Foreign Direct Investment – The ESG Opportunity

Events of 2020 have accelerated interest in sustainable & responsible investing (SRI) and in the environmental, social and governance factors that define an SRI portfolio. Measuring ESG commitment has become a critical component in the evaluation of a company or asset’s performance and in the assessment of investment risk. Indeed, ESG data is ranked alongside financial data in importance, and is frequently used as a predictor of future financial achievement.

Demand for ESG data from a broad spectrum of requesters, including asset managers, investors, boards, lenders and consumers has dramatically increased, creating a vast new ESG data market. This market, populated with data-providers, ratings agencies and reporting-experts is largely unregulated. As a result, data quality is inconsistent - a situation that will doubtless improve as the market matures.

To address data issues, companies seeking to promote their ESG credentials are taking an autonomous approach by producing proprietary ESG metrics and performance data.   These metrics are frequently based on UN sustainable development goals (SDGs) as a universally accepted set of ESG targets, under three headings – People, Planet and Shareholders.  And, in response to investor demand for greater data granularity, companies are increasingly building more complex metrics into their ESG reporting, with data drawn not just from across the business but from the entire supply chain.

From Business to Economic Development

As a result of this increased scrutiny, company leaders are applying an ESG lens to all aspects of their businesses, supply chain and operational sites. Whereas in the past, ESG factors were limited to the evaluation of emerging markets, today they increasingly feature in general site selection criteria. Indeed, requests by expanding businesses for data and information on city or regional commitment to net-zero, sustainability, diversity and transparent administration are set to dramatically increase in 2021. By the end of the decade, this data will be provided as a matter of routine.

The ESG FDI Opportunity

The market in low carbon goods and services is set to be worth between £2.8tr and £5.1tr by 2050 with associated new job creation in cleantech, renewable energy, data, investment & risk management, legal, financial services and digital technologies.

At the same time, thanks to remote working, companies have access to a global workforce, with the ability to put the right people in the right jobs regardless of where they live. New FDI projects will be internationally mobile on an unprecedented scale, and accessible to ambitious economic developers.  Competition for high value FDI will be fierce, as cities and regions jostle to position themselves as future global sustainability hubs. Ireland and the UK have set out their ESG roadmaps and others are only marginally behind. Inspirational leadership and robust methodology will be key to success.

The need to create and fine-tune city and regional ESG stories is urgent, and interest is growing, evidenced by participant responses to two polls from our ESG seminar in March 2021.

Poll 1. What approach is your organisation taking to ESG?

74% of participants confirmed that they are already thinking, planning and taking action on ESG

Poll 2.   How important will ESG be to you over the next 5 years?

89% of participants confirmed that ESG will be very important or key to their proposition over the next 5 years

Develop your ESG Story

ESG is an extensive subject, and economic development leaders often face challenges with: defining the right metrics; determining the optimum reporting frequency; collecting and validating data; and weaving the right ESG messaging into propositions for investors. But, as the investment industry has shown, creating a set of ESG credentials is a reporting challenge and can be addressed as such.  The most important consideration is to get the metrics and data collection/validation right.

A good starting point for agencies and councils is to confirm details of existing policies that relate to environmental protection, social commitment and good governance. Most will have a well- developed policy framework that can form the basis for early stage ESG reporting.Second, to consider the priorities of target investors and identify policy gaps. Addressing these gaps will form phase one of an ESG plan, which can be published and promoted. Next steps will be to add some simple metrics, using the UN SDGs as a guide

For a cost-and-time-efficient start, initial reporting should ideally use data and information that is already available from sources within the organisation. This might include;

Commitment to the Planet

  • The existence of an environmental or sustainability policy or strategy.
  • Energy-consumption (e.g. across a 2-year period).
  • Water consumption.
  • Waste production and management.

Commitment to People

  • The existence of a policy on discrimination.
  • A demonstrable community engagement plan.
  • A clear employee development plan.
  • Existence of an ethics policy.

Commitment to Governance

  • % women and minorities in leadership roles.
  • % independent representatives in Board/Committee roles.
  • Senior leadership salaries as a multiple of local median.
  • Adherence to local code/regulations for governance.

These simple considerations are an effective starting point. Over time, they can be developed into more detailed and complex targets and metrics, and the ESG plan revised to reflect achievements and future ambitions.

From a data-gathering perspective, ESG reporting shouldn’t be onerous. Early-stage regular data-gathering from internal sources can pave the way for ESG data-collection to become a component of other essential periodic reporting.  For later-stage, more advanced reporting, metrics can be expanded to include statistics from city and regional stakeholders and partners, including data from local businesses, who can follow the same methodology as the agency or council in developing ESG credentials.

In this way detailed insights into the entire city or regional ESG ecosystem will be possible, and economic development leaders will have powerful and compelling information, ready for individual investor presentations, proposition collateral and bids for sustainability-linked grants and funding.

Get Started

With this phased approach in mind, Catalina Consulting and ESG data specialist gather360 have developed two matrices to assess ESG performance, both aligned to defined investor needs. The first is a very simple report designed for those new to ESG disclosures and the second is a more detailed view, which can be tailored to individual need.

Under three pillars – Planet, People and Governance – the metrics reference UN SDGs on; climate change; clean energy; resilient infrastructure; sustainable industrialisation and innovation; inclusive and sustainable economic growth; minority equality and empowerment and transparent governance.

These metrics have been translated into an intuitive, ESG reporting template for economic development. Hosted on gather360, this template can be used to collect ESG data points and convert these into a concise ESG report. This report can be shared by city or regional agencies and councils, their stakeholders, and local businesses to manage and report on ESG commitment, achievement, and ambition. Real-time data on industry and market median provides opportunities for benchmarking and competitive analysis.

By beginning to report on ESG metrics, economic development leaders can start to assess and improve their own ESG performance, demonstrating commitment, achievement, and progress by producing ESG metrics in a transparent, timely and accurate way. Doing this will reflect commitment to the issues that are important to investors and begin to evidence the impact of positive changes to improve ESG performance.

Read more about gather360 ESG technology

Icon for ESG will drive the creation of thousands of new jobs

ESG will drive the creation of thousands of new jobs

Icon for FDI projects will be mobile on an unprecedented scale

FDI projects will be mobile on an unprecedented scale

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