ESG Ignite Report 2: Interpreting the ESG acronym by millsandreeve

ESG Ignite: Unlocking environmental, social and governance potential Part 2: Interpreting the acronym

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Introduction: your ESG What’s in a name? I could include countless definitions of ESG here with each one presenting its own nuances. To add to the complexity, some industries and organisations use different terminology altogether to describe the same broad concept of doing the right thing, in the right way for the environment and society. This report, the second in our ESG Ignite series, does not set out to provide the elusive definition. We don’t think it is necessary since the individual elements and scope of ESG can differ between organisations based on the industry, business makeup and corporate priorities. Each organisation faces their own, often competing, ESG opportunities and challenges. It’s normal and we certainly feel these pressures too.

Based on in-depth interviews with senior leaders across a diverse range of sectors, we first outline their understanding of “environmental”, “social”, “governance” and the crossovers between them. We then delve into three sectors where ESG is particularly relevant: education, health and care, and food and agriculture. Finally, we offer practical advice based on our own experience and those of our clients. Thank you to the leaders who took part in our research for their openness. I hope their insights are useful for you as you continue to define and refine your ESG approach. Surjit Deuer (she/her) Senior ESG Manager, Mills & Reeve

We believe these unique (often inter-connected) elements should be reflected in every organisation’s own ESG strategy. Through this report, we aim to help organisations define what ESG means for them by revealing what their peers believe.

Breaking it down to the E, S and G Originally, ESG was an acronym used by the investment community to assess non-financial value by examining a company’s impact on the environment and society, and their internal governance strength. How has it developed since? Here’s what our research reveals.

“For us, it is about making sure that we protect the environment for future generations.” Farming business “Social and governance issues should not be seen as a distraction from the environmental conversation but a part of it.” Financial services firm

for environment

With a whole lexicon of terminology around environmental matters and a huge amount of legislation, it’s hardly surprising that the “E” of “ESG” appears to be widely understood, covering reducing emissions, using resources effectively and responsibly, and mitigating biodiversity impact. Our research suggests senior leaders are committed to constantly updating their knowledge of how to reduce their organisation’s environmental impact. Many are still focusing on potential significant wins to protect natural resources rather than being able to get into the details of refining their processes, or indeed completely innovating their organisation.

Most focused on environmental issues Carbon usage and emissions

“Scope 3 emissions can be between 80 and 95% of total university emissions, so as a sector, we need to focus on carbon reductions in our supply chain, in particular our digital estate and travel and transport. This means hospicing out old carbon intensive ways of working and pioneering new low carbon approaches to education and research.” Dr Victoria Hands, Director of Sustainability, Open University

Reducing Net Zero Biodiversity

“It means recognising our members are contributors to the community and society. As individuals who both work and live here, they have perspectives as citizens as well as employees.” Sarah Haywood, Managing Director, Advanced Oxford

for social

In this element of ESG strategies, many leaders combine human resources, employee wellbeing policies and a host of regulatory obligations. Measures include equality, diversity and inclusion policies, building communities and local engagement, creating social value and ensuring partners have similar priorities.

Most focused on social issues Equality, diversity and inclusion Building communities / engaging the community

“The S in our space is of real relevance and real impact. Investing in the real estate that we do has a real genuine social impact. We are not an impact investor, but the types of assets we invest in have a clear social value. Being the funder and working with an operator allows us to provide them with a stable long-term partner. This helps them grow their business and continue providing a high-quality service for residents who are often some of the most vulnerable in our communities.” Simon Gould, Investment Manager, Impact Healthcare REIT plc

Social value

"Transparent decision-making is key, as is taking a circular approach. If one feasibility study or proposal is put forward, the reasons why it's accepted or rejected need to be revisited over time to ensure return on investment is realised. It means we keep up with contemporary changes, we learn and improve for future decisions and become good ancestors by leaving a positive legacy for future generations.” Dr Victoria Hands, Director of Sustainability, Open University

for governance

Governance is trickier to define for the senior leaders in our research. For many organisations, good corporate governance starts with having a properly operating board that holds the business to account, as well as expert non-executive directors (NEDs).

What governance means to organisations Monitoring risks to meet set standards Having good leadership

How organisations are embedding governance Training employees to understand procedures and engage their hearts as well as their minds Taking it seriously at board and governing body level so it is embedded in all systems Trying to make it a part of the culture

“The G is by far the most challenging to explain and to understand. I think that is a bit of the weakness of ESG, because you want to do great things on environmental and social action, but if you do not have the leadership and management system, then you re-invent the wheel every time.” Emmanuel Deschamps, Associate Director, Sustainability, Harwell Science and Innovation Campus “I think the test will come, when you have got to make a hard decision and how much of these ESG factors are influencing your decision – that is the key for me. We need to start thinking ESG strategy is what we do, it is not a separate thing.” Simon Gould, Investment Manager, Impact Healthcare REIT plc

Making sure we do things the “right” way

Sector spotlights

Education Health and care Food and agriculture

Education Feeling pressure from students and staff, the university sustainability leads we spoke to have set ambitious ESG policies and are making great strides towards achieving them. “We’ve got a very engaged and motivated group of stakeholders through the student body and that's what we want! I want students to be complaining if they spot something on campus that they don't feel is sustainable behaviour and pushing us to do better and go further. This all feeds into us achieving our Net Zero targets for scope 1 and scope 2 emissions in 2032 and we are committed to being Net Zero by 2045 for our scope 3 emissions.” Karl Letten, Environmental and Sustainability Manager, De Montfort University "A lot of our students, employees and employer partners are asking “what are you doing about this?“ or they have seen good practice elsewhere and ask “can we do the same?“. We welcome stakeholder collaboration and learning from good practice, especially related to systems thinking and understanding the interconnected nature of what can appear to be separate issues, when in fact they are all part of this one, ESG approach.” Dr Victoria Hands, Director of Sustainability, Open University

"The University has not defined ESG, it is not a term that is so much used within the higher education sector. We more often use language such as sustainability, and a lot of Exeter’s communication is around the climate emergency. Carbon is critically important, but one of several priorities. One of the challenges with the climate emergency is it can overshadow other aspects of ESG or sustainability, and people almost forget there’s an ecological crisis, and there is a social crisis and many other things. Joanna Chamberlain, Director of Sustainability, University of Exeter “Students are our customers and they really care about ESG issues so everyone needs to be doing their bit.” Alistair Lomax, Director, Arc Universities Group

“UK universities and all those working within the education sector share a deep commitment to sustainability and ESG. There is a desire to behave as responsible Global Citizens and to demonstrate to their communities, students and staff that institutions are passionate about behaving responsibly. There is a real willingness to communicate their progress openly and to be held to account by stakeholders. We see more and more that ESG is really embedded successfully in governance.” Martin Priestley (he/him) Partner, Head of Education, Mills & Reeve

Health and care Pressing issues such as recruitment and retention, finances, complying with multiple complex frameworks, policies, regulation and risk management could prevent organisations in the health and care sector being on the front foot with their ESG strategies. “As a governmental body and a care organisation, we have to be able to demonstrate all of those values. We’ve got to be transparent in what our purpose is and have a corporate conscience, a social conscience and an environmental conscience. As well as holding ourselves accountable for transparent and ethical use of data.” Ciaron Hoye, Chief Information Officer, NHS Birmingham and Solihull Integrated Care Board

“The Trust’s new strategy ‘Working Together, Improving Together’ launched last year now includes for the first time environmental sustainability as one of its goals. My role is to inspire the organisation with enthusiasm to do something about it. It is not an easy challenge given our operational pressures but there are passionate staff across the organisation who want to make a change. We’ve published a Green Plan setting out the actions we intend to take. There's a cultural transformation that needs to occur, but it needs to be everyone's business, and that's the way the strategy is structured. Everybody needs to think or apply a sustainability lens to their decision making, their individual actions on a day-to-day basis.” Trevor Mose, Head of Sustainable Development, Portsmouth Hospitals University NHS Trust

“We need to start thinking ESG strategy is what we do, it is not a separate thing.” Simon Gould, Investment Manager, Impact Healthcare REIT plc

“E and S and G runs through every element of the health and care sector. At its core is the “S” – the day-to-day care for patients, residents and service users. The sector is under so much pressure with many challenges such as Covid, waiting lists, inflation, recruitment and retention, new legislation, regulation – the list goes on. With the immediate everyday demands of the care of patients and residents it can be a challenge for leaders to focus on long-term strategy. However, the benefits of engaging with communities, developing inclusive staff policies, and taking a sustainable approach to reducing waste and emissions cannot be understated. It’s a focus for investors. It’s a focus for NHS England (Greener NHS). It’s a focus for the Independent Healthcare Providers Network (Net Zero Pledge). As the Social Care Sustainability Alliance have said, short term head winds must not deflect organisations; it is not a choice between economy and ecology or between sustainability and profitability.” Jill Mason (she/her) Partner, Head of Health and Care, Mills & Reeve

Food and agriculture The food and agriculture sector is looking closely at ESG issues and rightly with a focus beyond environmental. "We are committed to doing the right thing as a business and are taking steps both big and small to meet regulation and have a positive impact. For instance, we’ve set a target to recycle 65% of our waste across all sites - we are currently sitting at 75%. Another example is how we have supported charity through our brands, donating 167,000 breakfasts to magic breakfast in partnership with the Happy Egg Co in 2023.” Louisa Hogarty, Group HR Director and Non Executive Director, Noble Foods “The reason behind launching Regenerate Asset Management as a whole was to take advantage of the opportunity in the agri space which is ripe for disruption as well as a requirement to find funding and support for regenerative and sustainable agri practices. The whole market is going to have a shake up and I am glad that we fundamentally built Regenerate Ventures and Asset Management from the ground up to be able to be something that is sustainable before we start.” Paul Rous, Managing Director, Regenerate Ventures

“We brought two distinct pillars together which we call the sustainable employee environment. This is the relationship between employees and the company, the company and its environment, and employees and the environment. We recognise the position our company has within its community and the contribution it makes. We have a large factory in a rural community that we draw a lot from and bring a lot of employment to the area. So we are quite conscious of the environment and the communities that we are in.” International food business “When we launched our ESG strategy we asked employees to volunteer to support our efforts. We now have 115 people that volunteer their time outside of their day jobs. This has massively helped engagement and these volunteers have really championed it, making videos, blogs, and really influencing how we do things. They’ve worked with the senior management team to really embed this, it’s what is in our hearts and minds. They have gone out and sold it through integrity and it has come from the heart, it’s not just a tick box. They believe it is fundamentally important for the future business and it’s a force for change.” John Shropshire, Executive Chairman, G’s Group

“ESG considerations lie at the core of our sector’s success, and rightly so. Regulation and consumer pressure compel responsible behaviour to protect the world’s vital resources. Many organisations are not just making incremental adjustments but embracing innovative approaches to reducing emissions and waste, for example using technologies such as precision agriculture and AI.” Craig Hodgson (he/him) Partner, Co-lead of Food and Agribusiness, Mills & Reeve

Practical steps: connecting the ESG dots

When all organisations are subject to different ESG pressures, drivers and circumstances, strategies and priorities will depend on what is material to each. A factory will have a very different footprint to an office. There are also different reporting frameworks and requirements, and both primary and secondary legislation can be tricky to navigate. Although there are some signs of convergence, there is no consistent pathway or blueprint. While the E, S and G create a useful framework for any organisation to assess how its operations impact people, places and the planet, they are impossible to understand in isolation. How can you reduce carbon emissions without enabled, motivated employees? How can you meet environmental legislation without the right governance processes? All this interconnectedness and resulting complexity can cause paralysis, especially if you’re not a large organisation with infinite resources (and who is these days?). So, when the fear starts to set in, think about your sector and use that to focus in on what elements of ESG need action today. And talk: to your partners, advisors and other organisations facing the same challenges. We always find that is the surest way to see issues in a new light and with greater confidence.

“It is very easy at the moment to focus on environmental issues but they all carry equal weight for different reasons.” Financial services company “The E and the S are very strongly embedded in who we are and what we stand for. That said, the G is equally important because we like to be compliant; we like to do things right, and we like to have the right level of governance.” Louisa Hogarty, Group HR Director and Non Executive Director, Noble Foods "Investing in a company that demonstrates strong corporate governance and adheres to high social and environmental standards can significantly mitigate reputational risks. The presence of these factors indicates that the company is well-managed and operates with a clear sense of responsibility towards its stakeholders." Paul Rous, Managing Director, Regenerate Ventures

Neil Pearson (he/him) Head of ESG & Social Value, Mills & Reeve

Get in touch To discuss any of these issues in more detail or to sign up for the next report in the series, please get in touch: Neil Pearson (he/him) Partner, Head of ESG and Social Value, neil.pearson@mills-reeve.com 07769 994210 How can our ESG expertise support your business? Click here and visit our website