Janet Du Chenne, Advisory Board Member of Fintech B2B Marketing and Editorial Director at flow, Deutsche Bank Corporate Bank’s insights magazine for corporate and institutional clients, assesses how environmental, social and governance (ESG) factors have climbed the corporate agenda since Covid-19, and how Deutsche Bank used content marketing to showcase its move from targets to action.
The arrival of the Covid-19 pandemic in March disrupted capital markets and caused many companies to pivot towards operational resilience and business continuity management. Almost overnight, and ahead of an impending lockdown, companies made arrangements for employees to work from home. Analysts, faced with sharpened market volatility, drew parallels with previous crises to draft appropriate coping strategies, but environmental, social and governance (ESG) themes remained on the agenda.
One benchmark for the analysts was the dotcom bubble burst in 2001, putting a major focus on corporate corruption and malpractice. The crisis uncovered a scandal at US energy company Enron that at the time came to be known as the biggest bankruptcy and the biggest audit failure, subsequently also uncovering improper accounting at World-Com in 2002.
As a consequence, the Sarbanes-Oxley Act of 2002 enforced improvements in the accuracy of financial reporting for public companies and mandated increased penalties for destroying, altering or fabricating records in federal investigations, or for attempting to defraud shareholders.
Almost two decades later, amid a very different crisis, accounting practices have continued their rise to the top of the priority list as one of the ESG factors measuring the sustainability and societal impact of an investment in a company or business.
ESG grows up
In July, I wrote an article titled “How ESG grew up during the pandemic” for Deutsche Bank Corporate Bank’s flow magazine, showing how these themes were not relegated from the agenda because of the pandemic. In fact, governance has become one of the hottest topics. In the article I quote a report from the bank’s research team titled ESG through the pandemic, and cite data showing that since the Covid-19 outbreak, corporate are typically 38% more focused on accounting practices than they were at the start of the pandemic.
Just as the dotcom bubble uncovered fraud at Enron and WorldCom, so the 2008 financial crisis shone a light on accounting and audit mismanagement at leading global banks, such as Lehman Bros and Bear Stearns, while Japan’s 2011 earthquake and tsunami helped unveil accounting problems at Toshiba. The corona virus pandemic has brought to light similar scandals, with China’s Luckin Coffee being delisted from Nasdaq after failing to file its annual report and reportedly inflating sales figures.
Each crisis has nurtured the journey of governance statements into company reports and accounts, encouraging companies to adopt good corporate governance through a policy of greater transparency. The notion of corporate ‘doing good’ became a topical boardroom discussion post-Enron and, following British Petroleum’s Deep water Horizon oil spill in the Gulf of Mexico in 2010, environmental and social joined governance to form a trio of measures that companies have begun integrating into their reporting to showcase their improved ethical behaviour to investors and stakeholders.
A deeper understanding of ESG between issuers and investors followed, with the wider capital markets community throwing its weight behind supporting ESG reporting and communication with global frameworks and reporting formats.
Auditing groups played their part. PwC sought to bridge the divide between investors and corporates on ESG reporting. They explained investors’ need to understand a company’s long-term value creation plan and for credible, standardised information to support long-term risk assessments while ensuring corporates – even those with good ESG stories to tell – were giving investors the right information in the right format.
ESG enters next phase
Given the global nature of the pandemic and the disruption it has caused in economies and society at large, ESG is entering a new phase and people approach it with a different lens. In Europe, while regulators and governments have tried to support economies with stimulus measures and financial regulatory responses, they have not dropped the ball on sustainability, with the European Commission eager to press ahead with a sustainable finance strategy. Political and economic pressures mean that beyond the short-term impacts, there is the strategic imperative that makes ESG a licence to operate.
Corporates have duly responded. In the flow article I note the Deutsche Bank Research team’s analysis of how ESG has changed and performed since the onset of Covid-19. This includes the use of data from AlphaSense, which tracks the extent to which corporates are discussing ESG issues, the number of public documents (including filings and ESG reports) and their matrix containing the five most relevant issues from each category of ESG, the research team deduces that corporates’ ESG priorities have changed in response to the pandemic.
The top five ESG topics are:
- Employee wellness;
- Accounting practices;
- Climate change;
- Corporate supply chains; and
- Social inclusion
The people agenda has risen the list of priorities, with US data showing the focus on employee wellness was up 48%. Other ESG topics that have increased in prominence are ‘supply chains’ (up 18%) and ‘social inclusion’ (up 16%).
Investor sentiment changes
Investors have changed the way they look at ESG, according to the report, with analysis showing they have severely curtailed their investment into ESG funds. A further analysis of the Global Impact Investing Network’s 2020 investor survey during the pandemic shows that overall, investors will increase their investment in ESG by two per cent this year.
The findings also indicate that ESG is increasingly being judged on the same merit as traditional asset classes.
Frameworks drive action
In Europe, the merits of ESG were given a boost by the introduction of an EU Taxonomy setting out standards for sustainable activities. According to Gerald Podobnik a Member of the German government’s Sustainable Finance Advisory Council and CFO of Deutsche Bank Corporate Bank, regulatory intervention such as this has helped to position the issuance of green bonds as a maturing market.
“The first issuers wanted to send a message: look at us, we’re committed to operating sustainably,” says Podobnik in the flow article. “But the Paris Climate Agreement, the supplementary One Planet Summit in 2017 and ultimately the European Commission’s Sustainable Finance Strategy gave the idea a tremendous boost”.
Podobnik adds that such regulatory requirements and incentives can help the financial sector make a huge shift towards sustainable finance swiftly. “More and more institutional investors use sustainability criteria to manage their portfolios and are enquiring after sustainability ratings. We are convinced that the current crisis provides an opportunity to link growth and sustainability,” notes Podobnik. “When the coronavirus crisis began, we all saw that parts of our economy lacked resilience. This shows how important a sustainably oriented economy can be. As a bank, we can provide a decisive boost by supporting sustainability from every angle – for example by issuing our own green bonds”.
The EU Taxonomy should offer investors transparency in how firms measure up on their sustainability agendas, while the EU is also revising its directive on non-financial reporting for companies. Investors are therefore increasingly able to use an ESG lens to identify a corporate’s biggest risks, says Podobnik: “ESG presents hard-edged information for businesses, and can be used to show where your biggest risks are in the short term using an ESG lens.”
Marketing the message
To provide institutional and corporate audiences with more insights on pursuing a sustainability agenda, the flow team leveraged the client magazine’s multi-channel approach. It showed how the bank is employing a Sustainable Finance Framework, including targets and classification criteria for projects to meet, in order to be deemed sustainable and to qualify for sustainability-linked loans. These standards show the impact that Covid-19 has had on the sustainability topic. A flow podcast captured the essence of what Podobnik describes as a more balanced and holistic focus on ESG precipitated by economic and political pressure in the wake of pandemic.
These pressures quickly attuned corporates towards a strategic imperative, despite severe economic and liquidity management concerns during the first few weeks of the crisis. “We quickly saw that the political pressure (for sustainability) is not going away,” says Podobnik in a flow podcast. “On the contrary, this might even intensify, because if we learned one thing from the crisis it’s how little resilient our economies are.
“This, in addition to the overall pressure to combat climate change and the recovery programmes, mean you have a clear ESG element. The second element is that the social dimension of ESG actually gained significantly in importance. We’re seeing substantial changes required for the infrastructure for the economy if we are to effectively combat climate change. Obviously, there will be social consequences of this development that will have to be to be managed properly so that we get the best out of it for society.”
Podobnik notes that for many corporates, ESG is seen as a strategic imperative. “I think there is widespread acceptance that beyond the potential short-term financial impacts, there is the long-term risk impact and strategic imperative that will define your licence to operate. So that’s why we tell corporates that take an interest to look at it from a long-term perspective because in the end there are two megatrends that will shape the global economy: one is digitalisation and the other is sustainability.”
Implementing an ESG marketing strategy
Podobnik also shared insights on how Deutsche Bank is integrating ESG, highlighting how corporates can integrate sustainability into their strategy. During the pandemic, the bank has employed several initiatives as part of its sustainability strategy:
- Appointed Trish Taneja as head of ESG Advisory, Capital Markets to set up a team to engage with stakeholders on the topic. With the team still in its infancy, Taneja’s goal for the first six to 12 months is simple: increase the client dialogue on ESG and spread ESG knowledge within the bank as much as possible.
- Published its sustainable finance framework and created a website for resources and insights on its sustainable products.
- Published sustainability targets earmarking 200 billion euros in sustainable financing and ESG investments. When defining which activities it will classify as sustainable, the bank will be guided by the EU Taxonomy – the European Union’s ESG standard.
- Following this, the bank published a framework for putting those targets into action, including a classification criteria for deeming which projects meet the criteria for sustainable loans.
- It released a climate statement outlining how a bank contributes to sustainable and climate-friendly economic activity. This covers the entire spectrum from sustainable finance and managing climate risk and its carbon footprint right through to how it encourages employees to identify with our drive towards greater sustainability.
By driving these initiatives and positioning them as a key topic for CFOs, Podobnik and an ESG competence team wanted to communicate to the wider market that ESG is more than PR discussion, and that it has moved way beyond that. “So, it should be at the heart of the strategy of a company, and the CFO is obviously the best person to drive this with many colleagues in the business and on the infrastructure side,” he says.
To engage audiences about these initiatives, the ESG competence team in the bank worked closely with marketing, leveraging several content channels to show how it is putting its sustainable targets into action on its Sustainable Finance website. These included case studies featuring other corporates and advice on how corporates can adopt a sustainable agenda, which Podobnik highlighted in his podcast.
The marketing team showcased these sustainable solutions and presented insights and written case studies about these specific financing projects it is working on as part of the sustainable agenda. This includes a case study on how Halcyon agriculture used a subsidiary to embrace sustainable principles supported by a sustainability-linked loan from Deutsche Bank.
Working with the ESG competence team, marketing published regular updates to the website, including insights leveraging all digital channels.
By launching a website with resources and real-life case studies written by journalists, the marketing team is able to tell the story and engage audiences about the long-term strategic imperative of ESG.
A full version of the article titled ‘How ESG grew up during the pandemic’ is available on www.db.com/flow
Janet Du Chenne is Editorial Director, Marketing, Deutsche Bank Corporate Bank, where for the past five years she has been jointly responsible for the production of flow magazine. She joined Deutsche Bank as a journalist with experience gained on a number of financial trade press publications.
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