Dialogue with Louise Gardiner: Next-generation ESG Operation System: An Innovation Entrance

Vukani Impact Collective gathers the most experienced and enthusiastic experts in the sustainable development and impact area.

Headquartered in Cape Town, South Africa,   the Vukani team has cooperated with clients across Africa and even the globe. They have professional and comprehensive knowledge in areas of environment, society and corporate governance. Their services include the systematic design and support for best practice in ESG performance management, ESG due diligence, impact verification, team training and research. Vukani helps corporates and financial institutions to create positive and measurable impact via their projects, meanwhile, creating visible and tangible business value.

“if risk management and performance management are neglected, the pyramid scheme of social impact is going to topple over. Therefore, the foundation for good environmental and social welfare must be laid firmly.”

Q: Why did you enter the area of sustainable development and found Vukani Impact Collective?

A: I began my career in Belgium in 2000, working for CSR Europe, the business network for corporate social responsibility, oriented towards big businesses. Over time, I came to realize that smaller businesses can often track sustainability quickly. In many ways it is also easier for them to actually see the benefits, including financial benefits. Therefore they are often easier to be convinced to persist on a sustainable path. Moreover, the Global Reporting Initiative (GRI) did some work at that stage that impressed me. They helped a group of SMEs to develop sustainability reports in a more simplified way, then to pitch those reports to investors. They found that the SMEs with sustainability reports were more likely to win investors. That was a big moment for me to recognize this interaction between investors and smaller growing businesses. I then applied for a position at IFC, part of the World Bank Group,   in 2005 and have supported a range of global IFC programs since then that encourage the private sector and financial sector to adopt sustainability standards. Since the 1990’s, IFC has paid increasing attention to the ESG factors in their investments. Several high-profile cases contributed to this urgency. For example, a company in which IFC had a 5% stake in 2000 had an accidental mercury spill while transporting it in Peru, which led to serious consequences for local communities and jeopardized IFC’s reputation. The lessons from this case and others have contributed to IFC’s development of its Sustainability Performance Standards, which are the gold standard. Over time, IFC has also found that these standards actually lead to good financial and social returns on investments in emerging markets, thanks to ESG interventions. This has been verified through a number of IFC studies and is consistent with research by Harvard Business School, Deutsche Asset Management, and others. The most consistent finding from these studies is the direct correlation between corporate focus on ESG and the ability to access capital at a lower cost, suggesting that banks may have integrated sustainability factors into the pricing of loan risk (because they know that firms performing well on ESG are less risky overall), or that investors are willing to pay more for a responsible firm. All of these are very interesting to me.

I cofounded Vukani because I am passionate about unlocking this value for private equity funds. Many existing sustainability standards remain quite complex and cumbersome, so it is difficult to directly implement sustainability at the level of private equity. Private equity funds, particularly in emerging markets, often work with smaller and fast-growing companies that have many different priorities to manage and might not have the resources to take a comprehensive approach to ESG. Therefore, their interventions need to be very strategic. Also, private equity investors have paid little attention to this field until recently. However, they are particularly well placed to support the long-term sustainability journeys of enterprises, because of their hands-on involvement in the management of their investee companies over multiple years. At Vukani, we believe that by letting everyone work under a common vision, the industry can bring about very big changes in a relatively short period of time (5-7 years). The word Vukani means to awaken and rise up as a group.

We therefore founded Vukani to support investors of any kind to develop their ESG policies, systems ,systems, and capacity to undertake more strategic sustainability interventions. We work with leading funds that are committed to sustainability and positive impact, and we help them put ESG policies and systems in place to evaluate and engage with their investee companies. In doing so, we have developed a cutting-edge online assessment tool and methodology – the ESG Tracker (esgtracker.com) – which covers all the essential ESG topics for companies operating in any sector or region. It supports companies and investors to identify areas for improvement as well as value creation. We took the lead in exploring the ESG field before the market was mature enough. This means we have done a lot of preparatory work and learned lessons from setbacks which were a gradual learning process.

Q: What the innovation can be for investors entering environmental and social impact evaluation?

A: People feel excited about the concept of social impact, and many people want to achieve it by integrating the sustainable development goals (SDGs) into their business strategy and committing to ambitious social and environmental outcomes, while also creating jobs. This is great. But, in doing so, if sound ESG risk management and performance management are neglected, social impact is going to topple over like a stool with only two legs. For instance, issues like health and safety, labour practices, pollution management, and responsible use of natural resources are essential. Businesses also need to quickly start preparing themselves for the impacts of climate change on their operations and supply chains. Therefore, the foundations for good environmental and social welfare must be laid firmly.

This is where financial institutions can play a powerful role. Although the individual impact a company creates from changing may be quite small, if a financial institution makes several small interventions in each investment in its portfolio, overall, they can make a significant contribution to addressing the bigger challenges over the medium to long term.

Q: During the client service, have you found any repetitive themes or feedback?

A: A recurring theme is confusion. Some asset management teams have individual sustainability professionals on their teams who have a deep understanding of impact, but most people in the financial sector are still struggling with understanding what ESG means and what impact means. People often mix these two concepts up. From my perspective, the link between them is that they share similar types of factors to measure, but they hold different perspectives and measuring methods. Investors from the ESG perspective focus on risk management and its return on overall performance, while investors with the impact perspective focus on creating additional value in their investments through positive outcomes for society and the environment. For example, from the perspective of ESG, if a corporate does not fully consider issues related to its female workforce, there may be business risks related to sexual harassment and improper treatment of pregnant employees, which could result in legal consequences and reputational damage. Looking at the female workforce from an impact perspective, the corporate could also choose to hire and empower women, such as by ensuring that they are well represented in management and leadership positions, or simply that they have access to good livelihoods and a safe and healthy workplace. This can result in positive impacts for the women themselves, as well as their families and people around them. The mindsets are different, but some of the strategies might be the same. For instance, a proactive approach to hiring and promoting women and ensuring their health and wellbeing can reduce business risk and achieve positive outcomes. However, if potential risks are not managed, such as health issues, then the positive impact of hiring women can be undermined. The most value is created when companies combine the risk management and impact mindsets.

When talking about sustainability, ESG, and impact, it is not easy for many institutions to understand their differences and gather relevant information. Because there are so many topics and related metrics under ESG and impact, most people struggle to untangle and integrate them into business management. Hence, there is a tendency to focus on fewer but more understandable aspects, such as climate change, water, energy, employment, the proportion of women on board, executive payment and so on. However, a key finding from the research on this topic is that it is critical to focus on issues that are really “material” to an enterprise. Material issues are those that are most likely to affect the business in a meaningful way (both risks and opportunities). Studies show that focusing on the right issues can enhance a business, while focusing on non-material issues can actually lead to business costs. Our job is to help companies and investors focus on the material themes and indicators and manage these well.

Q: How to understand the issue of “materiality” more deeply?

A: George Seraphim, a professor at Harvard Business School, has found in his research that firms have better financial performance if the ESG areas they focus on are materially related to their business. If they focus on non-material issues, then they actually underperform – not just achieving a neutral result, but actually worse.

Using the ESG Tracker, we are able to provide companies with an ESG scorecard that assigns different weights based on the nature of their business, the sectors and the regions in which they operate. This means we can provide practical recommendations on the most critical and high-value interventions they can adopt.

The gap that decision-makers in the company need to fill is how to understand and use an ESG scorecard to strengthen business strategy and metrics. This is something new for most management teams and boards of directors. While the overall picture is getting better, we still need to educate our clients continuously to get them familiar with the wide range of tools and techniques available to improve ESG management across the dimensions of   risk, performance, and impact. The first step is to understand what the key ESG issues are for the business and how the enterprise would benefit from managing these effectively. Secondly, we encourage our clients to identify their quick wins. While successful ESG management must be a long-term process, there will always be goals that can be achieved in the short term. Pick the fruits that are easy to pick first. Finally, the direct benefits of ESG management should be measured and presented to the client's whole organization, particularly to the CFO and financial manager. Our experience is that, as soon as these benefits become clear, the CFO can actually become one of the strongest champions for sustainability.   

In fact, we are seeing growing interest from banks on the materiality of ESG management within a corporate. In South Africa, for example, the local exchange requires all listed companies to publish integrated ESG reports. While local banks, such as BNP Paribas's South African branch, sift through clients' ESG reports to see which loans they make. In their opinion, it can be obvious to observe from companies’ ESG reports whether they have made substantive ESG integration and whether they take sustainable development seriously or not. They will reach out to those companies caring for sustainable development and offer them a lower interest rate. The conclusion is clear: they recognize that sustainable businesses are better.

Q: What are the characteristics Chinese clients of Vukani have in common? What are their most concerned issues and what are the goals they want to achieve the most?

A: A common feature of our Chinese clients is that their teams are often highly organized and responsive to evaluation services. It is a pleasure to work with them, especially when it comes to health and safety-related issues. Chinese companies have many specific requirements related to their domestic markets, such as emergency response measures and so on. In most cases, we focus on whether the company has the appropriate regulatory certification and license, including the permissions of newly established sites. In addition, we also find some interesting regulatory requirements in China, such as the regulations concerning the employment of disabled people. Moreover, the launch of new and tougher laws in China may strike companies to some extent. For example, a manufacturer of plastic packaging may be affected by the new laws on plastic use and disposal. On the flip side, it is also an opportunity for companies to innovate in their packaging.

Another trend we see is that Chinese banks are sometimes very interested in green credentials. Companies that have received an ESG rating before going to the bank can show their ESG score sheet for proof, which is a good trend. It is our observation and understanding that some Chinese banks are marking their loans with green loan ratings, but I am not sure about either their actual level of engagement with the company in terms of sustainability or whether they will offer a more favourable loan rate accordingly. However, the China Banking Regulatory Commission requires banks to monitor green loans and credit risk, partly because they have found that green companies have lower non-performing loan ratios which implies that green businesses have lower credit risk.

Q:What feedback have you received frequently from training clients?

A: When we provide training to clients, there is always a situation where at first clients don't understand sustainability, thinking it is vague and having no idea on what they can do. But we find that they quickly get inspired and by the end of the training they are thinking of ambitious ways to change the world and protect the environment. This shows how important this topic is for most people on a personal level. These customers realize that it is serious and there is a lot they can do. Sometimes, they may worry that the immediate needs and priorities of their business might not be compatible with ESG ambitions. However, we are able to share many examples and resources that show how practical adjustments can be made to achieve alignment, and that actually this is part of achieving long-term competitiveness and resilience.

What I have learned in this process is to be patient with people who are new to the topic. Sometimes their negative reactions to concepts like impact and ESG are simply because of their instinctive resistance to new things. Despite their initial concerns, we often find that six months later our clients have already done something really positive, and even have achieved a phenomenal success.

Q: What other problems need to be addressed to make sustainable and impactful investment strategies incorporated into the market?

A: In my view, the next breakthrough point in the evolution of the field is the tracing of causality between ESG interventions and improved business performance. There exists a solid basis of research showing the correlation between ESG performance and financial performance, but there is still a need to push the data forward to show the causality or to reinforce their correlation. This requires experts to collect, organize, and analyze data, then to give sophisticated insights into how ESG drives value creation, to test it in the market, and to reach a conclusion successfully in the end.

In addition, many international exchanges, including the Shanghai Stock Exchange, now require listed companies to provide ESG reports. But if the stock exchange asks for ESG reports and the exchange, ratings providers, investors and other finance providers don’t follow up on what's in the reports, the market won't actually benefit. This problem has already existed in South Africa, where a lot of sustainability and integrated reports are produced by local companies but there is insufficient use of the data in those reports to drive better decisions and engagement by investors. Thus, the market needs more and better analysis of these reports and for information to be packaged in a way that supports better decision making – both about ESG performance in order to manage risk, and about the link to better business performance. I think that is the missing piece right now.

Q: Do you worry about the risk of “Greenwashing”?

A: A client who hires us is normally not a greenwashing company, because they want to know their current weaknesses, risks and remedial measures through our strict standards of the service delivery. So, we will encourage them to take an honest and pragmatic view of their situation. In addition, in order to eliminate the "greenwashing" risk, the market calls for a certification mechanism; otherwise, the risk is inevitable. I believe the application of blockchain technology will be revolutionary for the certification industry.

Q: What will the next-generation ESG evaluation and management system be like? What vision do you have for the future?

A: Looking ahead to the next generation of systems, first of all, blockchain will be a very important part of it. ESG data is expected to be "commoditized" to meet the rapid demands of enterprises or investment behaviour. For example, ESG is starting to be considered across a wide range of financial activities, including services such as trade finance that require assessment of companies in a very short timeframe, such as 24 hours. This means that the consideration of ESG would require the company to already have these credentials in place. Thus, sufficient standardized ESG data and certification processes/technologies can make companies quickly offer their ESG certification and thereby receive financial benefits. At the same time, under a transparent data system supported by blockchain and robust verification methodologies, companies will not be able to tamper with information, thus directly eliminating the risk of greenwashing.

Thus, the enterprise can regard ESG as a necessary added value and part of the enterprise's ledger, rather than a dispensable one.

My vision is that companies can operate better with these data, and thereby accessing more beneficial financial support. Plus, these ESG-related data assets will be analysed and processed by professionals around the world, and big data will be used to drive the right behaviours of enterprises and investors.