This article is written by Saloni Mathur, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.com.
Table of Contents
Introduction
It indeed must have been a wonderful time for the city of London, when a poll of global institutional investors hailed it as a world leader in the Environmental, Social, and Governance framework (hereinafter called the ‘ESG’). Over time, London has been a competitive location for business and investments, benefitting from the inherent advantages such as legal, political, and regulatory frameworks, as well as having corporation tax rates lower than any other G7 country. In the lead-up to COP 26 in Glasgow in November 2020, 66% of the investors hailed London as the world-leading and one of the best cities in the world in tackling sustainability, social, and governance issues. Out of the global institutional investors residing in the United States, 71% rank London as the world’s leading and one of the best cities in the world on this agenda. The research also shows that despite the COVID-19 pandemic, 64% of global institutional investors currently hold investments in London, and 30% are considering doing so.
London has been the prominent destination for inward and outward investments, specialising in different fields, including but not limited to information technology, industrial specialisation, financial services, professional services, and information and communication. One can say that the city attracts a lot of positive investor sentiments that make it globally acclaimed in the Environmental, Social, and Governance framework. Also, there is a slew of factors that encourage investors to invest in the city such as the economic opportunities, ease of doing business, and the prevailing culture and heritage. London’s specialty in high-skilled, high valued business activities means that London is able to offer high wages and numerous growth opportunities for any start-up or business. This think-piece intends to discuss the ESG Framework and the factors that contributed to London’s acceleration as the world leader in the ESG agenda.
What is the Environmental, Social, and Governance framework?
ESG framework is a set of certain standards and principles that top global investors use to screen potential investments in any country. Environmental in ESG signifies that a particular destination is a steward of nature and the environment. Social factor signifies relationships with society including employees, suppliers, customers, intermediaries, and the community where it operates. Governance signifies good corporate governance, shareholder protection, audits, internal controls, good secretarial and legal compliances, etc. 
How does the ESG framework work?
Environmental framework
Environmental criteria include a company’s efficient energy use, waste management, natural resource conservation etc. It also measures the company’s environmental risks and how the company is efficient in managing those risks. For example, if a company is into manufacturing hazardous substances that make the environment toxic, is it complying with the government’s environmental regulations?
Social framework
The social framework evaluates how well the companies are complying with their Corporate Social Responsibility obligations. Is the company serving the local community well and whether the company is showing high regard for its employee’s health and safety? It also evaluates whether there is enough shareholder protection.
Governance framework
The governance framework measures the company’s corporate governance practices. Governance framework evaluates the company’s compliance with good governance, due and timely disclosures to the stock exchanges, financial and accounting transparency, honest financial reporting, executive compensation, shareholder’s voting on important issues, powers of the Board of Directors, compliance with payment of statutory dues, etc.
Ways in which ESG creates value
Every business is deeply intertwined with environmental, social, and governance (ESG) concerns. A strong ESG framework can create value. Every company uses energy and resources, every company affects and is affected by the environment. It includes the energy that the company takes in to produce the resources and the wastes its discharges. Social criteria understand the relationship of the company and its reputation with people and institutions and the communities where one does any business. Governance criteria are measured by the system of practices, controls, procedures, the company adopts in order to govern itself, make important decisions, comply with the law, and meet the demands of the external shareholders.
A strong ESG framework links to value creation in five essential ways:
|
Strong ESG Proposition 
|
Weak ESG proposition |
|
|
Topline growth |
Attract B2B and B2C customers with more sustainable products. |
Lose customers through poor sustainability practices. |
|
Cost reductions |
There shall be lower energy consumption and reduce water intake. |
Generate unnecessary waste and expand more in packaging costs. |
|
Regulatory and legal interventions |
There shall be greater strategic freedom through deregulation and greater government support. |
Suffer restrictions on advertising and point of sale, incur fines, penalties, and enforcement actions. |
|
Productivity uplift |
Boost employee motivation, attract talent through greater social credibility. |
Deal with a social stigma that restricts the talent pool. |
|
Investment and asset optimisation |
Enhance investment returns by better allocating capital for the long term. |
Suffer stranded assets as a result of premature write-downs. |
Table 1.1, Source: Mckinsey
Factors that caused London to become a world leader in ESG
1. Most innovative city
London is supported by the highest concentration of research institutions in the world and a healthy funding ecosystem. Research shows that London is the world’s leading innovation hub. London has been the hub of innovative start-ups over the last decade. The start-ups and the large companies are environmentally conscious and supportive of the ESG framework.
2. Legal, financial and political frameworks
London has a well-recognised legal framework, as well as accounting and finance practices. This gives a boost to the institutional investors to invest in the country. Also, London has been seen as a politically stable location. All these factors play a significant role in attracting business to the capital.
3. Tax and regulatory environment
The current corporate tax rate in London is 19%. The UK Government is bolstering measures to make the United Kingdom competitive in terms of Corporate taxes. The United Kingdom offers a lower corporate tax rate as compared to Asia, Africa, and America. The UK has become extremely competitive on corporate tax with the rate falling from 30% in 2008 to 19% in 2021.
4. London’s business structure
Business churn is higher in London than in the UK as a whole. London offers a competitive business environment with higher levels of business start-ups and closures. Due to ease of doing business, London offers wide opportunities for start-ups and companies to establish their presence. Also, the feasible environment of London for the companies provides opportunities to generate good profits if the business model gets successful. City ranking indicator summary for the company is as follows:
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S.No |
Rank 1 |
Rank 2 |
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2. |
||
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3. |
||
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4. |
||
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5. |
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6. |
Table 1.1, Source: Economic evidence base for London 2016
5. Innovative policy solutions
Innovative culture, protection of Intellectual Property Rights, government and regulatory support for the companies, and investment to promote a network of start-ups are some of the reasons behind London’s success in the ESG framework.
6. Gender equality
The country is committed to gender equality and equal opportunities for employees at all levels, in terms of employment throughout the market and throughout the investments.
7. Clean and affordable technology
London has significantly invested to support clean and affordable energy, including modeling climate change risk and insuring customers in the renewable energy sector.
8. Decent work and economic growth
London has played a significant role in supporting inclusive and sustainable growth and is committed to protecting human rights within the market, supply chains, and business partners.
9. Industry, innovation, and infrastructure
London has demonstrated a proud history of innovation, resilience, and green infrastructure.
10. Sustainable cities and communities
London has been an expert in helping businesses and communities, and therefore the cities they live and work in, reduce their risks and become more resilient.
11. Climate action
London has been a pioneer in improving society’s understanding of climate change and its impact is one of the country’s key priorities.
12. Other factors
Firms in London have made considerable efforts during the pandemic to support key workers, as well as supporting communities particularly challenged by COVID-19. The city of London Corporation is also leading the way on sustainability, with its radical climate action strategy committing to:
- Achieving net-zero carbon emissions from its own operations by 2027.
- Achieving net-zero carbon emissions across the city of London’s investment and supply chain by 2040.
- Support the achievement of net zero in the square mile by 2040.
Conclusion
The further advancement of COVID-19 consequently saw London’s strategy in complying with the ESG Agenda becoming stronger. Focus on the Environmental, Social, and Good Governance framework got placed as the top agenda of London. As per a research published of KPMG published on December 16th, 2020 on “What your investors want”, London has reflected on strong factors exhibiting a commitment to the ESG framework that includes meaningful disclosures on the climate change, socio-political environment, emphasis on materiality, strong response to the COVID-19 pandemic, transparency, consistency, and assurance, and is a hub for sustainable, resilient, and purpose-led organisations.
References
- https://home.kpmg/uk/en/blogs/home/posts/2020/12/esg-reporting-what-do-your-investors-want.html
- https://www.fenews.co.uk/press-releases/67971-london-named-a-world-leader-in-environmental-social-and-governance-by-global-institutional-investors
- https://www.raconteur.net/finance/investing/why-the-uk-wants-to-be-an-esg-leader-post-brexit/
- https://home.kpmg/uk/en/blogs/home/posts/2020/12/esg-reporting-what-do-your-investors-want.html
- www.spglobal.com/marketintelligence/en/news-insights/blog/covid-19-impact-recovery-healthcare-outlook-for-h2-2021
- www.knightfrank.com/research/article/2020-02-05-green-is-the-new-black-how-sustainable-buildings-can-support-returns
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