ESG in Corporate Finance

Per the WSJ, following years of simmering investor backlash, political pressure and legal threats over ESG efforts, a number of business leaders are now making a conscious effort to avoid the once widely used acronym for such initiatives. Many leaders are more closely examining disclosures, wanting to avoid regulatory scrutiny or political criticism. In lieu of lofty pronouncements, advisers are telling CEOs to be more precise and to set goals that can be achieved. Saying as little as possible is recommended. “We’ve seen a great deal of reframing and adjusting by CEOs in the ESG arena. Not only of what they say, but also where they say it and how they characterize it,” said Brad Karp, chair of law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP who advises a number of CEOs. “Most companies are moving forward operationally with their ESG programs, but not publicly touting them, or describing them in different ways.” On earnings calls, mentions of ESG rose steadily until 2021 and have declined since, according to a FactSet analysis. In Q4 2021, 155 companies in the S&P 500 mentioned ESG initiatives... by Q2 2023, that had fallen to 61 mentions. Adding to the challenges for companies is that some dimensions of ESG, particularly the social goals, can be difficult to quantify. Corporate diversity programs, often part of an ESG agenda, face new scrutiny following a Supreme Court decision on affirmative action and legal challenges from largely conservative groups. The fiercest critics of ESG say they welcome less discussion of it. But what to call such efforts now remains a debate. One advisor suggests leaders discuss initiatives in clear language, explaining efforts to cut water use, for example, or to use terms such as “our people” or “our natural resources.” More leaders should to adopt the phrase “responsible business." The angle? You can be anti-ESG... but it’s hard to b anti-responsibility. Our Take: The shift in ESG messaging reflects the reality that “ESG is complicated,” said Daryl Brewster, a former Kraft Foods exec who now heads Chief Executives for Corporate Purpose, a nonprofit of more than 200 companies focused on social impact. Yeah, no kidding. What's more, in most cases it's not what it pretends to be either. ♻️❓ #esg #capitalmarkets #management

'#ESG Month’ was only four months ago. The House of Representatives held 7 hearings to pillory ESG investing. At the same time, States have introduced over 160 bills to limit the application of #ESGinvesting. The rancor seems to have died down and most bills did not pass. And yet, outflows to US ESG funds have persisted over the past 4 quarters. Is the backlash to blame? I am guessing not. Here is my guess of the driver of flows: ESG funds have underperformed non ESG funds. According to AB Bernstein, “top #ESGfunds with global mandates have underperformed in 2023 by 640 bp.” This is, in part driven by underweighting of certain industries (e.g. defense) and overweighting of other (e.g. water utilities and big tech). Underperformance in 2023 has more than offset prior years over-performance. As a result, as the chart below reflects, over a 4 year period, ESG funds have underperformed non ESG funds by 220 basis points. More importantly, notwithstanding the claims of ESG advocates, investing in secondary market, single materiality rated ESG funds does nothing to advance planetary welfare. Tariq Fancy Julia Y. Pei Thomas Kamei Heather Conforto Beatty Alison Taylor Grant Harrison Joel Makower Mindy Lubber Lawrence Heim Harald Walkate Tom Gosling Katherine Collins Simon Mundy Florian Heeb, PhD Florian Berg #esgreturns #esgalpha #esgratings

How should banks price the future? Imagine: You’re sitting across from your loan officer, discussing the interest rate on a new business loan. Behind the scenes, The bank isn’t just looking at your credit history; they’re running complex calculations to figure out how likely you are to repay. Now, What if those calculations included your company’s environmental and social practices? This isn’t science fiction it’s where the financial world is heading. Pricing loans and calculating profitability have always been about managing risk. Traditionally, factors like creditworthiness and collateral were the stars of the show. But now, ESG (Environmental, Social, and Governance) metrics are becoming part of the equation. Why? Because ESG risks are real risks. Think about it: A company ignoring environmental regulations could face hefty fines. A business with poor labor practices might experience higher turnover, impacting productivity. These risks affect a company’s ability to repay loans, and banks are starting to notice. Let’s break it down. When a lender sets a loan price, they look at two main factors: 1️⃣ Probability of default (PD): How likely is the borrower to miss payments? 2️⃣ Loss given default (LGD): If they do default, how much will the bank lose? ESG factors can influence both. A business heavily reliant on non-renewable resources might have a higher PD due to potential regulation changes. Meanwhile, a company with strong ESG practices might have more valuable collateral, lowering its LGD. Some banks are already incorporating these considerations into their models. For instance, According to a study by the European Central Bank, companies with poor ESG ratings faced a 20% higher risk of default during the pandemic compared to their peers. This isn’t just theory; it’s happening now. From my perspective, this shift is crucial. As someone deeply invested in sustainability and finance, I see ESG as more than a buzzword it’s a lens through which we can make smarter, more ethical financial decisions. By pricing loans with ESG in mind, banks not only protect themselves but also encourage businesses to operate more responsibly. The future of finance isn’t just about numbers; It’s about values. What do you think? Should ESG risks play a bigger role in loan pricing?

A recent BDO survey (article in comments) reveals that 75%+ of CFOs plan to maintain or increase sustainability investments—even in the face of potential policy shifts under a new administration. This underscores a crucial shift I am seeing with my clients: Sustainability is no longer just a regulatory obligation but a strategic business imperative. From ESG-driven risk management to long-term value creation, companies are prioritizing sustainable practices to stay competitive. The report concluded that "91% of companies working to integrate sustainability also anticipate increased revenue in 2025, compared to only 74% of other respondents, and 69% expect increased profitability, ahead of their peers at only 56%". Companies that are integrating sustainable practices into their operations and supply chains are unlocking cost savings, innovation, and competitive advantage while mitigating risks. #Sustainability #BusinessLeadership #ESG #CorporateStrategy

Sustainability teams are shrinking. Government funding is disappearing. Regulations are stalling. If you’re still selling sustainability the old way, you’re already behind. This isn’t just about business strategy - it’s about figuring out how to move forward when so much is at risk. For many of us, this work is personal. And while policy shifts are out of our control, how we adapt and keep pushing forward isn’t. Companies still need to manage risk, improve efficiency, and meet customer and investor expectations. The responsibilities haven’t disappeared - they’ve just shifted. ➡️ Instead of sustainability teams driving decisions, the focus has moved to operations, finance, and manufacturing leadership. ➡️ Instead of compliance or ESG goals being the reason to act, the justification is now cost savings, efficiency, and risk mitigation. ➡️ Instead of selling into a sustainability department, companies need to make the case to CFOs, COOs, and heads of manufacturing. This shift is happening fast. Over the last few weeks: ⚠️ Government funding for sustainability initiatives has been frozen or cut back. ⚠️ Regulatory momentum has slowed, reducing external pressure to act. ⚠️ Inflation Reduction Act incentives are at risk, disrupting investment in sustainable technologies. For greentech companies, this means one thing: 👉 If your sales strategy still depends on sustainability teams and ESG goals, it’s time to pivot. How to Stay Ahead: ✔ Reposition your pitch: don’t lead with “sustainability.” Instead, start with how your solution solves a specific business problem for your customer - whether that’s reducing costs, improving efficiency, or mitigating operational risks. ✔ Speak to new decision-makers: finance, operations, and manufacturing leaders care about measurable business impact. Show them how your solution improves margins, reduces downtime, or increases productivity. ✔ Map your customer’s real business problem: before pitching, pinpoint the operational challenge your prospect is facing. Is it rising energy costs? Supply chain inefficiencies? Labor shortages? Position your solution as the answer. ✔ Arm yourself with proof points: bring real numbers. Cost savings, efficiency gains, risk reduction - whatever matters most to the decision-maker. ROI calculations and case studies will get the attention of finance and operations leaders. Sustainability isn’t disappearing - it’s just moving to a new seat at the table. The work continues, even when the path forward feels uncertain.

If you’re a CFO at a PE-backed company — sustainability isn’t a CSR initiative. It’s your best EBITDA lever. Here’s the reality we see every day: If you’re running a manufacturing or real estate company, and you’re looking for $10M, $20M, $50M in EBITDA expansion over 5–7 years? Most of your biggest levers will be sustainability levers: • Redesigning packaging to reduce materials • Launching circularity programs to reclaim products and feed production • Switching facilities to renewable energy or improving efficiency • Shifting transportation and logistics to lower-carbon options • Building brand equity that commands premium pricing with consumers And you don’t even have to call it “sustainability” if you don’t want to. Call it operational excellence. Call it brand repositioning. Call it value creation. But the levers are the same. Because sustainability is now baked into how you expand value — financially, operationally, and reputationally. Look at a company like Lipton under CVC. Premiumizing the brand. Optimizing supply chain efficiency. Aligning with shifting consumer expectations. Every major initiative connects back to sustainability fundamentals. And when you execute well? You don't just hit EBITDA targets. You improve exit multiples. You de-risk the asset for future buyers. You increase strategic optionality. If you’re a CFO or portfolio operator today, you don’t have the luxury to treat ESG as a reporting task. 𝐈𝐭’𝐬 𝐚 𝐩𝐥𝐚𝐲𝐛𝐨𝐨𝐤 𝐟𝐨𝐫 𝐭𝐫𝐚𝐧𝐬𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧. The companies that realize this early will dominate the next cycle of PE exits. The ones who wait? They’ll be explaining “why sustainability wasn’t a priority” in due diligence rooms five years from now.

As demand for sustainability-led transformations dwindles, has the era of specialised ESG consultants come to an end, and how do we redirect towards progress? Many businesses, particularly those under Private Equity ownership, are scaling back on funding for sustainability initiatives, primarily because they lack tangible commercial benefits. This retreat follows significant investment in sustainability projects around 2-3 years ago, which have not yielded returns to the bottom line, leading to a decline in the demand for consulting services in this area. The key to revitalising interest in sustainable transformations lies in the development and enforcement of more robust regulatory frameworks that are actually adhered to. These frameworks must mandate clear sustainability goals and reporting standards to prevent the loss of momentum towards meaningful environmental and social change. Without such, the risk is that the moment for impactful change could slip away, relegating the sustainability agenda to a missed opportunity. Nonetheless, the hype around dedicated sustainability consultants will likely fade, with this crucial function becoming integrated into the broader operational transformation practices and sector teams at major consulting firms, sitting alongside other drivers of performance improvement. Sustainability will also play a pivotal role in deal teams, where ESG considerations are increasingly recognised as crucial to value creation. This shift underscores a future where the essence of ESG consulting is not just preserved but is also pivotal to the strategic operations of businesses. The challenge and opportunity ahead are to redefine and reinforce the role of sustainability, ensuring it remains at the core of business strategies, driving both ethical and economic value. Without additional incentives or regulatory reform, this is unlikely to happen.

Wall Street cooling on climate commitments. Recent reports show a concerning trend of financial institutions withdrawing from key climate alliances. While these institutions often reaffirm their individual sustainability goals, these departures raise questions about the future of collaborative climate action within the financial sector. A few notable updates: 🟢 Major US banks, including Goldman Sachs, JPMorganChase, Bank of America, Citi, Morgan Stanley, and Wells Fargo, have exited the Net Zero Banking Alliance. 🟢 BlackRock, the world’s largest asset manager, recently left the Net Zero Asset Managers initiative. 🟢 The Net-Zero Asset Managers initiative has suspended all activities and removed its signatories from its website. ESG Dive has a great set of write ups on all of these exits / shifts - https://lnkd.in/gqQufFHt This shift comes amid increased scrutiny from some political figures regarding ESG initiatives. This scrutiny, coupled with evolving (unpredictable?) regulatory landscapes and perhaps shifting internal priorities, may be prompting financial institutions to re-evaluate their participation in these alliances. So, how should we read this trend? There's a good deal of discourse that I've found really interesting. Some argue that these withdrawals signal a weakening commitment to collaborative climate action, suggesting that companies are prioritizing short-term political pressures over long-term environmental goals. Others contend that companies are simply "recalibrating" their approach, choosing to focus on demonstrable internal actions rather than high-profile public memberships. It's also possible that these institutions are seeking more flexibility in their approach to climate action, finding that the constraints of formal alliances hinder their ability to navigate a complex and rapidly changing landscape. Regardless of the underlying motivations, these departures raise important questions about the most effective strategies for driving change within the financial industry...and have me wondering: where are the loudest voices and the boldest actions in this moment of "recalibrating" globally? #sustainability #circularity #finance #ESG #climatechange #netzero

As sustainability continues to be a strategic imperative, CFOs are uniquely positioned to drive meaningful outcomes—enhancing resilience, uncovering growth opportunities, and building long-term value. The CFO’s sustainability playbook outlines key areas where finance leaders can make the biggest impact. Three points stood out to me as powerful levers to help reach sustainable success: 1️⃣ Embed sustainability into corporate strategy:  By integrating sustainability into the core of business strategy, CFOs can align initiatives with long-term planning, measure the cost of carbon, and prioritize projects that balance financial performance with environmental impact.  2️⃣ Leverage technology and data for ESG reporting:  Trusted, actionable data is the foundation of any effective sustainability strategy. CFOs can collaborate with technology leaders to implement advanced analytics and generative #AI solutions, enabling compliance and transforming decision-making processes.  3️⃣ Unlock value through tax incentives and credits:  The wave of new tax regulations, such as the Inflation Reduction Act, provides CFOs with opportunities to fund sustainability initiatives while driving cost savings and innovation. These aren’t just compliance exercises—they’re pathways to creating resilient, forward-thinking organizations that can thrive in a rapidly evolving landscape. 💡 What strategies have been effective for your organization in integrating sustainability into financial operations? I’d love to hear your thoughts. https://lnkd.in/eMMAN5Tq #PwCSustainability #Sustainability #CFO Ron Kinghorn J.C. Lapierre Ellen Walsh Bobby Marandi #esgreporting

Kroll just released a telling story: after looking at 13,000 companies over 9 years, they found that "ESG Leaders earned an average annual return of 12.9%, compared to an average 8.6% annual return earned by Laggard companies." Ultimately, ESG indicators highlight risks that can impact a company's performance. This is sometimes debated, but this massive study indicates that ESG really is an indicator of performance. https://lnkd.in/eQ32QpQT HT Tim Mohin