Integrating Sustainability into Decision Making in Times of Distress - Briefing Notes

Transcription

1. Industry Series Thursday - 19 November 2020 Integrating Sustainability into DecisionMaking in Times of Distress Corporates that learn positive lessons from the pandemic and change the way they operate , particularly regarding the adoption of ESG considerations, would end up stronger coming out of the crisis and help build more resilient markets and economies. The core emphasis of Islamic finance is the protection of wealth, which not only preserves the wealth of individuals, but also the environment’s and social’s wealth. CSR label is viewed by corporates as more of a public relations exercise, whilst ESG considerations are more connected to the impact of the firm on the society as a whole. L ooking Beyond the Short-Term: Blake Goud opened the floor by acknowledging that companies are compelled to think fast and adapt to necessary changes, in the wake of the COVID-19 pandemic that caused an economic distress globally. Jessica Robinson drew upon her extensive experience in the Sustainable and Responsible Investment (SRI) space. She stated that in the past, large institutional investors were short-term focused and concentrated on economic gains. Sustainability and non-financial considerations were viewed as a luxury, particularly amongst emerging markets. Robinson attributed this to the lack of policy push and understanding of interpretations of fiduciary duty and stewardship. However, Robinson noted a fundamental shift across global markets, with large institutional asset owners showing an increased interest in SRI as well as Environmental, Social and Governance (ESG) responsibilities over the past few years. Robinson stated that investors no longer believed that sustainable and responsible business practices were “nice to have”, and instead wanted to see these areas embedded into strategic decision-making, with the adoption of ESG interpreted as incorporation of sound governance and effective risk management. Robinson added that investors would pay the price in the end if companies did not understand the importance of SRI factors. Further, she commented that issues surrounding the environment and climate change have become more visible to all stakeholders, especially consumers, and the concept of having social licences to operate businesses is being discussed. Institutional investors are of the view that, similar to the on-going pandemic, unpredictable climate events could also cause rippling shock effects on public health and global markets. As a result, Robinson emphasised that post-COVID-19 economic recovery plans should incorporate low-carbon and green investment strategies, with an added focus on economic and employment opportunities in a low-carbon sustainable environment. COVID-19 has also sharpened investor views on sustainability considerations, with Robinson citing these as critical to the long-term growth and success of companies. Adoption of Maqasid al-Shariah: Goud then invited Dr Ziyaad Mahomed to share his views BLAKE GOUD CEO RFI Foundation on the convergence of Shariah and responsible investing. Dr Mahomed started by saying that the ESG framework is at the core of Islamic finance guidelines and Islamic economics. According to Dr Mahomed, an area that needs focus is a shift towards positive screening in the selection of Shariah-compliant investing. Previously, stock investments were screened using a checklist, whereby if a company was involved in gambling, Riba (interest) or any other immoral activity, they would automatically be rejected. With positive screening, the company will be assessed beyond this checklist, to see if it has achieved its ESG requirements. Dr Mahomed then highlighted the five key objectives that underpin the Islamic economic system – which include areas of protection of life, faith, social fabric and lineage, wealth as well as intellect. The core emphasis of Islamic finance is the protection of wealth, which not only preserves wealth of individuals, but also the environment’s and social’s wealth. However, Dr Mahomed emphasised that wealth could not be achieved without the other elements in place, with the triple bottom line of people, planet, and profit forming the essence of Islamic economics, also known as Maqasid al-Shariah. In terms of regional adoption, Dr Mahomed noted that businesses in emerging markets have not actively intended to integrate Shariah compliance within their business practices, rather they focused on merely passing the checklist for Shariah compliance. Proper Shariah governance was largely adopted by Islamic financial institutions however, Dr Mahomed stated that this adoption was mainly to ensure maximum disclosure from a Shariah perspective, that decision-making incorporated adequate oversight and governance mechanisms. Further, it also sought to ensure that robust internal and external frameworks were issued by regulators, whilst the issues of sustainability and social impact were not considered. ESG and Key Performance Indicators (KPIs) DR ZIYAAD MAHOMED Associate Dean and Head of Social Finance INCEIF JESSICA ROBINSON Associate Director International Affairs, ADGM Measuring the Impact: Robinson stressed that the availability and transparency of data in strategic decision-making gave institutional investors access to a wide range and source of data. This has resulted in a much more sophisticated analysis of non-financial risks, with the use of technology and specialists to support the decision-making process. In this regard, Robinson noted that there have been favourable developments both on the regulatory and the corporate reporting sides, with several financial regulators and stock exchanges globally mandating ESG disclosure, which was previously only voluntary. Robinson also credited some corporates that went as far as integrating ESG reporting into corporate management processes and key performance indicators (KPIs). Robinson listed some elements of transparency that were most valued by investors during this crisis, including experience of the Board and management, crisis management, business restructuring skills of executive teams and Boards, along with the company's strategy and perception of its role in society, its understanding of stakeholder needs, and its interpretation of sustainability and Corporate Social Responsibility (CSR). She stated that the CSR label is viewed by corporates as more of a public relations exercise, whilst ESG considerations are more connected to the impact of the firm on the society as a whole. Robinson commented that the global pandemic is assisting ESG sustainable investors to identify companies that are good corporate citizens against those that are merely “social washing” or “greenwashing”. In her view, the post-pandemic recovery period is an opportunity for forward-thinking businesses to embrace the concepts of responsible investing and stakeholder capitalism, as these are currently valued more by large institutional investors. Concluding the discussion, Dr Mahomed said that key financial institutions could be proactive in Terms' establishing emergency funds that could be used Environmental KPIs: towards supporting businesses, particularly the more Energy consumption, Flexibility vulnerable micro, small and medium enterprises Carbon emissions, Waste (MSME) sector, in the event of inevitable future crises. generation, Water usage Robinson echoed these sentiments stating that lessons should be drawn from the pandemic, and institutional investors, in particular, need to consider innovation and greater regulatory guidelines for Relationship Reciprocity social financial products in order to develop a level of building preparedness that allows for mobilisation of funds to Governance KPIs: Social KPIs: Board-independence, get capital to where it is required quickly. Employee turnover, Diversity, Health, and Safety Composition, and Remuneration practices Watch again on IslamicMarkets.com