Recent events have brought ESG prioritisation into question in some boardrooms, and near-term responses will continue to evolve. But for any business with long-term horizons, the value from proactively engaging with ESG can’t be ignored.
In the dynamic global landscape, the risk of "stranded assets" - those that face unexpected devaluation, obsolescence, or regulatory restriction - has become a pressing concern. Stranded assets are no longer just a theoretical risk confined to the fossil fuel sector: the transition to a low-carbon economy proliferates them across diverse energy-intensive industries like industrials, real estate and agriculture.
In real time we are experiencing the starkest examples of stranded assets in the real estate markets. Insurers are particularly vulnerable to natural catastrophes and such events previously insured as unforeseeable "acts of God" are becoming increasingly foreseeable due to climate science developments. Factories and warehouses are being abandoned as no longer either insurable or operational. Even simple geographical location can bring such risks. In some jurisdictions, laws require stranded assets to be insured which is significantly spiking policy premia.
Businesses need to allocate resource to mitigate harms from such disasters and to build resilience. Institutional investors are also mandating capital flows in this way. In the UK construction sector, for example, without evidence of sustainable sourcing of materials and more efficient construction and operation methods, projects run the risk of not getting planning approvals and, commercially, narrowing the market for tenant leases. Whilst previously this behaviour was driven purely by the weight of capital, regulation is increasingly prevalent, and all companies will be in scope soon.
The opportunities are substantial for those who act decisively – by actively engaging with ESG they can realise the value preservation and creation from being a sustainable investment. This is already playing out in capital markets where businesses with strong ESG principles are experiencing lower borrowing costs (the ECB reported ~ 5% cheaper finance over a 5-year spread), stronger global credit ratings, and higher exit valuations.
For CEOs and board members, ESG is fast moving to become a fiduciary imperative, and it is increasingly common to have sustainability-linked KPIs introduced to remuneration. Whilst many boards will continue to adopt a compliance-based mindset, the increased balance sheet risks to businesses from ESG requires proactive engagement. The best way to manage this is by setting your commitments transparently, allocating the resources over a period of time and creating operational resilience for the unforeseeable risks.
With the entire world in transition, for a visionary business ESG is a prime opportunity to create value - when done right!
