What are the impacts of ESG norms reinforcements on Sectors?
Coface Economic Research department’s first study dealing with the impacts of Environmental, Social, and Governance (ESG) norms is out. The ambition of this study is:
- to explain how these measures impact the sectors for which we produce risk assessments
- to explain who are the ‘frontrunners’ and ‘laggards’ within these sectors, notably through the path to net zero1, which is definitely of utmost importance when one wants to consider the ESG framework.
It is worth mentioning that our sector risk assessment methodology incorporates aspects related to ESG, in the “sector structural changes” criteria2.
Through the latter, we also analyse other elements, such as the impact of transformative innovations in a selected sector. We can quote the emergence and rapid expansion of electric vehicles worldwide in the automotive sector or the future development of autonomous cars as examples.
Several actors, both public and private, have promoted ESG related concepts for a long time, particularly the necessity to reduce greenhouse gas (GHG) emissions due to human activities. Moreover, in many advanced economies, companies’ executives have to disclose some insights on social and governance issues within their organization. Finally, in this context, they have to make sure the company’s functioning complies with national labour laws and social regulations in place.
Since the first COP3 in 1995 at least, and the establishment of the UN Sustainable Development Goals (SDG) in 2015, public regulators worldwide have been working to push private sector companies to reduce their GHG emissions and to contribute to the SDG achievement. The key question is: what is new in the ESG criteria framework and why do companies have a strong incentive to comply?
There are two main reasons for them to comply:
- 1- the reputational risk for companies should they not respect ESG criteria. Contrary to the previous way of looking at GHG emissions of a company or a product’s ‘carbon footprint’, these ESG criteria look at the whole value chain of a company and its products are taken into account, in a holistic way (through the whole life cycle).
- 2- by complying with these criteria, companies gain greater access to financing, since monetary authorities are starting to scrutinize them. For instance, in October 2022, the European Central Bank (ECB) started the purchase of corporate bonds, guided by climate scores. This is part of the ECB’s wider objective to include climate change considerations in the Euro system monetary policy. In practice, and given these developments, financial actors (banks, insurers) have a strong incentive to look at the compatibility of their clients’ activities with the ESG framework, having in mind those criteria from now on, even if some of them are not yet targeted by ESG-related regulations. Looking forward, they are likely to be increasingly reluctant to finance activities or companies that do not comply with ESG criteria. In a way, ‘green finance’4 is gradually spreading to the entire financial system.
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1 - According to the UN Climate Action definition, net zero means cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere, by oceans and forests for instance.
2 - See Coface Barometer, A cold chill on the global economy, October 2022, for an overview on our Sector risk assessment (SRA) methodology p.13.
3 - For nearly three decades, the United Nations (UN) has been bringing together almost every country for global climate summits – called COPs –, which stands for ‘Conference of the Parties’.
4 - According to the World Economic Forum, at its simplest, green finance is any structured financial activity – a product or service – that has been created to ensure a better environmental outcome.It includes an array of loans, debt mechanisms and investments that are used to encourage the development of green projects or minimize the impact on the climate of more regular projects, or a combination of both.