The ESG Spot, part 2
Max Kraynov
I’ve decided to give these meetings a name - the “ESG Spot” (Russian: точка ESG). Let’s not be too serious about life.
Observations and random comments
Terminology: investors use the term “ESG”, corporates call it “corporate sustainability”. Not sure if it’s ubiquitous, but if so – it provides an interesting signal into what matters to companies. Specifically, ESG is observational while corp sustainability is proactive (since it’s reflected in future plans aimed at ensuring the company’s long-term survival).
Most strategic initiatives are bottom-up (i.e. the Board doesn’t come up with them), but in case of ESG the Board should be the driver, too, so the ESG agenda is driven by both sides of the table. At the same time, I am obviously biased towards IT companies with meritocracy and constant feedback between staff and management.
Many examples provided by the participants were about large mining / oil / gas companies, and I had to translate these examples into the more understandable examples from the internet world.
Social Washing
I didn’t think this term existed until it was actually mentioned yesterday, and guess what - it does exist. It means the falsely exaggerated impact of investment on labour or human rights.
The idea against social washing is looking at the core of the issue instead of slogans and holding companies accountable for unfair treatment of employees (including wage theft), lack of sick leave, etc.
COVID-related shutdowns caused many companies to reduce their spend on employees leading to contract breaches and insufficient support.
The more innocent form of social washing is emphasizing the support and fair pay for, say, delivery couriers, while in fact the retention of these couriers is the #1 objective of the business, otherwise it will stall or lose out to the competition.
The same article quoted above also mentions two new terms: pinkwashing (false LGBTQ claims) and rainbow washing (inappropriately using the UN sustainable development goals logo).
ESG Ratings
So far there’s no consistent methodology in thinktanks around the criteria and the weights of each parameter. During our conversation yesterday we didn’t couldn’t touch upon the specific path to revenue or cost savings of such criteria. Partially that’s because some of this knowledge apparently constitutes the know-how, or simply because there’s no proof! :)
We touched upon the level of disclosure, mentioning that in different jurisdictions the mandated levels of disclosure vary, and companies may have to voluntarily expand on them.
The risk of the bare-minimum compliance disclosure is the inability of rating agencies to produce a formal score, hence supposedly reducing the attractiveness of the business.
Shareholders are very pleased when Boards tie a portion of exec’s bonuses and LTIPs to their companies’ ESG scores. My personal take is that it’s not done specifically to advance the ESG agenda, but because tying exec comp to share price no longer works and this system is heavily abused to the detriment of everyone but the people motivated by the share price, so shareholders are looking for an alternative approach that hopefully can’t be hacked that easily.
On the other hand, a CEO whose LTIP depends on ESG factors will focus on risk reduction (more likely to ensure the company’s long-term survival), but at the same time this may conflict with the shareholders’ expectations of successful risk-taking (which by definition increases the level of risk for the firm).
Note to myself: review the NASDAQ’s ESG Reporting Guide.
Russian Specifics
MK: I do not intend this section to sound like a criticism, but rather as a checklist of a bunch of young and energetic executives with an ESG agenda. This content below mostly describes the state of things in legacy non-IT industries.
30-40% of energy and heat in Russia is wasted. Just reducing this waste (via processes or technologies) will generate enormous cost savings.
“Green” CAPEX is an challenge – unless absolutely needed (i.e. a catastrophe happens or the government introduces tighter eco norms), money will be distributed to shareholders instead of the reinvestment into the business. As I’ve mentioned before, E in Russia is mostly driven by the government.
In Russia E and S are surprisingly very tightly linked. There’s a setup called “mono-towns”, i.e. small towns built around a manufacturing plant or a refinery for the sole purpose of supplying labour and supporting this labour. Many of such plants are very heavy polluters, which affects low-level employees and top managers alike: it’s the same polluted air they breeze, although the motivation for doing so varies.
Mono-towns by design don’t provide room for lateral move into another company or industry, and many people’s lives are spent entirely in such towns. This, and rampant pollution, leads to apathy and lowered life expectancy.
Safety practices in large plants (despite the ISO certifications, etc) are lacking, and what’s worse – everyone is aware of it, including the workers who risk their lives while carrying out the tasks they really shouldn’t be doing. But again – when there’s a choice between starvation, social ostracism and risky compliance, one can’t be blamed for choosing the latter.
This issue is in particular applicable to shift workers: employees are not aware how sick their employees are and whether they will make the shift or call in sick. This is a clear business case for the S letter of ESG.
Special thanks to Nika Kryachko, Svetlana Vozykova, Sergey Bobylev and many others.
… to be continued.