging.
economies UNEP FI 2006, Show Me the Money Linking environmental social and governance issues to company value UNEP FI 2006. Global Framework for Climate Risk Disclosure Ceres IGCC IIGCC INCR UNEP FI 2006. A Legal Framework for the Integration of Environmental Social and Governance Issues into Institutional. Investment Freshfields Bruckhaus Deringer UNEP FI 2005. The Materiality of Social Environmental and Corporate Governance Issues to Equity Pricing UNEP FI 2004. 1 Background 5,2 Takeaways for companies and investors 7. 3 Key insights for companies 9,3 1 What investors want 9. 3 2 What companies can do 10,3 3 Getting started 12. 4 Key insights for investors 13,4 1 What investors need to know 13.
4 2 What investors can do 14,4 3 Getting started 17. 5 Annex A Sample ESG considerations,by sustainability theme and industry sector 18. 6 Conclusion 26,Acknowledgements 28,Appendix 1 Participating companies. institutions and stakeholders 29,About the United Nations Environment Programme. Finance Initiative and the World Business Council,for Sustainable Development 30.
1 Background, In the wake of the global financial crisis business leaders and financial practitioners have. been forced to rethink the fundamentals of mainstream asset pricing and business models. The crisis exposed the vulnerability of global capital markets and national economies to. systemic shocks and the devastating effect these have on economic growth and stability. The exposure of markets to shocks has brought to light the importance of businesses and. financial institutions incorporating systemic environmental social and governance ESG. factors into fundamental financial analysis and business planning The impact of climate. change on the economic performance of businesses and nations is one such example. and has been singled out by Sir Nicholas Stern as the single greatest market failure in. human history This has forced businesses and investors to rethink the basis for sustainable. economic performance into the future, The member institutions of the World Business Council for Sustainable Development. WBCSD and the United Nations Environment Programme Finance Initiative UNEP. FI believe that a company s management of ESG factors as well as a company s. leadership on sustainable development are at the core of business today and. therefore need to be considered by the capital markets Both organisations believe. that ESG factors can be financially material and can enhance long term sustainable. company value, In 2008 the WBCSD and UNEP FI launched a series of workshops that provided. a platform for institutional investors and companies to discuss how to facilitate. the integration of ESG factors into key processes of the capital markets A series of. workshops were held in Europe North America Asia and Africa for WBCSD and UNEP. FI member companies institutions partners and stakeholders to collectively address. process and communication barriers to assessing the ESG and sustainability aspects of. company performance evaluation and to chart a course for change. The workshops involved a large number of institutional investors principally asset. managers multinational corporations from a cross section of industries and key. stakeholders engaged on this issue 1 At each workshop one on one company. investor dialogues were used to formulate a common understanding of the financial. materiality of ESG factors and forward looking ESG and sustainability considerations in. business value and investment decisions, This document provides a summary of key findings from the 2008 WBCSD UNEP FI. workshops The company investor dialogues confirmed previous assumptions that. several communication gaps are at the heart of the issue of valuing ESG factors and. sustainability It also provides important insights for company managers and investors. on how their business and investment philosophy and practices going forward can. better address the why what and how of communicating corporate ESG performance. to the capital markets, It is hoped that this document will be used by business leaders and investors as a tool.
to continue discussing the needed evolution towards more holistic and realistic capital. market valuation processes It relies on the largest and most comprehensive series of. global workshops held to date bringing together companies and investors around. the issue of integrating ESG factors and sustainability into corporate and investment. decision making, 1 For the full list of participants please see Appendix 1. Commonly used terms,Companies Stock listed companies that produce. and sell goods and services, Institutional investors investors Asset managers asset owners e g. pension funds insurance companies,sovereign wealth funds mutual funds. foundations,ESG1 The term that has emerged globally.
to describe the environmental social,and corporate governance issues that. investors are considering in the context,of corporate behaviour No definitive list. of ESG issues exists but they typically,display one or more of the following. characteristics,Issues that have traditionally been. considered non financial or not material,A medium or long term horizon.
Qualitative objects that are readily,quantifiable in monetary terms. Externalities costs borne by other firms,or by society at large not well captured. by market mechanisms,A changing regulatory or policy. Patterns arising throughout a,company s supply chain and therefore. susceptible to unknown risks,A public concern focus.
ESG integration2 The active investment management,processes that include an analysis of. environmental social and corporate,governance risks and opportunities. Sustainable development3 Development that meets the needs of. the present without compromising the,ability of future generations to meet. their own needs, Sustainability business4 leading global companies of the. future will be those that provide goods,and services and reach new customers.
in ways that address the world s,major challenges including poverty. climate change resource depletion,globalization and demographic shifts. 1 Demystifying Responsible Investment Performance A review of key academic and broker research on ESG. factors UNEP FI Asset Management Working Group and Mercer 2007. 2 See note 1, 3 Our Common Future The Brundtland Commission 1987. 4 WBCSD 2006,Takeaways for companies and investors. The WBCSD UNEP FI workshops held globally in 2008 which informed this document. aimed to advance the debate by providing a platform for more companies and investors. to meet directly to address the evolution of corporate valuation in the context of ESG. and sustainability The findings of this study represent developed and emerging market. perspectives spanning six major investment centres and engaging over 150 multinational. regional and local companies and investors, During the workshops company managers and asset managers met to understand each.
other s point of view and to reach agreement on how to advance progress on valuing. ESG factors and sustainability in investment decision making The following are high level. learnings that stemmed from six global dialogues,The ESG financial materiality nexus is evolving. The companies and financial institutions that participated in the workshops argue that. ESG factors can have long term consequences on a company s financial performance. either for better or for worse They accept that ESG factors are now at the core of. business However the depth and breadth of ESG factors are not fully valued by. investors and company management Companies believe that mainstream asset. managers currently under or overvalue the long term intrinsic value of companies. because they fail to routinely integrate ESG factors into their investment analysis and. decision making, Companies and investors do not agree on which ESG factors. are material, The workshops revealed that there are many misconceptions between companies. and investors on ESG factors and their financial materiality Companies found that. they have unique expertise on how and why ESG factors are material and core to. their business they understand their business best Meanwhile asset managers have. not gained access to this information through current ESG questionnaires and desk. research and tend to focus on reputational issues Many asset managers generally find. the information contained in sustainability reports difficult to use for the purposes of. valuing a company, There is widespread acknowledgement among companies that ESG factors can. Translating ESG into sustainable business value Key insights for companies and investors Report from an international workshop series of the WBCSD and UNEP FI March 2010 Secretariat 4 chemin de Conches CH 1231 Conches Geneva Switzerland Tel 41 0 22 839 31 00 info wbcsd org www wbcsd org WBCSD North America Office 1744 R Street NW Washington DC 20009 United States Tel 1 2024207745

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