ESG

Rewards4Earth

What is ESG?

ESG stands for Environmental, Social, and Governance, and refers to the three (3) key factors when measuring the sustainability and ethical impact of an investment in a business or company.

These are called the pillars in ESG frameworks and represent the three (3) main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company’s day-to-day activities.

ESG is a generic term used in capital markets and commonly used by investors to evaluate the behaviour of companies, as well as determine their future financial performance. The Environmental, Social and Governance factors are a subset of non-financial performance indicators which include ethical, sustainable, and corporate governance issues such as making sure there are systems in place to ensure accountability and manage the corporation’s carbon footprint.

Whilst the popularity of ESG has been driven by customers and investors, ESG is also becoming increasingly important as a risk consideration for the long-term viability and success of a company. ESG investment is also seen as a pathway to achieve the UN Sustainable Development Goals.

Why report on ESG?

There are several factors for companies to report on their ESG performance and issues. Each is a powerful driver in its own right, and when acting in combination, they effectively compel companies to improve their ESG reporting practices or to start reporting ESG, when they have not already.

Some of these key factors are:

Market drivers

Investors, customers, bankers, insurers, and other stakeholders and capital providers are increasingly recognising that a company’s financial performance risk profile and longevity are inextricably tied to its proper management of ESG-related issues. As such, they are increasingly looking to understand, via data and narrative disclosures, how a company is performing on various ESG issues. In turn, this information influences the decisions they make – decisions that directly affect the company’s business activities. To meet the information demands of these stakeholders, companies need to produce comparable, reliable, and timely ESG disclosures.

Regulatory drivers

Governments around the world wishing to respond to market needs, adopting policies to promote ESG, and increasingly mandating corporate disclosures of ESg and climate-related data and narrative. For example, in Europe the Corporate Sustainability Reporting Directive (CSRD), which targets public and private companies, both large and small, entered into force on 5th January 2023. This new directive modernises and strengthens the rules about the social and environmental information that companies must report. The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment.

Value creation

By measuring and managing material ESG issues, a company can increase its growth prospects, reduce its operating and extraordinary expenses, and reduce its risk profile, all of which improves financial performance and thus creates financial value. By providing clear, consistent, decision-useful information to capital markets on how it manages these issues, companies can ensure that markets reflect their improved performance by lowering the company’s risk profile and granting higher market value and, therefore, higher enterprise value.

The impact of ESG issues on financial risk can be minimised if there is a strategic approach that is forward-looking and reflects the long-term interests of a company.

Therefore, it is important for companies to develop an ESG strategy to respond to and manage such risks. In particular, the board of directors should have oversight of and assume the overall responsibility of a companies ESG matters and strategic direction.

Five (5) Links to ESG Value Creation

The five links are a way to think of ESG systematically, not an assurance that each link will apply, or apply to the same degree, in every instance. Some are more likely to arise in certain industries or sectors; others will be more frequent in given geographies. Still, all five should be considered regardless of a company’s business model or location. The potential for value creation is too great to leave any of them unexplored.

Five (5) links to ESG value creation:

1. Top-line growth

A strong ESG proposition helps companies tap new markets and expand into existing ones. When governing authorities trust corporate actors, they are more likely to award them the access, approvals, and licenses that afford fresh opportunities for growth.

2. Cost reductions

ESG can also reduce cost substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material cost and the true cost of water or carbon).

3. Reduced regulatory and legal interventions

A stronger external-value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In fact, in case after case across sectors and geographies, we’ve seen that strength in ESG helps reduce companies’ risk of adverse government action. It can also engender government support.

4. Employee productivity uplift

A strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall. Employee satisfaction is positively correlated with shareholder returns.

5. Investment and asset optimisation

A strong ESG proposition can enhance investment returns by allocating capital to more promising and more sustainable opportunities (for example, renewables, waste reduction, and scrubbers). It can also help companies avoid stranded investments that may not pay off because of longer-term environmental issues (such as massive write-downs in the value of oil tankers).

A strong ESG proposition links to value creation in five (5) essential ways.

Strong ESG (Rewards4Earth)

Weak ESG (Regular Rewards)

1. Top-line growth

Attract B2B and B2C customers with more sustainable products.

Achieve better access to resources through stronger community and government relations.

Loose customers through poor sustainability practices (e.g., human rights, supply chain) or a perception of unsustainable/unsafe products.

Loose access to resources (including from operational shut down).

2. Cost reductions

Lower energy consumption.
Reduce water intake.

Generate unnecessary waste and pay correspondingly higher waste-disposal costs.

Expend more in packaging costs.

3. Regulatory and legal interventions

Achieve greater strategic freedom through deregulation.

Earn subsidies and government support.

Suffer restrictions on advertising and point of sale.

Incur fines, penalties, and enforcement actions.

4. Productivity uplift

Boost employee motivation.

Attract talent thought greater social credibility.

Deal with “social stigma,” which restricts talent pool.

Lose talent as a result or weak purpose.

5. Investment and asset optimisation

Enhance investment returns by better allocating capital for the long term (e.g., more sustainable plant and equipment).

Avoid investments that may not pay off because of longer-term environmental issues.

Suffer stranded assets as a result of premature write-downs.

Fall behind competitors that have invested to be less “energy hungry”

Five (5) Links to ESG Value Creation

The five links are a way to think of ESG systematically, not an assurance that each link will apply, or apply to the same degree, in every instance. Some are more likely to arise in certain industries or sectors; others will be more frequent in given geographies. Still, all five should be considered regardless of a company’s business model or location. The potential for value creation is too great to leave any of them unexplored.

Five (5) links to ESG value creation:

1. Top-line growth

A strong ESG proposition helps companies tap new markets and expand into existing ones. When governing authorities trust corporate actors, they are more likely to award them the access, approvals, and licenses that afford fresh opportunities for growth.

2. Cost reductions

ESG can also reduce cost substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material cost and the true cost of water or carbon).

3. Reduced regulatory and legal interventions

A stronger external-value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In fact, in case after case across sectors and geographies, we’ve seen that strength in ESG helps reduce companies’ risk of adverse government action. It can also engender government support.

4. Employee productivity uplift

A strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall. Employee satisfaction is positively correlated with shareholder returns.

5. Investment and asset optimisation

A strong ESG proposition can enhance investment returns by allocating capital to more promising and more sustainable opportunities (for example, renewables, waste reduction, and scrubbers). It can also help companies avoid stranded investments that may not pay off because of longer-term environmental issues (such as massive write-downs in the value of oil tankers).

A strong ESG proposition links to value creation in five (5) essential ways.

1. Top-line growth

Strong ESG (Rewards4Earth)

Attract B2B and B2C customers with more sustainable products.

Achieve better access to resources through stronger community and government relations.

Weak ESG (Regular Rewards)

Loose customers through poor sustainability practices (e.g., human rights, supply chain) or a perception of unsustainable/unsafe products.

Loose access to resources (including from operational shut down).

2. Cost reductions

Strong ESG (Rewards4Earth)

Lower energy consumption.
Reduce water intake.

Weak ESG (Regular Rewards)

Generate unnecessary waste and pay correspondingly higher waste-disposal costs.

Expend more in packaging costs.

3. Regulatory and legal interventions

Strong ESG (Rewards4Earth)

Achieve greater strategic freedom through deregulation.

Earn subsidies and government support.

Weak ESG (Regular Rewards)

Suffer restrictions on advertising and point of sale.

Incur fines, penalties, and enforcement actions.

4. Productivity uplift

Strong ESG (Rewards4Earth)

Boost employee motivation.

Attract talent thought greater social credibility.

Weak ESG (Regular Rewards)

Deal with “social stigma,” which restricts talent pool.

Lose talent as a result or weak purpose.

5. Investment and asset optimisation

Strong ESG (Rewards4Earth)

Enhance investment returns by better allocating capital for the long term (e.g., more sustainable plant and equipment).

Avoid investments that may not pay off because of longer-term environmental issues.

Weak ESG (Regular Rewards)

Suffer stranded assets as a result of premature write-downs.

Fall behind competitors that have invested to be less “energy hungry”

General Advice Warning:

This information is intended to provide general information only and has been prepared without taking into account any particular person’s or organisations objectives, financial situation or needs. Any general advice contained within or given (whether orally or in writing) does not consider your individual or organisational objectives, financial situation or needs. Nothing in this presentation is intended to be investment, financial advice or a recommendation to invest in a financial product. Before acting on such information, you should consider the appropriateness of the information having regard to your personal and organisational objectives, financial situation or needs.
Superannuation, tax, Centrelink and other relevant information is based on our interpretation and continuation of law current as at the date of this presentation. The information contained in this presentation or given during this presentation does not constitute legal or tax advice. You should seek expert advice in this regard.
This presentation may contain certain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control. You should not place reliance on forward-looking statements. To the maximum extent permitted by law, we and Matrix Planning Solutions Limited disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered as a result of relying on anything in this document including any forward-looking statements.