Companies collect money from investors with the promise that sustainability is very important to them. The so-called ESG standards are important to investors, says PwC consultant Nadja Picard in an interview. She is a partner at the auditing firm PricewaterhouseCoopers (PwC) in Frankfurt, where she heads the Global Reporting department. She coordinates worldwide consulting assignments and research on sustainability reporting.
The public prosecutor is investigating the former head of the fund company DWS, Asoka Wöhrmann, for greenwashing. Does the company make you nervous?
Nadja Picard: Of course that makes companies nervous. I see a great willingness among many to deal with sustainability and reporting on it. But it is often still unclear for companies how to implement the regulatory requirements for sustainability reporting, for example the EU taxonomy. They have called for clear regulations in the past because they see themselves exposed to increased demands from investors and other stakeholders. The best protection against greenwashing investigations is that everyone reports under the same set of rules.
ESG standards are playing an increasingly important role for investors. How important are they for their investment decisions?
Very important, as our research shows. Investors attach great importance to the topic of sustainability, 73 percent of them want to know how high the costs associated with a company’s commitment to sustainability are. 72 percent value publication of sustainability risks and opportunities in the annual report. And for 74 percent, the relevance of sustainability factors for the company’s business model is of great importance. However, investors also focus on the risks that arise for a company, for example as a result of climate change.
What does that mean specifically?
A global company has to put up with questions from existing or prospective investors as to whether its production facilities are located in areas threatened by flooding or rising sea levels. This is the only way investors can assess the costs and risks the company will face. For companies in the food industry, the sources are important – are there problems with the supply chains or with periods of drought, is there enough water available for production? Investors know that climate change threatens assets. Regulation also plays a role when companies are active in countries that could be affected by stricter regulations. Investors want to know the actual risks and see that the companies report on them transparently. They include that in their decision-making.
And if companies don’t do this, will they be cut off from investor money?
In fact, study results revealed that half of the investors surveyed would sell their investments due to insufficient sustainability reporting. However, I don’t know of any case where investors have divested due to a lack of ESG standards or poor reporting. I think the companies are already in very clear dialogue with their investors and get input from them on what to do if, for example, they are doing things differently compared to similar companies. Companies have to react to this. For example, three quarters of those surveyed would try to get more detailed information from the supervisory board.
Conversely, this means that ESG-compliant companies have a competitive advantage and get more money from investors.
Of course it is the case that for a company that is well positioned in this area or has a good strategy – for example through sustainable loans or green bonds – new additional investment opportunities open up. ESG is positive for business. That’s the whole idea behind the European Green Deal, which supports this development through the regulation of financial institutions and their products. Companies must therefore position themselves well in a short space of time in order to be able to credibly demonstrate that they take the issue of sustainability seriously.
What is the problem for companies when it comes to implementing sustainability goals?
The ESG standards are very new and have not even been finally defined. Yes, we do have the EU taxonomy, but that’s just a fraction of the standards. More will be released at the end of August. With the Corporate Sustainability Reporting Directive, abbreviated CSRD, the EU wants to expand the reporting system for companies again. This means that the companies are currently working with standards that are not yet definitive and leave a lot of room for interpretation. This worries companies because they don’t know exactly what to do. And they are very afraid that if they do something, they will be criticized, either by the interested public or by the regulators, who will ultimately check the implementation and thus compliance with the standards.
Sounds like the compliance departments are in turmoil.
For many larger listed companies in the Dax, sustainability has long since arrived as a strategic driver. They have defined their topics, have all the numbers, data and facts about ESG ready and are in dialogue with their investors. But there is still the second layer of companies, which hasn’t really gotten to the point and who now really have to make an effort to embed the topic of sustainability in the company. Many companies are still challenged.
Does this also apply to companies from the MDax and SDax?
Yes, absolutely. There are also companies in the MDax and SDax that still have to do their homework.
Are these companies now investing in ESG?
They do. We have the first results of a study for which we interviewed 170 companies in Germany, the Netherlands, Austria and Switzerland. The companies are actually investing in the development of new processes and structures and are increasing their workforce in order to be able to implement future sustainability requirements sensibly.
How expensive is it?
It’s expensive, but difficult to quantify. Half of the companies we surveyed spend tens of thousands of euros just to implement the EU taxonomy, and a quarter pay between 100,000 and 500,000 euros. The finance association EFRAG states in a paper that the audit of the sustainability report accounts for an average of 34 percent of the total audit costs of financial reporting.
Are sustainability goals pursued more seriously if management salaries depend on them?
Several Dax companies are already doing this, let’s take the automotive industry for example: BMW, Mercedes-Benz Group, Porsche and Volkswagen have stated this in their remuneration reports. One way to make sustainable management an issue is to link it to management remuneration. In many cases, however, the investors still demand it via the supervisory board.
The world’s largest wealth manager Blackrock was a pioneer of sustainable investing and was heavily criticized for this by conservatives and investors. Now he is appointing the head of oil giant Saudi Aramco to the board of directors. Are there also threats of regression in Europe?
I believe that in Europe, at least for the moment, we are developing differently than in the USA. In Europe there is a different societal consensus, namely that sustainability is something that we need to tackle and something that is being tackled.
Laura Eßlinger spoke to Nadja Picard