The big picture: 5 ESG trends

Inflexion understands the positive impact responsible investing can have. Last year saw the firm become a PRI signatory and achieve carbon neutral status, while in February this year Inflexion appointed Jennie Galbraith to lead its ESG focus. She is working with the portfolio to improve their sustainability frameworks including aligning each company to the UN Sustainable Development Goals and developing Net Zero pathways. Our portfolio companies are making great progress with their ESG plans, with some already having applied for B Corp certification. Jennie sees five trends that can impact how businesses think about ESG.

1. ESG has shifted from risk management to value driver

Initially ESG was seen by many as risk management, particularly as guidance became mandatory. However this is shifting and many are now seeing ESG as an opportunity which helps position a business as resilient for the future.

“It makes good commercial sense, with firms having a robust ESG framework in place likely to win more contracts, develop stronger consumer propositions, attract and retain the best talent through a strong employee culture, and be better prepared to meet regulation coming down the line.”

2. Backlash against greenwashing has led to increased regulation

Mounting concern around greenwashing has led to greater scrutiny and thus regulation, meaning yesterday’s guidance is today’s regulatory framework. Recent regulation, including the Corporate Sustainability Reporting Directive, alignment with the Task Force on Climate-Related Financial Disclosures (TCFD) and the proposed EU regulation on Corporate Sustainability Due Diligence, is placing even greater responsibility on businesses to address and report on impacts throughout their value chains. Regulation often starts with listed companies but the scope is widening.

“Even if companies feel they’re too small to be impacted, they’ll be asked to comply with regulations by their customers who need to consider their value chain and own Scope 3 emissions.” Possibly as a result, we’re seeing more voluntary certification, namely B Corp certification, which a number of businesses in Inflexion’s portfolio have formally applied for.

3. Consumer and employee activism is on the increase

“Activism is no longer the preserve of university campuses and online fora; increasing numbers of people from all walks of life are demanding action, and companies have to take notice.” These same people are both consumers and employees, and their decisions are influenced by the sustainability performance of companies and their products. 80% of consumers and 84% of employees said they’d base buying or career decisions on ESG credentials, and 1 in 10 would leave a company for one that has better ESG credentials.

4. Climate change is now a Social as well as Environmental issue

Climate change has become a human rights issue, with marginalised communities disproportionately impacted in myriad ways, from global warming-induced climate events to skills gaps as the world transitions to green energy. It is important to ensure this transition creates alternative and equitable livelihoods for people moved out of oil and gas businesses and for those who are directly impacted by climate change.

5. Impact investing is on the rise

ESG shot up the agenda on the back of the pandemic, with research showing that 1 in 5 investors now intend to double their investments in this space over the next five years. It means that companies which can show a positive quantifiable environmental and social difference will command higher valuations.