“Something is definitely changing,” says Gianluca Gramegna, head of ESG at ERG, itself a company that has undergone a significant transformation from an oil company when it was originally formed 80 years ago to now being the leading renewable energy business in Italy.
It is now among the top ten onshore wind operators in Europe. “When it comes to market sentiment towards climate change, the push for change is higher than it has ever been from consumers, governments and industry, with investments into ESG becoming more prevalent and the voices more vociferous.”
In particular, one notable shift in the market is the emergence of social and governance as equal factors to environmental in discussions around corporate responsibility. “About 10-12 years ago, we were only focusing on very broad environmental factors,” says Claudio Pirani, ESG team at ERG.
“Only in the last two years have social and governance aspects risen in importance to the point that they are now a consideration in company evaluations. Each of the E, the S and the G are all of equal importance – that has been a big change in the last few years.”
Essential component
This heightened focus on ESG is also evident in the fact that it is now an essential component of ERG’s business strategy, setting a foundation for the delivery of a tangible contribution to the creation of social value and achievement of the United Nations’ strategic development goals. Lynette Purves, head of UK legal affairs at ERG, says: “ESG is at the core of our business plan. We have set a carbon neutrality target of 2025 for both direct and indirect emissions. We have set a contribution of 1% of revenue to local communities and education for future generations. We are rolling out a number of inclusivity and diversity initiatives across our business and we have linked the long- and short-term remuneration of our senior management to the achievement of these ESG objectives.”
However, the type of bold transformation undertaken by ERG from oil into renewable energy and the embracing of ESG principles, whilst a great example of the diversification that needs to happen, is arguably not happening fast enough across the energy sector. Claudio Pirani says: “There are still problems with assets that rely on coal and gas. The adoption of renewable sources needs to happen quicker than it is currently and governments need to do more to support this change.”
“The adoption of renewable sources needs to happen quicker than it is currently.
Barriers to progress
Nowhere is this more apparent for a renewable energy company than in the permitting process which, for Lynette Purves, is one of the prevailing barriers to progress for the sector. “There is a drive to build more renewables projects but the permitting process for planning permission is very long and uncertain. This is the main barrier to the development of major-scale renewable projects.”
One area of industry that reflects this change in emphasis is the ratings market, where the agencies are now placing an increased focus on the ESG performance of companies. Gianluca Gramegna says: “In our recent ESG plan, we acknowledged that we have to evaluate from a different perspective to be accepted by the various ratings agencies, which are now changing how they rate companies.”
Measurement
Claudio Pirani says on this point: “In terms of measurement, environmental factors are easier to capture, for example CO2 emissions versus revenue. However, even these figures can be skewed if one company sells at a retail price and another at a wholesale price. The metrics can be misleading. Social and governance factors are harder to standardise but the ratings market is trying to find ways to do this such as through measuring the independence of the board, the diversity of senior positions and engagement with local society. However, even these are open to interpretation because such metrics do not in themselves result in a benefit for wider society and require a qualitative understanding of the context in which they are delivered to really assess their social impact value. Nevertheless, standardisation is definitely coming.”
The overall theme is one of contrasts – of positive progress at a business level tempered by slower progress at a governmental level. There is mounting evidence that the mood is changing within boardrooms despite the macro challenges that endure. Nonetheless, the direction of travel is getting clearer despite the realisation that major barriers exist further down the road. As Claudio Pirani says: “Everybody knows what is needed, but often it is difficult to reach it.”
“Social and governance factors are harder to standardise but the ratings market is trying to find ways to do this.
Author & contributors:
Author: John Palmer, Partner – Shoosmiths
Contributors: Gianluca Gramegna, Head of ESG – ERG, Claudio Pirani, ESG team – ERG, Lynette Purves, Head of UK legal affairs – ERG
Disclaimer
This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.