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ESG and sustainability integration for Corporate Finance Services

Most pension scheme sponsors face challenges from environmental, social and governance (ESG) factors – climate change in particular. While much time and energy has been spent to date on identifying sustainable investment vehicles, trustees and sponsors alike are now also beginning to think about the impact of ESG risks on the employer covenant.

Our ESG and sustainability advisory services fall broadly into two categories: services focusing on climate change and services embracing broader aspects of environmental, social and governance (ESG) issues.

Focusing on climate risk

Recent regulations in the UK are putting increasing pressure on DB pension schemes to assess the exposure of businesses to climate risks and to report on this publicly. Under the latest regulations, all schemes with more than £1 billion in assets will need to perform this assessment from October 2022. Incorrect assessments can lead to requests for more cash funding, greater prudence in funding assumptions or even negative publicity, which corporates must guard against.

 

Developing a coherent view on climate-related opportunities and risks and how these are managed (in line with the scenarios chosen by the trustee’s own advisors) is therefore incredibly powerful. Our award-winning, academically-reviewed Methodology for Analysing Climate Covenant Impact (MACCI) model is a proven, independent way of assessing these risks – one whose value has already been demonstrated by trustees of multiple household-name schemes.

 

The UK government is seeking to impose similar TCFD reporting requirements directly on companies in time – as well as Transition Plans for moving to net-zero.

What can we do for you?

We can help your consider and assess these implications (ranging from increased carbon emission costs to the financial impact of supply chain disruption) in good time – before you are faced with an obligation to comply with disclosure requirements.

Broader ESG focus

Public opinion, customer choices, investors and reporting requirements are increasingly pushing businesses towards achieving ‘sustainability’ and a positive impact across environmental, social and governance factors. This extends to UK DB pension schemes, which must consider whether ESG policies or exposure might weaken the employer covenant.

 

Our ESG Analytical Risk Tool (EARTh) model provides an independent way of demonstrating a business’s resilience to such risks and its ability to exploit opportunities. A government consultation is currently ongoing that may well lead to UK pension schemes being required in the future to report on social risks in the same way as they are now required to report on climate-change risks. Early assessment will allow sponsors to get ahead of these requirements.

 

Further ESG reporting requirements are expected for UK companies in due course.

What can we do for you?

  • We can help you to explore these ESG opportunities and risks before you either are obliged to meet disclosure requirements or need to answer difficult questions from stakeholders such as lenders, investors or staff.
  • We have developed innovative offerings to help you meet this challenge, whether that means helping to understand the possible impact of rising sea levels on your operations, or helping to assess whether government policy responses will raise your operating and financing costs.
  • We can help you to navigate the risks and opportunities associated with ESG factors. Our primary service lines include:
    • training;
    • bottom-up analysis of ESG risks;
    • top-down reporting;
    • disclosure support;
    • bespoke regulatory support (such as TCFD reporting).

A dedicated sustainability practice

We are the only covenant advisory firm with a dedicated, stand-alone sustainability practice. We have worked together with leading climate-change academics to develop an award-winning climate risk model (MACCI) that breaks down the complexity of the ESG challenge in order to answer the following questions:

 

  • What risks could materialise? Are these climate risks (e.g. weather events) or transition risks (e.g. social change)?
  • Where are these risks likely to develop?
  • In what climate-change scenario are these risks most prominent?
  • How will these risks affect all aspects of your value chain?
  • How extensive will the impact be from supply through to your end-market?

 

Our proprietary model, which is the first of its kind, assesses the risks to every country across the globe and maps these risks to the location of your supply chain, operations and end markets to identify areas of primary concern. By distilling the process in this manner, we are able to highlight specific, targeted risks, rather than broader, generic concerns.