Category: ESG

Pooja Khosla

Why insurance holds the key to ESG adoption

ESG Insurance
Insurance

Today, we live in a world that is very aware of and active in ESG issues, especially concerning capital markets.

2021 broke all records for ESG investing, with an estimated $120 billion poured into sustainable investments. This is more than double the $51 billion invested in 2020. This traction in capital markets is hopeful, but it is unequal. 

We see many new ESG movements in the Exchange Traded Fund (ETF) market, and 2021 experienced a record number of ESG-related ETF launches.

The insurance market still lags. 

In February 2021, BlackRock, RetireOne, and Midland National collaborated to offer what they say is  “the first-ever ESG option in a Fixed Index Annuity (FIA) space.” In April 2021, Investors Heritage Life Insurance Company (“Investors Heritage”) announced the launch of a new fixed index annuity that included an environmental sustainability offering that is benchmarked against the S&P 500 index and structured in collaboration with Société Générale and Entelligent. 

The insurance-annuity market needs to catch up with the current ESG movement by increasing such offerings globally. 

The insurance sector is in a unique position to accelerate ESG momentum globally. From the demand side, retirement planning is essential for working professionals. This is where annuities play an essential role by helping individuals guard against outliving their assets.

An annuity is an agreement for an entity (generally a life insurance company) to pay another entity a series of payments annually. There are many types of annuities. For example, structures can include tax savings, protection from creditors, investment options, lifetime income, and benefits to heirs.

This is also a significantly large industry. The Life Insurance & Annuities industry in the US is the 2nd ranked Finance and Insurance industry by market size and the 8th largest in the US. In 2022, the industry’s market size, measured by revenue, is $909 billion. On average, it grew by 1.1% per annum between 2017 and 2022. This is the potential yet to be tapped for ESG to scale and grow. 

The question, though, is how can this potential be realized? Indeed,  sales, marketing, and distribution channels have a significant role to play here. If we need ESG to reach ordinary household investors, it needs to be packaged in the investment packets and distribution channels that are available to these buyers.

According to LIMRA, about 40% of the sales of individual annuities in the United States were facilitated by independent broker-dealers and independent agents (see Sales Of Individual Annuities By Distribution Channels, 2016 And 2020). That knowledge, information, and communication are integral to creating demand.

We need ESG-focused marketing to increase the demand for ESG-linked insurance and annuity products.

This will further empower the capital markets to drive finance and investment into businesses on the road to NetZero, Social Justice, and Equality. 

Insurance professionals will need to understand this, and we will need more industry-specific ESG courses to train them.

On the supply side, we need insurance companies to partner with banking, asset managers, and data partners to bring more ESG related annuity products to the market. 

Most importantly, we need ESG to scale down so that it appeals to everyday investors and is not reserved as a prized possession of asset managers and high net worth individuals.

Insurance and Annuity markets have the power to make ESG a more democratic instrument of real change. Now that is worth a premium!

Sales Of Individual Annuities By Distribution Channels, 2016 And 2020

Insurance Segments

Source: U.S. Individual Annuities, 2020 Year in Review, LIMRA, 2021.

Sources: 

 

https://www.iii.org/fact-statistic/facts-statistics-annuities

https://401kspecialistmag.com/first-ever-esg-option-available-in-a-fixed-index-annuity/

https://www.prnewswire.com/news-releases/midwest-holding-announces-launch-of-sp-500-esg-index-for-the-fixed-annuity-space-301454958.html

https://www.esgtoday.com/midland-national-introduces-esg-index-for-fixed-annuity-marketplace/

https://www.ibisworld.com/industry-statistics/market-size/life-insurance-annuities-united-states/

https://www.fa-mag.com/news/who-buys-annuities-and-why-54016.html

https://www.swissre.com/media/news-releases/nr-20211214-sigma-full-year-2021-preliminary-natcat-loss-estimates.html

https://www.fastcompany.com/90706552/esg-investing-continued-to-soar-in-2021-the-government-could-boost-it-even-more

https://www.cnbc.com/2021/10/16/esg-etfs-launched-this-year-may-not-move-the-needle-enough-ceo-warns.html

https://www.thinkadvisor.com/2021/04/20/investors-heritage-life-adds-indexed-product-annuity-moves/

https://401kspecialistmag.com/first-ever-esg-option-available-in-a-fixed-index-annuity/

 

Pooja Khosla

EV: the crucial role of Finance in driving Electric Vehicles growth

ESG Net Zero

As we begin 2022, it is worth reflecting on one of the big Climate Transition success stories of the twenty twenties: the growth of the Electric Vehicles (EV) market.

At the end of 2021, the UN-convened Net-Zero Banking Alliance brought together  banks worldwide, representing over 40% of global banking assets. They are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. As of the end of 2021, major banks have pledged a trillion dollars of lending towards climate change.  

Let’s not get obsessed with existing green sectors

In the journey towards Net-Zero, we see significant commitments towards green investments. However, paving new green roads and paths will not get us there. To reach the desired Net-Zero goals, it is crucial to re-construct the non-green sectors such as utility, energy, and discretionary consumer goods.

The banks’ mantra (in driving the economy and businesses towards sustainability) has been the holy trinity of investing, divesting, and engaging. However, these decisions need primary measurement metrics.  

 Popular measurement metrics today on the carbon front utilize bottom-up carbon footprint data (Scope-1, 2 & 3 emissions), which is aggregated and reported by the companies themselves. Using this data is not enough as carbon-focused exclusionary strategies often drive most investments towards clean sectors such as information technology. Carbon-focused exclusionary strategies mean taking firms with larger current carbon footprints out of the investment portfolio. This strategy negatively penalizes high carbon-intensive sectors such as utilities and energy and regions such as the Mediterranean.

At Entelligent, we used this data on screening out S&P 500 companies with a high carbon footprint and noticed a 20% portfolio tilt towards the technology sector.  

 

Source: Carbon data from ISS. Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the lowest carbon footprint.  

 To add more power to climate change we need more attention on the sectors and companies that are changing their traditional pathways and paving a more sustainable future. Re-constructing old roads can be harder than building new ones. There is always a need for additional traffic management and temporary breakdowns during re-construction. 

A great example: the Consumer Discretionary sector

One sector that is overcoming all the re-construction barriers is the Consumer Discretionary sector. Entelligent’s T-Risk (Climate Paris Aligned Scores) is designed to capture these measurable and material climate transitions. When we screen the same S&P 500 portfolio using Entelligent T-Risk to choose 25% of the companies that are leading these climate transitions we see a big portfolio tilt towards this sector. Real Estate and HealthCare also get higher climate transition scores.  

 

EV in Consumer Discretionary
EV in Consumer Discretionary

 

Source: T-Risk from Entelligent, Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the best T-Risk scores.  

One reason the Consumer Discretionary sector is doing so well is the inclusion of  Electric Vehicles  (EV). According to the International Council on Clean Transportation (ICCT), vehicle manufacturers have announced over $150 billion in investments to achieve collective production targets of more than 13 million EVs annually by 2025 (though much more could be in the pipeline).

The best part of this commitment is it is not a distant 2030 or a 2050 commitment, but a near-future 2025 commitment. We can experience this commitment together and it sets a great example for other industry groups to follow.

It’s not all about Tesla

According to the Entelligent T-Risk analysis, this sector has players that are less obvious but who are making great strides towards measurable and substantial sustainability. These players include The BMW Group and DAIMLER AG. BMW is the latest global carmaker to commit to setting a science-based target. It is also committed to procuring 100% of its electricity from renewable sources for its operations by 2050, as part of its commitment to be 100% Renewable (RE100) led by the Climate Group (see https://www.there100.org/ ). Ford is following this trend by innovating and integrating projects like the Ford Bronco Sport which uses 100% recycled ocean plastics for parts. Another example, higher in the automotive supply chain is the Swedish steelmaker SSAB which is now 5 years into a program to develop a fossil-free steel process called Hybrit. The results of these efforts are reflected in the financial returns and the balance sheet indicators of these companies.

The importance of Finance in fueling EV growth

It is good to see how banks are supporting this journey in these sectors by fueling the speed towards NetZero with large amounts of capital.

The banks’ total auto loans rose to $530.20 billion in the third quarter, up from $518.11 billion in the second quarter and $489.16 billion in the same period 12 months ago.

The top of the funders is Capital One Financial Corporation. Of the top 25 lenders, ranked by auto loans in the third quarter, Capital One remained in the No.1 spot as the top auto loan lender for the fourth consecutive quarter. With a loan book of $74.72 billion in total auto loans, the bank posted a 4.2% quarter-on-quarter and a 14.3% year-over-year rise in auto loans. 

 

Indeed, the banks are still financing fossil fuels while also signing up to net-zero pledges. However, it is also comforting to see that they aggressively invest in sectors with the most potential for rapid carbon reduction.  

 

 

Sources and additional reading:  

Pooja Khosla

Climate Crisis: from Measuring to Managing

Climate Crisis ESG Sustainability
Climate Crisis

And From ESG Theory to Sustainability Reality

A little less conversation and a little more action, please!

Financial stakeholders are eager to redirect their investments into sustainability-related ventures, and since 2018 the momentum of this capital migration has been accelerating at full speed. As of the end of 2020, the UN-backed Principles for Responsible Investment (PRI) reported Assets Under Management of more than $103.4 trillion and 3,300 corporate signatories. This is a signal of the growth of the responsible investment.

We are observing a constant increase in regulations and investor consciousness about societal, environmental, and governance (ESG) matters, and the urgency of climate change. Indeed, climate change is on the top of the list. There is also a lot of urgencies demanded by regulators and capital markets to bend the temperature curve to 1.5°C (above pre-industrial level temperatures) and plan a more sustainable and livable future for the planet.

The spirits are high and the concerns are high. However, what is missing is the definition of sustainability and more.

  1. How can regulators and capital markets define sustainability?
  2. What are the right measurement criteria for sustainability?
  3. What is the taxonomy for sustainability?

These questions are still unanswered.

However, the important point that I want to make here is that world has started moving in somewhat the right direction. We are observing leaps of innovation in the renewable space with the scalability of batteries, electrolyzing hydrogen, and progress on methane. Every change counts.

The IPCC latest report on Climate Change: the risk of Climate Crisis

I totally get it that we are 10 years late for these changes to achieve the desired IPCC (International Panel on Climate Change) climate scenario of 1.5°C. The 1.5°C target relies on negative carbon emissions that are enhanced uptake.  The enhanced uptake here refers to the greenhouse effect based on human activities that are adding to the warming of the atmosphere, this includes gases that increase the atmosphere’s retention of the heat energy of the sun. You can explore an IPCC interactive version as well.

IPCC Climate Change Scenario

First, this assumes some combination of increased land and ocean uptake, when science suggests that overall uptake, especially on land, is decreasing. Increasing overall land uptake by more than baseline assumptions in models is challenging, with background sinks (A carbon sink is anything that absorbs more carbon from the atmosphere than it releases – for example, plants, the ocean, and soil. In contrast, a carbon source is anything that releases more carbon into the atmosphere than it absorbs – for example, the burning of fossil fuels or volcanic eruptions.) declining and some even changing to sources.

Second, “net-zero” and 1.5°C assume some form of industrial sequestration, for example, BioEnergy with carbon capture storage. However, these are new, expensive and unproven technologies.

We still have hope that we can still reach under 2.0°C with the power of regulations, innovations, and capital markets. However, we do not have 10 more years to solve this puzzle of defining the sustainability taxonomy.

What we have now is a power of choice. Financial markets process complex information each and every day. The impact of climate change is no exception. The concerns of squaring out the taxonomy should not stop innovation. Instead, we should empower the innovators to build diverse workable solutions throughout the regions and sectors. We are out of time in a climate emergency and code red is upon us. We cannot wait for the perfect solution.

What we need is a series of imperfect solutions that can make our planetary future perfect for us all. The real focus should be on avoiding the climate pitfall. This can be done with real live performance rather than commitments and promises.

Tackling Climate Crisis: some simple suggestions

– We do not need any more false promises from investors and companies. We need understatements and overperformance. Keep the targets real and achievable. We cannot afford any missed emission targets in accountable global emissions So keep the targets real.

– Frame future plans rather than goals. We need more action-based plans. Keep the future closer to today 10 -50 years is too long. We need quarterly and yearly quantified, measurable standards to monitor climate progress.

– We need to crack the climate puzzle from both a macro-level, top-down validation approach and from a micro-level bottom-up approach. The bottom-up approach has self-reported data on emissions reductions, both expected and achieved, which is more important than just carbon accounting. The carbon trajectory is more important than just the carbon footprint.

– We need more power and clarity on scope, reach, and measuring progress towards climate targets. This may vary across sectors, regions, and investment strategies.

–

Let us get to terms with this, but let us not forget that it is crucial for companies and investors to achieve their definition of sustainability. Show what you can promise and promise what you can show. It is high time that we changed our approach. We need more action and reality and less conversation and theory to drive sustainability!

Edmund Bradford

From ESG to ESDG: why to add a “D” and why ESDG Matters for Sustainable Brands

ESG Sustainability
ESG Digital

Transcript for ESG to ESDG: Why Add a “D” and why ESDG Matters for Sustainable Brands

Hello, everyone. I’m Edmund Bradford. And in this video, we’re going to be talking about the hot and tricky subject of ESG.

And to help me with that, we have Yelena Novikova, who is a G20 young global changer and an independent expert on ESG and sustainability.

So thank you very much, Yelena, and welcome.

Thanks for having me. It’s a pleasure, Edmund.

Now, one thing that you told me about, which I thought was very interesting, is that you and some of your colleagues, I’ve actually changed ESG and you’ve added D into it.  So you are often referred to it as ESDG. Do you want to explain what that D is all about on ESDG?

D is for digital. And I would say that we didn’t change the ESG. We just gave more importance and attention to the very important D factors that were always there but were becoming more apparent because of the work that we started doing on Public Value Principles for which this ESDG term is kind of very central front and center would say.

It started right during the time when we were all globally. Pretty much all the countries went into lockdown.

And as we know, even right now, one in four Americans are working from home, 16% of companies globally are fully remote, and 62% of people are reporting that they still work from home at least some of the time.

And it’s now when many countries are already getting vaccines. So right at the time when we studied this work, it was even more apparent digital kind of took over our life.

And even before that, laymen would think about digital factors because

they are given data to digital platforms like Facebook or even like regular

sites that ask you to give permission for cookies, for example. But as we went into the pandemic, it kind of became more apparent that it’s much more a nuanced topic of companies, our digital data, and us and how we communicate through digital means.

For example, one example I would give is productivity software because a lot of companies started to install productivity software on laptops for working from home employees. And no one actually knows how much data a certain software might receive.

There is a known kind of concept of mission creep the developers are talking about. So right now, for example, this software is used for productivity software strictly. But no one is to say if the company may be less responsible and they might use it for extracting more data about the place and stuff like that.

So it’s a big topic right now where some companies want to use this productivity software, others maybe don’t want to use this productivity software. And then there are other companies that say we might use it, but we will have a strict mandate what we are using this for.

Pooja Khosla

Why should marketers care about “ESG”?

ESG Marketing
Marketing and ESG

Interview Abstract: Marketers and ESG

Edmund Bradford says they want to relate the subject of ESG to the marketing profession. Pooja Khosla says that marketing people will be like the captain of the ship because they have to find out product ideas, that bring sustainability. Edmund and Pooja say that science has to meet business to create good growth. Edmund says that marketing has a huge impact because they are talking to customers continuously. Pooja and Edmund discuss the power of marketing to spread the message that sustainability is in everybody’s interest. Edmund says good marketers are multi-skilled and cross-organizational. Pooja says they need an agreement from the executive team to start the mission of sustainability. Pooja says marketers will look into how to add sustainability venturing into new markets.

Transcript of Why should marketers care about ESG

[00:00:09 –> 00:00:38] Edmund: Hello, everyone. I’m Edmund Branford, director of the Good Growth Academy. And in these short videos, we’re talking about the subject of ESG. And now in this video, I want to relate it a bit to the marketing profession where we have a lot of contacts and a lot of viewers. And I’m delighted to have with me Dr. Pooja Khosla, who’s Vice President of Client Development at Entelligent, good morning.
[00:00:38 –> 00:00:40] Pooja: Good morning Ed.
[00:00:40 –> 00:01:04] Edmund: Thanks for joining us again. And Yes, I know you’re not a marketer yourself Pooja, So you’re talking about this issue from outside the marketing profession, but why should marketers stand up and pay attention to this horrible acronym called ESG? Why does it matter to them?
[00:01:05 –> 00:02:51] Pooja: So I would say that you’re right. I’m not a marketing person by training, but definitely, I am learning marketing every day to learn and to spread knowledge of ESG more and more. Because if we talk about the ship of sustainability in an organization, I believe marketing people will be the captain of this ship. The marketing team will be the sailors on the ship to ensure that the ship is moving towards good growth because they have to find out product ideas, not only product ideas that bring revenues, but product ideas that bring sustainability. They have to be inventors of not just the product use, but consumer satisfaction also. That’s okay if I buy this product, how I am contributing to the environment, or what I am not extracting from the environment. To be very honest, I live in a really interesting town, Boulder (Colorado) where people do not look at price tags. Rather, they look into how much emissions have been produced using or getting that product to them. They are very aware and I know that this is going to spread. This is going to spread more and more as we sail towards sustainability. And now it’s time when marketers have to think like a scientist.
[00:02:53 –> 00:02:55] Edmund: That’s a very dangerous concept (ironic)
[00:02:56 –> 00:03:41] Pooja: So that’s right now they have to think like scientists in a way to innovate, messaging product future pathway of a company where they are not only increasing this revenue of the sales, but they are also bringing into concepts where people feel proud to possess those products because it is not only to satisfy a need, but it is also minimum impact on the planet. It is also a contribution towards management. So I think now it’s time where science has to meet business to create good growth.
[00:03:41 –> 00:05:21] Edmund: Actually, I think that’s a wonderful, wonderful idea. So I think many marketers maybe come in with a Master of Art background on a Bachelor of Arts background. And of course, through digital marketing, there’s far more science getting into marketing as well. So some of them are far more quantitative than they used to be. We know that understanding financials, it’s very important for markets as well. And I think from a wide perspective, there’s a huge impact that marketers can have in this area because they are talking to customers or should be talking to customers continuously. They need to be kind of helping to change the behavior of customers, nudging them more towards green options, maybe in the B2B area, you know, deprioritizing dirtier clients and prioritizing greener clients. And I would guess the more they can point their ship towards these better customers, the more it sends the right demand signals right through the supply chain, doesn’t it? People pay more for better products, higher-value products, more sustainably sourced, et cetera. That makes it easier. There’s enough for the supply chain guys to execute what needs to be done. So I think in my own saying that marketing has actually got a very big role to play here and making this happen.
[00:05:22 –> 00:06:35] Pooja: Absolutely. If we have to bend the temperature curve towards Paris goals (1,5-degree Celsius), if we really want to accelerate the speed of sustainability and we will need behavioral changes, we will need a new definition of value. And who can do that better than a person In marketing? They have the power to influence. They have the power to change how people think they have the power to create the demand for the product, even if the demand doesn’t exist yet. So I think they have to use their superpowers now to change it from inside the behavior to spread the message that sustainability is inside everybody. It is just like they have to look deep inside them and find ways how they can contribute. And I think that will come from our captains that are the people associated with marketing, people who have the power to change.
[00:06:36 –> 00:07:40] Edmund: I suppose if you’re taking your analogy of the ship as well. I mean, if the CEO is the captain of the ship, you say then maybe the marketer should be the Navigator, the kind of chief Navigator, and in your early video, you’re talking about ESG being the GPS of sustainability. The nice thing I think about good marketers is that they are multi-skilled. They’re used to working across functions with product development, finance, sales, operations. They are cross-organizational. So they used to deal with customer organizations, distributors, wholesalers, third party relationships, and actually, all those skills of dealing across the whole organization and between organizations can be applied here to try to turn this to your own company around and make it point it and help it to move to better greener water, better value market waters, as you would say.
[00:07:40 –> 00:08:47] Pooja: That is absolutely correct Ed because definitely, you are right. We need an agreement of the executive team to start with, but then this mission of sustainability value mix navigators, navigators, not only looking into where a company will progress often be the new products are who will be the new consumer targets, but navigators which will look into how we can add the sustainability venturing into new markets, how we can develop new products that we can associate closely with the change towards sustainability. So this navigation is very important, and it will become very critical to the organization moving forward.
[00:08:48 –> 00:09:02] Edmund: That’s an excellent Puja. Thank you very much. We’re trying to keep these videos short, so that’s all we’ve got time for now. And thank you again. Push for your time has been extremely helpful for anybody that wants to know more about this stuff.
[00:09:02 –> 00:09:02] Pooja: Done.
[00:09:02 –> 00:09:05] Edmund: Just look at the Growth Academy website. Thank you.
Pooja Khosla

How “ESG” and Good Growth fits together

ESG Good Growth
ESG and Good Growth

Environment Social Governance and Good Growth companies Abstract

  • Pooja Khosla and Edmund Bradford discuss the concept of good growth and how it fits into the concept of being a good company.
  • Pooja says that ESG is designed to provide standardized metrics to measure how an organization impacts all the creatures that live on the planet, including  human beings.
  • Edmund says that investors are stepping up to utilize this knowledge to support Good Growth which is beyond and better than regular growth.

Transcript How does ESG fits into Good Growth

[00:00:08 –> 00:01:11] Edmund: Hello, everyone. My name is Edmund Bradford. I’m director of the Good Growth Academy. And in these little videos, we’re looking at the subject of, ESG   which is a major term used commonly when talking about sustainability, especially by the investor community. Today we’re going to be thinking about how ESG fits into the concept of good growth. And to help you with that, I’m very pleased to welcome Dr Pooja Khosla, who’s vice president of client development at Entelligent. Good morning Pooja thank you for joining us. So we talked to the last video about what ESG is, how it’s different from sustainability, and why it’s important. What is it designed to do and how does it fit into the kind of concept of being a good company?
[00:01:13 –> 00:02:11] Pooja: So Ed I would say that ESG is designed to measure to standardize for metrics of part of which is just sustainability. Pretty much why do we need accounting? Accounting, make sure that the financial goal of an organization was achieved. ESG is the accounting of environmental, social, and governance causes of the organization. When we talk about growth, growth alone is an incomplete concept. Growth needs a partner, a partner where the growth is beyond the financial fact sheet, where the organization can show growth from inside out in their systems, in their governance, in their contribution to the society, to the planet.
[00:02:12 –> 00:02:25] Edmund: It’s not just about this is a thing that I found interesting when delving into ESG, that it actually is not just about looking at an organization’s impact on the planet. Is it’s far more than that?
[00:02:26 –> 00:03:59] Pooja: It is far more than that. It is also looking at organization impact on the creatures that live on the planet, including as human beings. So it’s beyond environmental, how an organization takes its employees, how the organization takes its consumers, how it basically sets and grows the trust of the community that supports that organization. So it is much beyond just contributing to the planet. It is contributing to the people on the planet as well as to the other creatures. Like, look at the impact on biodiversity. So it contributes to everyone, every creature that lives on the planet. So in order to make sure that we achieve good growth, it is time when we think beyond financial returns. I know financial returns are the fiduciary responsibility of everybody, but we have to consider environmental returns, social returns, governance returns pretty much on par with financial returns. If we have to focus on good growth and good growth is the best way to grow, it is to grow with trust. It is to grow with confidence. It is to grow with the value creations of all stakeholders rather than just value extraction.
[00:04:00 –> 00:04:39] Edmund: From your work with the investor community. Have they suddenly all become angels now, the investor community? As I said, well, we’re doing this because actually, we all want to be good investors, et cetera. Or is there just some really hard business cases out there and evidence and research that suggests that having a company with really good leadership, I’m thinking about companies like, Unilever than really trying to become a good company? Is there more and more evidence now that investors are seeing that most of the companies or actually give them better returns?
[00:04:39 –> 00:05:57] Pooja: So and I would not say angels and demons over here, rather, I would be scientific being a scientist, it’s about information. Like even when we talk about efficient market hypothesis, perfect information is very important. Before today, before the ESG, there were a lot of blind spots. But today, because of a lot of forms, a lot of data and research companies jumping in to measure the impact of the organization on the environment, social, and governance with respect to recent technology, Artificial Intelligence, and big data. With respect to regulatory push on reporting, more companies are reporting than ever before. There is a lot of information now with this rich information. Investors have more knowledge, more guidance than they used to have before. And investors are stepping up to utilize this knowledge, this guidance to support good growth that is beyond growth and better than growth.
[00:05:57 –> 00:06:36] Edmund: Thank you, Pooja. That’s excellent. That’s very helpful. I feel like we should talk about this all day, but I think that’s really been helpful so far. In the next video, we’re going to be talking about one specific area of business with which we were involved, which is marketing, and why ESG is particularly impactful for the marketing profession. But until then, thank you very much. Put of your time. Very helpful as ever. And I look forward to our next video. 
Edmund Bradford

What is “ESG” and why we should care about it?

ESG Good Growth
ESG

An interview with Dr Pooja Khosla

When discussing sustainability, “ESG” often comes up. What is it and why should we care about it?

To help answer these questions, I interviewed Dr Pooja Khosla, Vice President of Client Development at Entelligent.

Her thoughts can be summarized in three key points:

  1. “ESG” is about measuring how the actions of companies, consumers, investors and all stakeholders impact broader society.
  2. Before the industrial revolution, companies were focused on value creation. After the industrial revolution, the focus shifted to measurements of financial results and therefore value extraction.
  3. If “sustainability” is the destination that stakeholders want to reach, then “ESG”  is the measurement of progress towards that destination.

Transcript

The timings are shown to help you jump in to the video at the right point if needed.

[00:00:09 –> 00:00:48] Edmund: Well, Hello. I’m Edmund Bradford. I’m a director at the Good Growth Academy and in these short videos, we hope to help give people an understanding of some of the key areas around sustainability. In this little video, we’re going to talk about a term that you hear quite a lot when people are talking about sustainability, which is “ESG.” To help me with that, I’m delighted to welcome Dr Pooja Khosla, who is Vice President of Client Development at Entelligent. Good morning to you.
[00:00:48 –> 00:00:50] Pooja: Good morning, Edmund.
[00:00:50 –> 00:01:17] Edmund: Welcome to this little video. ESG is something that we hear all the time, and it’s a big abbreviation. It’s used a lot by a lot of people. Would you like to just give our viewers some background as to what it is and why, if you haven’t heard of it, why you should take ESG seriously?
[00:01:17 –> 00:03:17] Pooja: So, Edmund, I feel that when we started trading, when we started development, when we started to learn about business, ESG was always there because of all business. Initially, I’m talking about the Greeks. I’m talking about the era before the Industrial Revolution. All businesses were created for the purpose of value creation. There was always an exchange of value and how value can impact society, how value can improve or develop our state of living, or can add to our current living standards. But after the Industrial Revolution, there was a lot of focus on profits, the balance sheet indicators. The financial back sheet got more attention than the sustainability and development back sheets. Then there was a switch. Instead of value creation, people started believing in value extraction. That is what we see was happening earlier. Lots of value extraction . That is why we have to go through the climate emergency issues, exploitation, labor exploitation issues, lack of governance issues. I believe now it is time to take a U-turn. It is time to go back to the original concept that is value creation, because that is a pathway of sustainability, and we have to do it soon. We have to do it fast. We have to make a U-turn today and not wait for tomorrow.
[00:03:18 –> 00:03:47] Edmund: That’s very interesting Pooja.  By the way.  I have spent the last 25 years of my life working with companies and students trying to help them understand the importance of value. Value is such an important term in marketing as well as in shareholder value, etcetera. So I think it’s absolutely a very good point. And so what does ESG mean to start with and where does that fit into value creation?
[00:03:47 –> 00:04:16] Pooja: So ESG means Environmental, Social, and Governance. That it is much broader than the full form of this acronym. It is how actions of corporations, companies, consumers, investors and all stakeholders impact the broader society. A lot of people confuse ESG with sustainability, but they are very two different concepts. Sustainability is the destination that we want to reach by our actions. ESG is a pathway, a GPS, to this destination.
[00:04:45 –> 00:05:17] Edmund: And by the way, you’ve done a very good article on that whole point, I know, for us. So on that very point, Yes, people, please do read this article, which is on our Good Growth Academy blog. You were helpful in helping me understand this. So would you say that ESG is kind of the measurement of our progress to that destination? Is that what ESG is trying to do?
[00:05:18 –> 00:05:51] Pooja: Absolutely. ESG is how we can measure how we can look into that RV on the trajectory that we intend to be on our sustainability course, to set metrics, to set measurement, to set standardization, to set compliances. And we all know that what can be measured can be managed. So ESG is the first step to manage sustainability.
[00:05:52 –> 00:06:17] Edmund: Absolutely. And I think from my point of view, looking at it fairly new, I think, in comparison to you Pooja in the sustainability area, it seems to me that not only has there been an explosion in interest in sustainability, but of course,  also the whole metrics around how you measure sustainability has also exploded hasn’t it? Which is why we hear ESG mentioned so often, especially by investors, for example.
[00:06:19 –> 00:07:37] Pooja: That is so true. That right now, especially during the Covid era and two years before that, the interest in sustainability has exponentially increased. To be very honest, I am in this field when this field was called development economics, and then we graduated into fancy acronyms like ESG, SDGs, SRI, PRI, and all but the hard nice in development economics, how we can make our economy, business and finance revolve around real development. Development is very different from growth. Growth can be measured because it’s a  monetary term. It’s the financial faction: growth accompanied by contribution and improvement and standard of living,  lifestyles, betterment of humanity, betterment of the environment, betterment of governance. That is development. So absolutely, we need to look into ESG from “transparency towards development,” which is growth! Growth is a part of it.
[00:07:38 –> 00:08:07] Edmund: That’s excellent. Thank you, Pooja. And that’s been a really useful conversation for me as well. We will pick up on this subject of growth in our next video. So hopefully that has helped people understand ESG, why it’s important and how it’s different from sustainability. We’ll look at how it links to good growth in our next video. So thank you, Pooja and I look forward to connecting with you again soon.
[00:08:08 –> 00:08:11] Pooja: Thanks. It was a pleasure being here with you today.
Pooja Khosla

ESG is the GPS to Sustainable Development

ESG Sustainability
GPS

SDG and ESG sustainable goals

ESG and Sustainable Development

When we speak about economic growth, it is an incomplete concept. I agree that we need economic growth but we also need improvements in the quality of life and living standards. Growth without contributing to improvements in life is incomplete and selfish.  It is economic development that has been always preferred over just growth.

The Economic development so far

Since industrialization, there has been more focus on corporate revenues, profits, and returns. There has been a lot of attention towards balance sheet indicators, financial reporting, and achievements by investors that can be measured and scaled by financial bookkeepers. Popular global stock indices such as S&P 500 have experienced annual double-digit returns for the last decade. In the year 2020 itself, there has been triple-digit gains for some individual stocks. Tesla stock has surged 665%, and shares of solar energy company SunPower have risen about 500%.

There is no denial that as far as global corporations are concerned the story of growth is powerful. However, this is an incomplete story when we see its impact from the development point of view.

The amount of carbon dioxide piling up in Earth’s atmosphere set a record last month, reaching the highest levels in human history. By the way, speaking of carbon budgets, it is worth noting that the world only has 8% of its carbon budget left, which will be exhausted in the coming decade at current emission rates, according to the Global Carbon Budget report 2020.

Further, there have been repeated issues such as corruption, negligence, fraud and lack of accountability from leading global corporations. Issues such as false product claims, unethical accounting, poor working conditions, sexual harassment, trade secret misappropriation, and selling customer data have been identified and questioned. Such issues are detrimental to the quality of social and governance ethics and the value system of life.

Some examples here are the major data breach in the Facebook – Cambridge Analytical scandal, the Wells Fargo 2000 phony accounts , Abercrombie & Fitch’s modern slavery conditions, Nike and Adidas and child labor.  Indeed, there are very many corporate examples where social and governance values have been compromised to maximize financial and accounting growth.

Why ESG (Environmental Social Governance) and Sustainability have become so important.

We have to go beyond narrow growth and focus on broader development.  This is where there is a direct alignment between the financial factsheet and environmental, social, and governance (ESG) structures that globally raise the quality of life of all stakeholders. Investors, consumers, producers – and especially regulators – should seriously consider ESG factors connected to sustainable development.

“We have to connect the dots between authority, responsibility and accountability.”

In the past, there has been a lot of emphasis on financial growth and authority. This has been very expensive, unjust and detrimental to the environment and some sections of society. Now, with the evolution of better data, knowledge and information on non-financial factors, it is time to raise the standards of responsibility and accountability by adding a mandatory ESG factsheet along with a financial factsheet.

Considering ESG investing looks at “extra-financial” variables (or factors) that measure development and quality.

Environmental factors qualitatively and quantitatively measure a company’s stewardship of the environment by focusing on how companies are impacting the environment by measuring waste and pollution, resource depletion, greenhouse gas emissions and deforestation. These factors also consider how companies will be impacted by both physical and transition climate change risk.

Social factors consider how companies treat people and focus on employee relations and diversity, working conditions, local communities, health and safety, and conflict.

Governance factors check corporate policies and corporate governance structures. This includes tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, board diversity and structure.

The Sustainable Development Goals

At the United Nations Conference on Sustainable Development in Rio de Janeiro in 2012, global leaders defined the path of sustainable development by stabilizing the Sustainable Development Goals (SDGs).

The purpose of this was to produce a set of universal goals that would help combat the urgent environmental, political and economic challenges. These goals are the ideal development destinations that we want to progress towards.

However, we need a GPS to ensure we are on track with these goals. Enriching and enforcing ESG standards will ensure just, sustainable and inclusive corporate development which is much more than just corporate growth.

Conclusions

Today I see the G7 countries and major OECD countries like the UK, Canada and New Zealand supporting a move towards mandatory climate-related financial disclosures. The United States SEC (Securities and Exchange Commission) already has broad authority to require climate and other ESG disclosures.

The EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) is hugely significant in requiring asset managers to disclose the sustainability value of their financial products. In Asia Pacific, countries like Thailand, Australia, Japan, and Malaysia, among many others, have implemented various kinds of sustainability disclosure policies or rules, with various levels of focus on climate risks.

In Latin America, the Caribbean, and Africa the climate discourse is less developed and still fundamentally centered on climate impacts and pockets of climate risk disclosure.

This is only the beginning. With more reporting and stronger mandates from investors and regulators to include ESG considerations, many companies will find that they do not have an option to ignore it. The rise in ESG will both drive us and track us on the path to sustainable development. Development is growth powered by measurable improvements in quality of life.

Good Growth Academy

3 Simple Words to Sustainability

ESG Sustainability
Sustainability

An interview with Pooja Khosla of Entelligent

Summary

Many leaders would like their organization to be more sustainable. However, the path is not easy and one major challenge is dealing with the short-term demands of investors. In this article, Pooja Khosla, VP Client Development at Entelligent answers the following key questions:

  • What are the key challenges to organizations becoming more sustainable?
  • What are the answers?
  • What are the key lessons for anyone wanting to help their organization become greener?

The key lessons lie in three keywords: Education, Engagement, and Momentum.

Some background of Dr. Pooja

Dr. Pooja Khosla is an economist and mathematician with a deep interest in sustainability and the financial effects of climate change. She has nearly 20 years of experience in predictive modeling, microfinance and designing climate impact tools for investors, banks, corporations and other organizations like the United Nations. She has been working with Entelligent since 2016 developing its data science team, its Smart Climate system and its climate risk related products.

Entelligent (www.entelligent.com) is one of the most respected brands in climate risk assessment. It recently announced a partnership with Société Générale to launch an index to score companies in the S&P 500 on their exposure to environmental issues.

What are the key challenges to organizations becoming more sustainable?

I began the conversation by asking her what the key issues are holding back firms from becoming more sustainable, more quickly.
Pooja: “There is certainly a lack of understanding of the issues. For example, some organizations sign up for a Net Zero commitment without understanding what they have signed up for. They do not realize that the scope of the commitment could include their whole value chain from suppliers down to their end consumers.
There is also certainly a problem with greenwashing. It is easy for firms to aim for minimum acceptable performance, like complying with environmental regulations, and then beefing up their messaging to make it appear that they are committed to sustainability.
90% of S&P 500 Index Companies published Sustainability Reports in 2019, however, less than 11% of the organizations were meeting qualified reporting standards.“

What are the answers?

We then turned to her thoughts about the answers to these challenges.

Pooja: “One thing to bear in mind is that 20 companies in the world contribute to one-third of global greenhouse gas (GHG) emissions. That means that whatever improvements we can make in these few companies and their value chains will have a significant impact on global emissions. Of course, most of these companies are in the fossil fuel business and it is not easy to turn them around. However, we have seen a flurry of recent announcements (for example at ExxonMobil) about a much stronger commitment to sustainability which gives me hope that this sector is now turning.

A key to delivering real change is education. Investors are now much more knowledgeable about climate risk and its financial impacts. More investors understand that sustainability can affect valuations in the short term as well as the long term. They have seen the dire effects of sudden extreme weather events on agriculture, hospitality, and transport and the rapid damage that a consumer revolt can do to the brand of a polluting company.

We should note though that the actual levels of pollution or climate exposure in a firm is not the key metric. What is more important than actual levels is the rate of change. A firm that is maintaining its rate of progress towards sustainability can be more attractive to an investor than one where progress is slowing, possibly because all the easy actions have now been done.

We also need more engagement. First of all, we need more engagement from leaders. There is no doubt in my mind that some firms really are committed to becoming sustainable and are sustainability leaders in their sector. I would put firms like Ingersoll Rand and Volkswagen in this category. They are led by visionary leaders who are engaged with the issue and are driving it passionately. They do a better cost-benefit analysis of sustainability options. They also have a better understanding of the three types of climate risk. These are:

  • Climate transition risk. This is the risk that the organization does not change sufficiently in the desired time period
  • Climate physical risk. This is the risk to the organization from climate change including rising sea levels, hurricanes, floods etc.
  • Climate reputational risk. This is the risk to the organization’s brand reputation from its contribution to global warming.

Then there is the next category of firms that are the sustainability followers. They are keen to progress but lack the understanding and engagement of the sector leaders. Finally, there are the sustainability laggards. These are the slowest to change and see sustainability as a business distraction.

More engagement is also needed from investors. Things are moving in the right direction and we have seen great examples of good investor engagement recently, for example, in the latest annual letter to CEOs from Larry Fink at BlackRock where he makes it clear that he is looking to invest more in sustainable companies and less in unsustainable ones.

We also need more engagement from customers. Consumers and businesses need to tell their suppliers what is expected of them and move their spend to the most sustainable suppliers.”

What are the key lessons for anyone wanting to help their organization become greener?

To conclude, I asked her what key messages she would like to offer any green change agents out there.

Pooja: “I would summarize my advice in three simple words: education, engagement and momentum. By momentum, I mean both the direction of travel and the speed of change. It is no good traveling fast in the wrong direction. Nor is it useful to have high aspirations which are unattainable in our lifetime. It is better to keep moving in a good direction. This will build confidence and experience and is itself more sustainable.”

The journey to sustainability is not easy. However, focusing on these three words will help to ensure your efforts are well invested.

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