Leveraging ESG Initiatives to Lower Cost of Capital

Many execs struggle to categorically link increased equity flows or cheaper debt to their ESG strategy. Independent Consultant, Phil Barttrram, looks at how executives can best leverage what they are already doing to truly benefit from their ESG strategies. 

By Phil Barttram

I was recently lucky enough to be given an opportunity to stop and smell the roses. Much of my time in the garden overlapped with the Covid-induced lockdown. Fortunately, I was able to spend a lot of this time re-booting with my family but more recently, I have been able to focus my attention on the question of whether executives are able to leverage their existing data to better explain their Environmental, Social and Governance (ESG) strategy.   

ESG factors are playing a far larger role in the investment decision than they have in the past. There is also now a credible body of listed sector research that shows how “ESG Leaders” have outperformed “ESG Laggards”[1] over time. Investors are starting to take notice and are directing substantial capital flows towards ESG weighted equity and fixed income ETF’s.

However, while investors are increasingly provided with research from the multiple ESG rating platforms, company executives are still unsure whether (or even if) their ESG risk strategy has any impact on their company’s cost of capital. Furthermore, execs are being inundated with ESG related questions that demand extensive qualitative and quantitative responses.

I can only sympathise with the c-suite of today. Not only do they have to deal with the annus horribilis that is 2020 and the shifting landscape that is sure to follow, but they also have to decide how many resources to allocate towards telling their ESG story. And here I want to differentiate between the allocation of resources to mitigate their ESG risks and the allocation of resources to tell the story… they are not necessarily the same thing.

To illustrate the point, we only have to look at the real estate sector and specifically the environmental risks associated with this immovable asset type. In my experience, most South African real estate executives clearly understand the environmental risks associated with climate change and the transition to a low carbon economy. Not only do they understand the risks, but given SA’s unstable energy supply, excessive energy inflation and the recent water supply and water treatment stress, exec’s have actively introduced initiatives to mitigate these risks. Unfortunately, these activities do not speak for themselves and companies have to spend a disproportionate amount of key resources’ time consolidating information in order to quantify and report on the ESG impact.

Let’s be honest, many execs will struggle to categorically link increased equity flows or cheaper debt to their ESG strategy[2]. Given the moral imperative, it would be highly irresponsible for them to state that ESG is not a current priority. So how can they best leverage what they are already doing for the maximum benefit?

The first thing to do is to recognise that the ESG discussion is primarily a risk conversation. I then propose the following three steps.

  1. Understand the language and methodology of ESG rating companies. Identify which of the issues within each of the ESG pillars, for your sector, that carries the highest weightings within the rating methodology.
  2. Talk directly to the issues identified in step 1 above and couch your responses in the language of risk. Highlight the risk to income you have identified and the activity you have implemented to mitigate those risks. Make the information clear and easy to find. The superior ESG research companies will reference a large proportion of their information from non-company sources so don’t be shy about stating the obvious.
  3. Get your data in order and automate as much of your reporting as you can. By consolidating your data, you enable comparative analysis and benchmarking and unlock the potential of efficiency savings that come from it. By automating your reports, you free up key resource time so they can focus on extracting those efficiencies. You also introduce the protocols and governance required as a bare minimum for ESG reporting.

South Africa is arguably behind the curve when it comes to sustainable investment. But ESG ratings are having an increased influence on the allocation of capital, particularly as large asset owners are provided with the tools needed to assess the ESG tilt of their internal and external mandates. CEO’s are required to demonstrate that they not only understand their ESG risks but are actively mitigating those risks. From a capital allocation perspective, the maximum benefit can be achieved by talking the language of the rating agencies, focusing on the issues that carry the most weight and automating reporting that feeds off the data already available within the organisation.

Phil Barttram is an independent consultant and a self-proclaimed real estate evangelist, hailing the role of real estate within multi-asset class portfolios and the benefits of improved transparency across the sector. Phil has an MBA from UCT’s Graduate School of Business, complemented by over 26 years in financial services in London and SA. Phil’s previous role as an Executive Director, MSCI, enabled him to work with investors across Africa and the Middle East, providing him with a unique perspective of Real Estate investment strategy and portfolio optimisation. Phil is a recognised authority on South African Real Estate with a record of profiling innovative concepts and analysis at national and international conferences and through the media. Linkedin

[1] MSCI ESG Research – MSCI Foundations of ESG investing part 1

[2] Equites/Standard Bank sustainable finance deal linked to Sustainability rating accepted

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