When we talk about shocks affecting our businesses, we usually think of negative shocks. Coronavirus, rising raw material prices, wage indexation, and so on. However, there are also shocks resulting from a transition. Consider the European Green Deal, which will have some immediate impacts on companies in the short term.
Shocks in the context of transition
The European Green Deal is very current and will remain a priority on the agenda in the coming years. The member states have committed to reducing greenhouse gas emissions by 55% by 2030 compared to 1990 levels. By 2050, the EU aims to be climate-neutral. The transformation aims to create a European society and economy that are cost-effective, fair, and socially balanced. There is no doubt that these ambitious goals signal a fundamental transition. The initiatives related to climate, environment, energy, transport, industry, agriculture, and sustainable finance will undoubtedly have a direct impact on businesses. Companies may not yet be fully aware of this, but they face a drastic choice: adapt to the changes or disappear.
The interpretation of ESG
In this context, ESG has gained significant importance recently, although most companies are not yet engaged with it. Let alone understanding what ESG means for them. ESG, which stands for environmental, social, and governance, is not new. ESG emerged in the 1960s when some organisations introduced ethical filters to identify companies that did not meet moral values. Companies involved in the alcohol, tobacco, and arms industries were subsequently excluded from investment portfolios. Over the years, behaviours and violations of internationally accepted norms and standards also became part of these ethical filters.
More recently, the European Central Bank (ECB) has brought ESG to the forefront. Since April 2022, the ECB requires all banks to report what their major clients – meaning large companies they lend money to – are doing to be ESG-compliant. From 2024 onwards, this requirement will apply to all bank clients, including SMEs. This measure has considerable implications.
Consequences in the context of ESG
ESG will become a standard used not only by banks. It is obvious that investment firms, for example, will also use this standard to decide in which companies to invest. Moreover, being ESG-compliant or not will affect the application for a loan and, therefore, the survival chances of a company. Ultimately, it will become clear that a company that is ESG-compliant will likely be able to secure a loan more easily and at a lower cost.
Additionally, in the context of credit management, a company will be viewed differently, not just based on creditworthiness. Two similar companies in the same financial position will differentiate themselves through ESG. A credit manager will technically have more confidence in a company that is ESG-compliant.
Perception and financing problem
The fundamental transition impacts not only the perception the outside world has of a company. The image of 3M with its Antwerp PFOS story, Volkswagen with its diesel scandal, or Shell being less green than claimed, has taken a significant hit in the past. This is a perception problem that can be worked on. However, in the future, they will also face a financing problem. Many of these companies are required to undergo a rapid transition between now and 2030. The question is how they will finance these changes.
Will they turn to banks and become even more dependent on the outside world? Will they seek government assistance, thereby burdening our society? Or will they realise that shocks, though unpredictable, are not so exceptional after all? Will they (finally) understand that shocks can occur every day and that they must be prepared?
Indeed, it is advisable for a company to survive autonomously and independently when a shock occurs. From a societal perspective, it is also desirable and much more beneficial.
ESG and redundancy
Every company benefits from being shock-resistant or redundant. It creates a favourable situation for the company itself and for society. If our companies had been much more shock-resistant during the COVID-19 pandemic, it would have cost our society much less. Undoubtedly, some subsequent shocks – such as inflation – would have been less pertinent. Additionally, it allows every company to quickly and easily respond to a new market or societal situation. It, therefore, simply improves the social fabric.
