All businesses, whether knowingly or not, are intertwined with the ESG movement. As ESG elements become increasingly visible across the various lenders lending criteria, it will be crucial for businesses to not only understand what ESG is, but also adopt a robust ESG strategy.
What is ESG?
ESG (Environmental, Social and Governance) factors are core to an organisation’s strategy and operations. They are non-financial factors that investors and lenders use to identify material risks and growth opportunities and include the following.
This relates to a business’s commitment to the natural world both in current projects but also how they evaluate environmental risks for future projects.
Some environmental factors include:
- Carbon emissions
- Energy efficiency
- Waste management
- Air and water pollution
This looks at the business’ relationships with customers, suppliers, local community, employees, other stakeholders, etc.
Social factors include:
- Data protection and privacy
- Gender and diversity
- Community engagement and volunteering
- Employee health and safety and engagement
- Human rights
Governance in ESG is the internal systems of practices, controls, and procedures.
Governance factors include:
- Tax strategy
- Stockholder involvement
- Accurate accounting and reporting
- Corruption and bribery
- Board diversity and structure
Consumer expectations around ESG factors rising
According to a study conducted by PwC, sustainability is a low priority for Australian family businesses, with only a third (33%) putting sustainability at the centre of what they do, compared with almost half (49%) of family businesses globally.
On the other hand, the same report concluded that consumer expectations around ESG factors are rising, with 43% expecting businesses to be accountable for their environmental impact. And it’s not only the consumers – investors and lenders are prioritising investment in businesses with ESG credentials.
ESG consideration front of lenders minds
A recent article in The West featuring Westpac’s CEO Peter King explored how ‘Westpac will expect new oil and gas customers to publicly disclose goals aligned with Paris climate targets as it moves climate action to be part of its chief executive’s main priorities’.
‘Westpac would support existing oil and gas customers to transition to climate-sustainable goal and pledged to provide annual updates on progress from next year’.
Westpac has also put in place that it will have no exposure to thermal coal mining by 2030 – Which is just one example of the length’s lenders are going to, to ensure businesses are ESG aligned.
“We’ve always examined what is the risk we’re taking in supporting and financing thermal coal activity… We very much made the decision around exiting thermal coal from 2030 on the basis that it was not the risk we want to be part of” – Anthony Miller, chief executive of Westpac Institutional.
Westpac is not the only lender who has adopted lending criteria around ESG factors. Other lenders, such as CBA and ANZ also understand the importance of providing debt solutions to sustainable businesses that have environmental, social and governance as part of their core strategy.
We have also noticed an increase in lender support for businesses wanting to invest in sustainability with a number of debt solutions made specifically for businesses to invest in reducing their carbon footprint. To find out more, speak to your Ledge account executive today or contact our offices on (08) 6318 2777.
Why your business should adopt ESG standards
Many businesses view a focus on ESG as a huge cost, however this should not be the case. In fact, having a strong ESG proposition can save your business money and lead to value creation.
As an example, if your business becomes more conscious about reducing your carbon emissions, then you’re not only more energy efficient and saving money which can be reinvested into the business – you are also more appealing to a large company looking for a supplier with a commitment to net-zero emissions.
Businesses that adopt a robust ESG strategy may not only save money and secure contracts, but they may also experience several other benefits including (but not limited to):
- Provide a complete picture of their prospective value to investors, lenders, and larger businesses
- Better operational performance
- Attract and retain valuable talent
- Viewed as less of an investment risk
- Able to recognise strategic opportunities and meet competitive challenges
Next steps for Australian businesses
Businesses should start looking at what ESG factors matter to their stakeholders, consumers, and lenders. Once these are finalised an ESG strategy must be well thought out and include all three major components being environmental, social and governance.
There is a huge opportunity for Australian businesses to be early adopters with a sustainable ESG strategy.
Get in touch
ESG (Environmental, Social, Governance) concerns are becoming increasingly important for businesses, as lenders begin to incorporate these factors into their lending criteria. At Ledge, we want to ensure all businesses are well-equipped to continue to secure contracts for large projects, as well as having access to debt solutions.