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How Should Companies Play Green Basketball?
Arguably, upon solidification, all industries in all developed economies will begin centralising decisions around ESG – so much that ESG becomes an intrinsic part of all successful companies.
06 August, 2021

Current landscape

The UN’s central objective for 2021 is to build a truly global coalition for carbon neutrality. A quantum leap towards carbon neutrality is required, said the UN chief, Antonio Guterres. Considering recent events, ‘a quantum ESG leap’ is currently set in wet concrete. Arguably, upon solidification, all industries in all developed economies will begin centralising decisions around ESG – so much that ESG becomes an intrinsic part of all successful companies. For more information on ESG, visit “What are ESG criteria?”. 

Source: The Conversation, data as of Dec 7, 2020

Recent events have paved the road to such a quantum leap. Through the Net Zero Carbon Bill 2019, New Zealand enforced a legal obligation to achieve carbon neutrality by 2050. On 28 June 2021, the EU followed suit and approved the European Climate Law – with the aim of becoming the first carbon-neutral continent by 2050. All eyes are set on the US and China to make the final push towards ‘a quantum ESG leap’. Biden was elected with progressive environmental policies, advancing a Green New Deal, “a crucial framework” for addressing climate changes, re-joining the Paris Agreement, and proposing a 2050 carbon-neutral America. Chinese President Xi Jinping’s UN address in late 2020 was another ESG breakthrough; he announced China would reach its carbon peak before 2030 and carbon neutrality by 2060. Evidently, quite an ambitious target for a country responsible for 28% of 2018’s carbon footprint. Regardless, China seems serious in achieving these goals; 2021 marks the official launch of China’s emission trading scheme; notably, the 14th Five Year Plan (2021-2025) has no GDP growth target – marking a transition from quantitative to qualitative growth.

It is great that the ‘quantum ESG leap’ is slowly unveiling itself; currently, the USA, and China have made non-legal carbon neutral commitments. In due course, these commitments will have legal standing. But what then? The response of banks, Private Equity and Venture Capital, public and private companies will be crucial towards achieving carbon neutrality. These institutions must either be incentivised or coerced into becoming more sustainable. Hence, supplementary legislation and regulation should be passed to accessorise carbon neutrality goals. Drawing from New Zealand and Hong Kong, this article examines examples of supplementary legislations. Companies should pay attention to them if they desire a successful transition to the incoming sustainable economy. 

New Zealand; mandatory ESG disclosure for companies with AUM > NZ$1b

Two years after New Zealand made a legal promise to become carbon neutral by 2050, James Shaw, the Climate Change Minister for New Zealand, proposed supplementary legislation. By 2023 the earliest, companies with AUM exceeding NZ$1b will likely face mandatory ESG disclosure. ‘We cannot get to net-zero carbon emissions by 2050 unless the financial sector knows what impact their investments are having on the climate. This law will bring climate risks and resilience into the heart of financial and business decision making.’ 

Hong Kong; public companies must disclose ESG

In contrast, the Hong Kong Stock Exchange requires mandatory climate disclosure for all listed and to be listed companies. Requirements include board statements setting out the company’s ESG considerations, disclosing significant climate-related issues that may have impacted and may impact the issuer, and also disclosing relevant ESG performance indicators such as energy use and water efficiency. 

Conclusion and recommendation

Until recently, ESG reporting was more of a niche. Reporting was voluntarily done to bolster reputations. However, this dynamic has rapidly changed since the 21st century. The world’s largest institutional investor, BlackRock, through CEO Larry Fink’s 2020 open letter, threatened to vote its shares against any portfolio company that does not comply with carbon reporting, suggesting sustainability will be the next ‘big thing’. It is crucial companies follow these trends. Compare the top30 Fortune500 companies in 1980 and 2020; only 4 remain. The other 26 companies either did not accommodate trends of the time or adopt innovative technologies. 

So, how should companies play green basketball? The current pace of ESG change is already a significant breakthrough, but there is more to come. C-board executives need to keep up to date and lay the groundwork for these changes now. Rather than following ESG trends, companies should get ahead and immediately start ESG exploration. This head-start will offer abundant experimentation to ascertain the most suitable way of connecting the company’s operations with ESG. Such experimentation will prove invaluable come the enactment of future ESG legislation. Both New Zealand and Hong Kong’s mandatory ESG disclosure policies had less than two years notice between proposal and enforcement. Companies that had already voluntarily disclosed and effectively explored ESG were well prepared. Contrastingly, other companies were placed in stressful positions and faced a very short time frame to find their way around a very precarious situation.

King's Equity Research Group

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