ESG webinar highlights: Counting down to Zero

On 16 September 2023, StrategicRISK hosted a webinar in partnership with AXA XL to explore some of the drivers towards embracing ESG frameworks, with a focus on corporate’s growing responsibilities in relation to environmental and transition risk.

Leading the discussion was Mark Houghton, head of specialty, Asia at AXA XL, and Max Lee, CEO and co-founder of Pantas, which provides companies AI-enabled carbon management software solutions and access to green financing and investments.

The discussion began with Houghton contextualising the ESG landscape. “Over the last five to 10 years, ESG has become more balanced and equal. We are starting to see it move in a composite direction and as a way forward for many companies, institutions, and governments.”

Houghton detailed that a focus on environmental issues dates back to 1861 with early investigations into greenhouse gas emissions, since then we have witnessed CO2 emissions mushroom across the globe.

“The environmental part is very visible and the impact is real. Over the last 20 years or so various actions by governments and companies have tried to limit this, which is where we are now with net zero initiatives,” said Houghton. “If we think one step further beyond the environmental and consider the social impacts, there have been droughts, floods, increasing natural catastrophes.”

Houghton said such ESG issues are also being tackled at the same time as other global challenges, such as population growth, poverty eradication, inclusion and diversity, and refugee migration.

“Navigating issues around renewable energy, greenhouse gas emissions and water management are complicated in their own right. Complicating that further is the social aspects such as those various global challenges,” said Houghton. “There are then governance aspects around being responsible investors of capital, ethics, stakeholder management, social inclusion, and working with our local communities.”

Managing ESG

In terms of how to respond to such challenges, Houghton said risk managers have the toolkits, processes and procedures to effectively manage risk. It will be about managing these risks in a different way.

“We have not been able to test many of these risks yet. We are still trying to get to grips with how they impact our businesses and the communities in which we operate,” he said.

“Responding with prevention, preparedness, recovery response plans and suitable risk management frameworks which help us manage and control situations still applies here. But the issues and outcomes are slightly different and that needs to be considered in more detail.”

Houghton said the cost of this process will be vast and focus is needed to ensure money is not wasted. “For many of the investments we have made today, we have no ability to know whether they are going to have the right impact on ESG frameworks and ESG principles going forward in 10 or 15 years,” he said.

Beware greenwashing

Next, Max Lee presented with a focus on climate investment risks and the notion of ‘greenwashing’ – where an organisation makes misleading or false claims about its environmental impact.

“Carbon counting is really complex,” said Lee. “It involves extensive data collection, but a survey from the Boston Consulting Group found that businesses have an average error rate of 30% to 40% in their emissions measurements. There are growing concerns that ‘green capital’ is being deployed based on misleading information.”

Lee said there are several exaggerating claim about ‘net zero’ from organisations. “If you do not report most of your emissions, you can get to net zero very easily,” he said.

Lee used a real world case study of errors committed by a publicly listed company in its reporting. He said that despite gaining third-party assurance on its report, it made false claims around biomass and recycling.

Another example comes from an oil and gas services provider that reported a 70% increase in their electricity in fiscal year 2022, but only a 1% increase in its emissions. Pantas’ software then discovered the company had underreported their scope to emission by around 20%.

“This is the tip of the iceberg, because we cannot conduct due diligence on climate information not publicly disclosed or which is insufficiently disclosed,” said Lee. “If we can find error in such public reports, imagine how many errors are being made behind the scene. Imagine how much investment is going into a company claiming to be Green, without real numbers to substantiate.”

Challenges for risk managers

As organisations around the world roll-out their transition plans to net zero, it will be risk managers who will be undertaking a major slice of the responsibility. So what challenges will loom largest?

Lee said the first challenge is comprehending the three scopes of ESG. Scope one concerns direct emissions such as company facilities and vehicles. Scope two is indirect and covers the purchase of energy for company use. Scope three are indirect elements such as investments, capital goods, purchased goods and services, transportation and distribution.

“Scope three will cover your supply chain. Let us say you are a manufacturer in the US and you are you buy certain parts from Asia. How do you calculate that? So the first challenge for risk managers is understanding these scopes.”

Houghton said transparency is key and with increased data availability, it is important to get reliable data and information, which allows an organisation to make decisions.

“Another aspect is the willingness to adapt. We are going to get some aspects of ESG wrong over the next 10 years. We are going to fail fast and adjust quickly. There’s a tendency in risk management to try and catch all the risks and quantify them. But for this pool of risks, we have to be more adaptable and drop our expectations about getting this right from the start,” said Houghton.

In their closing remarks for the webinar, Lee said ESG creates risks but also opportunities, but to always focus on “meaning what you say” and follow a plan. For Houghton, a major take-home is to be adaptable and keep an open mind.

“We are all in this together and we have no choice but to try and find the path,” added Houghton. “We have to be optimistic and have a vision about how to make an impact on the ESG framework. Risk managers are a key part of that.”