Why should corporates care about ESG?

ESG – a strategic cornerstone in every aspect

Soon, no business will be beyond the reach of environmental, social and governance (ESG) pressures. Wolfgang Vitzthum, Director of Real Estate & Sustainable Finance, and Mladen Levanic, Head of Infrastructure & Energy for Commerzbank’s corporate sector advisory team, delve into the complex world of corporate sustainability and explain why even small companies should be paying attention.

Wolfgang Vitzthum, Director of Real Estate & Sustainable Finance

The focus on ESG is becoming increasingly global, impacting all levels of society, politics and the economy. We are witnessing widespread awareness among corporates of the importance of sustainability, and environmental issues in particular. Adjusting to the growing requirements of governments, banks and regulators is a challenge the entire market will need to face and at a scale never before seen by businesses.

As drivers of wider economic change, many financial institutions (FIs) have taken a proactive role in promoting and implementing solutions to galvanise the sustainability transition. Indeed, while it may be a stark reality check for some corporates, ESG-compliant financing will soon be the new normal. The need for corporates to act is no longer a consideration for the future; it should be part of business strategies today. For every company, engraining sustainability into their business models and financial setup accordingly – and being able to demonstrate their ESG credentials – should therefore be a strategic imperative if they are to seek future funding opportunities, continue to successfully participate in supply chains and maintain their positions in their respective markets.

A lack of standardisation

Mladen Levanic, Head of Infrastructure & Energy for Commerzbank’s corporate sector advisory team

Actioning an ESG strategy is easier said than done. Complicating matters is the fact that many corporates are confronted with an inconsistent regulatory ecosystem.

While the Corporate Sustainability Reporting Directive (CSRD) provides a regulatory framework for larger corporates, ESG reporting lacks a standardised approach and can be very challenging for corporates to navigate. The main barrier to standardisation is the complexity of the undertaking. Looking across different sectors, production processes and the depth of the value chain, quantifying and correlating the amount of CO2 that has been emitted, for example, is far from straightforward. Existing reporting standards vary and so do the methods of measurement themselves. Yet we are witnessing evolving sector-specific approaches that are – for the time being at least – currently accepted by regulators, investors, and banks.

ESG ratings by established providers are one of those reference points. Yet, a clear definition of what constitutes ESG data doesn’t exist. ESG rating agencies collect different data on ESG in different ways. Further, their methodologies are designed for different groups of stakeholders (for example, equity investors, debt investors or the supply chain). It is therefore not surprising that there is a lack of consistency with respect to ratings outcomes, with end results frequently failing to match with one another.

In order to take charge of their own ESG strategies, reporting standards and ESG-compliant financing tools, corporates need to align with regulatory and legal frameworks, and capital market standards, while at the same time emphasise accurate benchmarking of their activity based on their peers.

ESG Strategy and KPI Reporting Map

Standardisation sits at the top of the agenda for most regulators, policymakers and capital market participants. The looming possibility of mandatory disclosure for even more corporates will pose additional challenges for businesses, but we expect the EU Taxonomy to provide clearer guidance once finalised – currently planned for early 2022. It is important to note that standards are constantly evolving. To stay up to date, bank-client partnerships are proving invaluable. As a bank, we can give our clients insights into:

  • Prevailing regulatory ESG developments
  • Capital market requirements
  • Sector-specific ESG standards
  • And evolving standards imposed on banks’ credit processes.

A gradual yet fundamental transition

The transition to sustainability will of course vary for different businesses depending on factors including size, sector and geography. For instance, larger, listed companies face scrutiny from more angles than small and medium-sized enterprises (SMEs).

Yet, even smaller companies are now feeling pressure from financiers and the supply chains in which they operate, with SMEs increasingly expected to fulfil certain requirements formulated by their larger counterparts, for example. It is important not to overlook the role of corporates in effecting positive change both within their own businesses and the wider supply chain. Large multinational organisations in particular play a crucial role in setting the standard for the rest of their supply chains, driving action towards the achievement of sustainability targets.

The gravity and sense of urgency around the implementation of ESG strategies is without question. We recognise that each sector, and indeed each individual company, will need to define a bespoke ESG strategy, connect it with funding and financing tools, and act within their own appropriate time frames and practicalities. ESG is something that will affect all levels, processes and departments of a business, meaning a considered approach is vital.

Compared with their smaller counterparts, larger corporates can more easily afford to dedicate resources and personnel to tackling the issue, formulating an effective, realistic strategy and integrating reporting processes as well as ESG-compliant financial products. Large multinational companies require in-depth advice while integrating ESG components across capital structures and funding tools. The next category of clients in terms of size does produce sustainability reports – or at least an informal set of reported sustainability KPIs – and seeks guidance on how to make beneficial use of them for funding and financing purposes.

A clear motivator here is to underpin the ESG strategy and make it more credible by linking the performance of sustainability KPIs with loan margins, for example. Last but not least, there is a third category of corporates, usually SMEs, that remain hesitant to act at all.

For clients of all sizes, Commerzbank offers profound and sector-specific advice, supporting financial solutions that promote the sustainability journey of each corporate.

Bank-client partnerships are crucial

Given the reach and scale of the challenge of the sustainability transition, a collaborative approach is crucial. An important port of call for any corporate looking to commence – or formulate a more in-depth – ESG strategy should be their banking partner, their trusted advisor, who can impart knowledge on where to start, provide direction and incentivise that transition through appropriate financing. For those about to initiate sustainability journeys, it is advisable to include banks at an early stage to ensure ESG strategy is aligned with banking, financing and capital market standards right from the start. Banks are steadfastly committed to supporting their clients in adapting to the evolving landscape and can provide specific, tailored guidance based not only on their knowledge of the client’s business, but also their understanding of the sector as a whole.

At Commerzbank, we offer support and education concerning ESG strategies, through sector-specific insights and analysis. Our aim is to make banking and capital market requirements much more transparent, while offering suitable financial products that can support our clients on their sustainability journeys.

At Commerzbank, we are a natural partner for our clients in every aspect of their sustainability journey as both a trusted advisor and financier. As part of this, we have identified six key points that we believe corporates need to take into particular consideration when it comes to ESG.

At a glance: why care about ESG?

  1. The Paris Agreement and our common goal to reduce greenhouse gas emissions
  2. Increasing regulatory pressure and the focus of investors and banks on the EU Taxonomy
  3. The integration of climate-related risks into banks’ credit processes
  4. A broad shift in investor focus in favour of ESG across all assets and financial products
  5. Increasing ESG performance transparency fuelled by unsolicited ESG ratings especially but not limited to listed companies
  6. Finally, ESG adds value, positively influencing client revenues, cost basis, talent acquisition, market share and finding opportunities, to name a few.

Soon, ESG compliance will be the norm across all aspects of a business and each of us needs to pay attention to sustainability requirements and make sure we are prepared – and can deliver. As we are seeing, corporates that consistently fail to comply with minimum standards are already facing consequences such as being penalised, excluded from supply chains, deemed ineligible for funding, and overlooked by consumers.

Certainly, the time for action is now. When it comes to the sustainability agenda, there is decreasing tolerance of a business that is merely talking the talk; they must be seen to be doing something about it.

Individually, all corporates are currently undergoing a fundamental transition process, but that journey does not have to be taken alone. Having an effective, experienced banking partner can provide invaluable support and solutions to help make sure your business is ready to be part of the sustainable revolution.