June 2022 | 23 min
What is ESG and what does it really mean? Join host Nick McClelland, Mercer’s growth leader who explores these questions with Mercer’s Vanessa Hodge, Sustainability Integration Lead and Maura Jarvis, UK lead for transformation. In this podcast they cover the E, S and G in detail and unpack the multi-dimensional level of ESG, the complexity and how everything is linked together.
Chief Growth Officer, Mercer
What is ESG? - Podcast transcript
Nick McClelland: Growth Leader, Mercer
Maura Jarvis: UK Transformation Leader, Mercer
Vanessa Hodge: UK Sustainability Integration Leader, Mercer
Nick McClelland: Hello and welcome to the first episode of Mercer's ESG insights podcast. In this new series, we will be addressing ESG issues from a people, purpose and profit perspective. I'm your host Nick McClelland, Mercer's growth leader, and each week I'll be joined by guests from Mercer and beyond, who will share ideas, experience and actual insights to help you on your ESG journey.
On today's episode, we're going to be discussing what is ESG and I'm delighted to be joined by Vanessa Hodge and Maura Jarvis from Mercer. It would be great if you could both give a little introduction first. And Vanessa, I might ask you to kick off.
Vanessa Hodge: Thanks, Nick. I'm Mercer's UK sustainability integration lead. And this role allows me to help asset owners take a pragmatic and structured approach to the important, but complex subject of sustainability, which we're going to cover today.
Maura Jarvis: And I'm Maura Jarvis, I am the UK lead for transformation, specifically looking at organisational transformation, culture transformation, and the people transformation. I work a lot with HR functions to help them understand the really critical role that they play in supporting the ESG programme within the organisation. So lovely to be here with you both.
Nick McClelland: Well, thank you both for joining me today, I'm really pleased to have you both on and I guess it would be best if we just sort of kick off with really a definition and actually find out what ESG really means. So again, maybe Vanessa, if you could kick off on this, that would be great.
Vanessa Hodge: So ESG stands for Environmental, Social and Governance. And it's a catch-all term for many different themes and factors. And it's not a new term, ESG from an investment perspective has been around for a long time. But I think what has changed is that the view is that ESG isn't just a moral or ethical position, now asset owners and corporates are understanding more the financial importance of ESG factors and more broadly, sustainability.
And it makes common sense, a company that doesn't treat its workforce well or doesn't make efficient use of its resources is going to be less profitable compared with its competitors. And maybe it's worth us going through each of the different components of E, S, and G just to give that a bit more colour. And I'll start with the E, the environmental, it’s probably the most tangible out of the three factors. Climate change is the most dominating environmental theme and rightly so. I mean, the reports from the IPCC over the past 12 months are quite damning, that if we collectively as countries, businesses, asset owners, individuals, don't reduce the amounts of carbon emissions being released into the environment, then the planet will continue to warm to levels that create irreversible damage within most of our lifetimes. But climate change isn't the only environmental factor that businesses and asset owners should consider.
Biodiversity is quite critical for the continuation of plant and animal species, which we need for food and other natural supplies. And deforestation and agriculture are upsetting that balance. And then water stress is also another critical area linked to climate change, and people living in the southeast of England will probably acknowledge this during the summer months. So reduction in water use or use of recycled water can improve the operational efficiency of businesses.
Nick McClelland: That’s the E covered Vanessa and I think obviously close to your heart, you’re very passionate about that area.
The S, I wonder Maura, if you could cover the social aspect of E, S and G in that sense.
Maura Jarvis: With pleasure, Nick, I think when we look at the social component historically, it really has felt more around what organisations were doing in terms of their social programmes for the broader community. I think the change and the shift that we're seeing now in terms of ESG, is really around the business impact that employees have in terms of driving the performance of that business. So we know that organisations that have engaged and happy motivated workforces are a lot more successful as businesses as a whole.
So the other thing that you're also seeing is that it isn't as narrow as only looking at employees, but the S also needs to take into account looking at contractors that organisations are engaging with and obviously that broader community where your organisation is operating.
We’re also seeing that there's an increased focus and importance on diversity and inclusion. And I think with the pandemic very firmly in our minds, also looking at issues such as mental health, which has become a massive factor. And then also issues like you know, modern slavery and then obviously corporate social responsibility.
Why this is really important is that in the war for talent that we are all experiencing at the moment, these are the type of factors that attract talent to an organisation. And that is what high talent are looking for when they are considering applying for a job with a particular organisation. I think historically, people would go on to the company website and sort of have a look at what does the organisation do? What is it about, etc., may have touched on what your values are.
What we’re see now is that people are fundamentally going and having a look and saying, what is your position on ESG? And, what role does the organisation play and I think very much around looking for evidence that it is not just something that is on a website, or written on pieces of paper, but that the organisation can actually demonstrate that it is living that commitment to, obviously, the whole of ESG, but specifically for them around the S on social.
Vanessa Hodge: Can I just add in from an investment perspective on the social side, because as I mentioned, I think the E of ESG is probably the most tangible, the S is probably the least tangible from an asset owners perspective. But one of the key things that we look at, at Mercer from an engagement perspective, working with asset managers, is on the modern slavery point that Maura mentioned. And that it's surprising that still exist in this day and age. But I've heard, for example, trying to connect the dots on the climate side. So you think moving away to from fossil fuels into renewable sector, renewable energy is the way that we should be going. But I read an article saying that in Australia, one of the areas where they've been using solar panels, the solar panels are used with minerals, which have been mined from emerging market countries that actually use modern slavery to be able to get those minerals in the first place.
So I think what we're highlighting also today is the multi-dimensional level of ESG, the complexity, how everything is linked together, we're looking at this very bucketed, the S and the G, but everything has links in some way. And in fact, we haven't covered the G, so if you'd like me just to cover that one off Nick?
Nick McClelland: Well, I would Vanessa, because I think that, you know, we've covered so much there, it's such a big topic, Environmental a huge topic today. Social, clearly a huge topic and emerging, particularly off the back of the pandemic. So the G, governance in this sense, what does that mean for organisations Vanessa, because there's a lot to govern in that sense?
Vanessa Hodge: Again, governance is nothing that's new in the focus. It's how well run a business is. So I mean, again, looking at this with my asset owner investment hat on, we're looking at how a board structure is, what is their remuneration policy, what are the shareholder rights? How do they actually treat their investors?
And again, it comes back to that if a business is well run, you would expect it then to be profitable. And one of the areas that we look at, again, from an engagement priority, linking in with Maura’s point around diversity, equity, inclusion, so how diverse is a board of a company, and that's not just in terms of gender or race, it's also of their makeup, the knowledge and skills.
What we want to make sure is that there isn't a group thing, or everyone just goes along with the most dominant voice, that also applies with when we're looking at asset managers and how their portfolio teams are constructed. So again, how diverse is that board?
You might think, actually having a portfolio management team full of female portfolio managers is a positive. Well, yes in terms of gender, but actually no, not if they're all from the same business school, or they're all being brought up with the same sort of thinking, we want to make sure that there is that idea generation that brings that innovation that avoids those potential pitfalls and risk.
Nick McClelland: I mean, it's a fascinating viewpoint from both a corporate and an asset manager perspective, Vanessa. And if I think particularly about the emphasis now appearing on the corporate, and you hear terms like greenwashing happening, where the corporate is almost feeling like they're having to demonstrate these values around ESG in a very pronounced way.
Can you just, I mean, either of you by all means chip in, but just talk a little bit about that, and what greenwashing and the risks that poses to organisations as well at the moment.
Vanessa Hodge: It's definitely around credibility and reputation. You're right, in terms of lots of statements being put out there. In particular, there's lots of commitments on the net zero journey, so reducing emissions to help combat climate change. It's all well and good making that public statement, but you actually need to be able to publish also your transition plan, and that's quite important. And we're going to see more and more of that disclosure. The next phase is actually demonstrate what you say you're going to do with all your commitments, and getting those metrics and targets to be able to evidence I think is going to be hugely important for businesses.
Maura Jarvis: Maybe if I can jump in and just add another dimension to the whole concept of greenwashing. And that is around, we are seeing at the moment that trust is actually at an all-time high of employees with regards to the organisations that they work for. And I think a lot of that has been linked to the pandemic, and how organisations have really stepped up in terms of how they've looked after their people during the pandemic. So we're in a great position where trust is really high. And I think that if you are going to, let's say, make various commitments in the ESG space and not have a solid plan that could erode the trust that we have worked very hard at building. And we all know that if you are working for an organisation that you do not trust, the level of engagement, the level of performance is going to be dramatically affected for the negative.
So I think also employees, as well as investors, are going to be watching very carefully to see whether you actually are going to walk the talk, or whether you, as an organisation, have sort of used it as a positioning tactic, but that you really are not fundamentally committed to it. So I think it's really, really important that is taken on board by both leadership and obviously the board.
Nick McClelland: Thanks Maura and Vanessa on that. I mean, we're starting to get into a sort of second topic. And I think we're certainly leaning into it a little bit with some of those topics, some of those conversations we’re just having about greenwashing and the image versus the reality, perhaps. Again, Maura you were talking a little bit about this earlier, and when we were covering the social, but if you're an organisation today, and whether you're just at the start of your journey with ESG. And it is a journey, I think that's clear from what you're saying. There's no way that this is something that people can achieve overnight. But if you're an organisation today, and you're at the start of that journey, why should you care about ESG? Why should we be really focused in on this topic, as an organisation today, as a company?
Maura Jarvis: Nick, we've just published our latest Global Talent Trends for 2022. And in that study we have over 11,000 voices of both CEOs, HR directors, and the bulk of that is actually employees. And very interestingly, the major trend that has come out of that survey is that talent is looking for the relatable organisation. And we know that for talent, it's really important that they are working for an organisation that has purpose and values. And that is aligned to what they feel is important in terms of their own perspectives.
So really important for an organisation to say that if sustainability isn't that important to all of the talent in the market, it's really critical that you have a narrative and a plan around how you're going to implement ESG within your working environment, and that's for your current employees, as well as future employees that you would want to attract.
And as I said earlier on, it goes beyond the ambit of just employees, but also looking at the people that you're doing business with, the contractors that you're engaging with, the business partners that you're developing. I really think it's, you know, it's multifaceted. And again, you've got to have taken a stance on this because without it and without having some kind of view of how you're going to be sustainable in the future, your ability to really have high performing teams, high performing people within the organisation and highly talented people wanting to join your organisation, you're going to be very, very challenged, if you do not have a comprehensive plan around ESG.
Vanessa Hodge: I'm phrasing it slightly differently, which business wants to be unsustainable? None of them. It's, again, it comes back to that common sense point, that if you're not looking at better ways to become more efficient in the use of how you use your resources, or how you treat your workforce, you're going to lose your market share, you're going to lose your talent, you're going to lose your brand identity, that's going to impact on revenues, expenses, shareholders will revolt and sell their holdings. So there's lots of knock-ons there.
But again, coming back to an earlier point I raised, it's a complex space, we've mentioned the environment, social, governance issues, there's economic issues as well. And there's lots of stakeholders involved. So you've got customers, employees, you've got investors, there's regulators, they've all got slightly different demands and so on. So, actually setting and defining a clear strategy is challenging, but it all comes back to what is your core area of business, what's your areas of competitive advantage? And then setting concrete actions and measurable objectives as well, for leaders, I think that's important to hold the leaders accountable.
And similarly, in my space talking to asset owners, again, it's kind of where do you start? There's just so many areas to think about in ESG, and sustainability. So again, reflecting on what are their investment beliefs? What's important to that core group of asset owners? Where are the areas that they should spend most of their attention? What are the core themes? And that's really helpful to be able to translate into policy to then naturally translate into investment decisions, and get a clear, structured plan to be able to implement that as well.
Maura Jarvis: Vanessa, I wanted to just to support you on something that you said there around the importance of leadership and leadership really taking this on board and driving it from an organisational perspective. I also think for it to be really meaningful, you really need to start to create a culture in your organisation around ESG and build that sustainability in at every level of the organisation. So yes, absolutely, leaders need to drive and own this. But I think there's also a huge amount of work that needs to be done in terms of training and educating your whole workforce on ESG. Because if we think about the organisation has the ability to make a difference in the environment within which it operates, imagine if every employee that works in a large organisation takes that on board in their own personal capacity, and is educated and upskilled around what they can do in their own home, for example, around sustainability, that can have a phenomenal and massive effect, you know, on sustainability and what we are trying to achieve. So just to support you on that leadership side, but just too almost bring up that upskilling of the employees, as well, to create that ripple effect that we are looking for.
Nick McClelland: Maura then, can I ask you to maybe build on that a bit further, because I think some of the listeners today would be very open to practical advice, things that you've seen perhaps done by organisations leading the way in this space, is there anything specific that you could give the listeners today, some tangible actions they could think about as next steps?
Maura Jarvis: So I think one thing, maybe just as a suggestion is to decide what your approach is on ESG and to create a really clear narrative for the business around that. And then to cascade that throughout the organisation. So in other words, to have information, upskilling sessions for every single person who works in your business, and say, this is what ESG is, because I think all the way down to the shop floor, not everybody has a comprehensive understanding of what it is.
And then I think, to my previous point around just saying, and what could you do in your space, in your job in this organisation that you could apply, you know, some of the practices around ESG? And actually, you know, allow people to perform, to form small working groups, to really come up with fantastic practical ideas around how they could implement ESG in their space, in their team, in their part of the business. So that's a really easy, relatively easy thing to do, it's quite quick. And I think it could really start to drive that accountability of ESG. So that would be one thing that springs to mind.
Vanessa Hodge: And translating that into what does that mean in practice. I mean, at Mercer, for example, we've moved away from meeting papers on paper, they’re now e-books, they're all done remotely, that seems quite obvious given that we've just gone through lockdown and remote working, but that makes a huge difference on resources and energy. And also in our local offices, we've moved away from having disposable cups for water and tea. There's glass and ceramic, which we've gone back to, but again, it's thinking about that use of resource.
Nick McClelland: I'll probably lead towards the wrap up in a second or two. But actually, just one more area I’d be quite keen to understand. And there's a word that you mentioned, Vanessa, you re-emphasised it Maura. It's that accountability piece. And we can talk about that within sort of the departments that work across an organisation. I'm sure many of our listeners today are in the HR space as an example. But at leadership level, are we seeing trends again, where there is clear metrics and accountability happening for the executive suite of an organisation?
Maura Jarvis: So Nick, I'd say I think it's starting. I think there's still quite a long way to go. And specifically if we look at executive reward as an area, we are starting to see some metrics coming in to KPIs for executive teams. I don't think it's as widespread as it needs to be yet, but I think it's a good start.
And I think that you know, old story of, you get what you measure. I really think it's critical that these measures are brought into particularly the executive roles. But again, I would challenge it and say, I think that ESG needs to be owned by everyone in the organisation, and that these goals should be incorporated into each one of them.
So I mean, Vanessa gave a great example of our change at Mercer away from paper cups, to china and glass. And I think you know that's an idea that comes not necessarily from the executive team. But that's an idea, again, that can be harnessed from people needing to relook how they work, where they work, when they work, and how could they do that in a more sustainable manner.
Vanessa Hodge: And in terms of asset investment innovation, there are more sustainability linked bonds for debt issuance that are coming on board, which have key performance indicators linked to criteria set by businesses on how they will improve their sustainability characteristics. And if they don't meet those criteria, then there are penalties involved in either increasing the amounts that they have to pay in interest or increasing the term. So again, that's a different way of looking at the accountability of a business in what they say they will do.
Nick McClelland: Both, thank you so much for that today. I think, it's our first session talking about this topic, I think we've covered, you know, the what is ESG, because I'm sure there are some people out there who are really trying to get to grips with the basics on this. But most importantly, it's been very clear for both of you that there's a real importance to this topic that organisations in particular need to take seriously. And I think in particular, what I've picked up is this idea that organisations need to really understand why this is important. And we can’t be in a position as a company, Mercer is the same, but all of our clients need to be in a position where it can't just be talking the talk, there's got to be real tangible actions, walking the walk.
And particularly Maura, I love that point about culture, it’s something within the organisation. Because of course, the risk to organisations today is that they create a gap, a credibility gap, which is the difference between what you're saying and what you're doing, by all accounts.
And so, you know, really helpful, I think, to get some of those basics of what is ESG. But more importantly, today, why it's important. And to all our listeners hope that you've enjoyed today's episode. And thanks for downloading the podcast.
We have some fantastic episodes coming up, planned on DEI in particular, which has also come up today, and sustainable investments in particular. So if you are fascinated by either of those topics, look out for those episodes coming soon. And if you'd like us to cover off any other topics in the series, please let us know via the podcast website. Thanks again for listening and thanks to both Vanessa and Maura for joining me today.
UK Transformation Leader
UK Sustainability Integration Leader
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