Incorporation of Environment, Social and Governance (ESG) considerations in investment decision making is paramount for asset intensive organisations. Targets are being set and KPIs established at an organisational level to ensure tangible efforts are made to participate in addressing climate change, provide positive societal outcomes and ensure benefits for customers. Copperleaf provides the opportunity for these organisations to enhance their current AM practices by incorporating ESG measures with their existing risk framework. It allows for the capture of ESG contributions made by investments and allows a holistic view of ESG debt that an organisation is carrying.
Current business processes for ESG tracking practiced across industries generally include high-level reporting using Excel reports, PowerPoint presentations, and Word documents. These artefacts contain a variety of data, usually including business wide performance on the management of scope 1 and scope 2 carbon emissions, waste generation, and employee and customer surveys containing social and governance outcomes. They are an amalgamation of numbers and explanations on the overall performance of the organisation against it’s defined ESG targets.
The current business processes present a challenge with respect to maintaining the accuracy of the ESG data, are time consuming, and create a disconnect amongst stakeholders. These processes also become a challenge when organisations create CAPEX plans for asset maintenance and service delivery, as these processes do not include tracking of ESG contributions on a project or portfolio basis. Asset managers and portfolio owners do not consider the ESG contribution that their projects are making to the organisation’s overall ESG targets while creating asset strategies and balancing other business targets, including, for example, financial, reliability, and customer demands. A disconnect is therefore established between the Sustainability and Compliance teams of the organisation, who are responsible for ESG reporting, and the asset managers / investment owners, whose projects and portfolios are major contributors to the organisation’s ESG outcomes. The eventual result is inefficient and inaccurate ESG reporting.
Innovative Solution Overview
Copperleaf provides capabilities to assess assets and investments using a common economic scale referred to as a Value Framework. A Value Framework is a smart and effective way of implementing Multi-Criteria Decision Analysis (MCDA) that captures all the essential elements of risks and benefits within an organisation. Investments can be compared across investment portfolios for objective analysis on a common economic scale, making it very convenient to implement MCDA. By incorporating ESG targets into the Value Framework, investment owners can make more informed decisions that align with organisational strategic objectives and contribute to a more sustainable future. Additionally, by using a structured and systematic approach, MCDA implemented with a Value Framework can help to ensure that the decision-making process is transparent and objective.
With the challenges of current business processes, and the effectiveness of the concept of a Value Framework, the way forward is to implement a Value Framework and assess the value of each investment. This is achieved by enhancing existing frameworks through the inclusion of value measures which capture ESG contributions. This will allow the investment owner to assess the value that their project brings, while considering its ESG contribution. It will also allow to compare the projects and optimise them based on the holistic value they bring after ESG incorporation in the framework. In addition, it will provide tangible visibility on the compromise, if any, the organisation is making to its ESG outcomes by prioritising any project for other business outcomes.
Creating a Simple ESG Value Model
In Copperleaf, a simple value model can be created to track a component of ESG contributions. As an example, a model to track carbon emissions reduction is shown below:
Figure 1: Simple carbon tracking model
Using ESG Models to enhance Value Framework
Once ESG related Value Models, like the above, are created, an organisation’s existing Value Framework can be enhanced to include multiple ESG contributors. The figure below shows an existing framework without ESG considerations included.
Figure 2: Existing Value Framework
With the enhanced Value Framework, projects can be assessed across their lifecycle as a function of the contribution they make towards ESG outcomes. This allows the asset managers to get visibility of how their assets would contribute to the organisations’ overall ESG performance and help them to create strategies accordingly. Also, it will allow the investment owners to assess the ESG contribution of their investments. This allows the investment owner/portfolio owner to balance the ESG targets along with other targets the portfolio needs to achieve. It can also be optimised with or without any constraints, t providing visibility on ESG debt that the organisation would be carrying while implementing a portfolio, or any risk to the reliability or growth of the network if ESG targets are set to be achieved. For example, if a portfolio is optimised based on a financial constraint, which is very common in the industry, then the result will provide us the visibility on how much behind the ESG targets would be if that constraint is achieved.
Figure 3: Updated Value Framework with ESG contributors as Value Measures