Getting to the heart of ESG: An investor's perspective

The belief that companies should not solely focus on shareholder value, but should benefit all stakeholders — including employees, customers, and communities — is what many investors, large and small, have been rallying around. As a result, investors have been demanding environmental, social, and governance (ESG) information from companies to help guide their long-term investment decisions.

Matthew Hurn, OBE, FCMA, CGMA, is the CFO for Disruptive Investments at Mubadala Investment, an investment vehicle owned by the government of Abu Dhabi in the UAE with approximately $24.5 billion of assets under management. In this episode, he shares what ESG means for investors and for him personally, and how his team determines whether ESG issues are truly embraced by a company and not merely lip service.

In this episode, you will learn:

• For ESG issues to be authentic, they must resonate with individuals within the company.
• The tools to track “E” in ESG are more developed compared to the “S” aspect.
• Why ESG shouldn’t be a box-ticking exercise.
• Why finance professionals are among the logical custodians of ESG data.
• Tips to embrace ESG in your organisation.

Play the episode below or read the edited transcript:

To comment on this podcast episode or to suggest an idea for another episode, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.

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Transcript:

Alexis See Tho: Well, Matthew, first of all, thank you for joining us on the FM podcast. Can we start with you telling us a bit about your current role at Mubadala Investment and how ESG relates to your job?

Matthew Hurn: I've been Mubadala at now for over 13 years here in Abu Dhabi. Mubadala is an investment vehicle owned by the government of Abu Dhabi. And I think anybody who's been in this part of the world has probably noticed and experienced the rapid transformation of the Emirates from an economic point of view, a social point of view, and it's been great to be part of that journey.

I came initially as the group treasurer, responsible for treasury, tax, assurance, and risk, and then several years ago transitioned across to CFO of what is now the diversified investment, so disruptive investments, platform.

And so, as an organisation, when we look at ESG, we look at it in its totality. And I don't think I necessarily look at ESG in a professional capacity any differently than I look at it in a personal capacity. So what do I mean by that?

ESG has risen to prominence and everybody knows what the E, the S, and the G effectively stands for and represents. But I think if you don't believe in each of those and what component parts of them mean and how they relate to you personally, it's very hard to actually portray those in a professional capacity.

So one of the things I do, I spend a lot of time looking at the world through the eyes of my children. They're not young, they’re young adults now. Because I think the change that they see as ESG in the world is very different maybe than I saw it initially. I think if I look at that context, then relate it to the context of an investor or any other stakeholder, if ESG is to be authentic and genuine, it has to resonate. Therefore, the choices I'm making in my life and the choices I make as a finance professional have to align in order for it to be a genuine, authentic, sustainable.

But I think if you take the ESG journey, it has changed. ESG typically may have been covered up by companies’ CSR statement where they'd spend money in supporting events in local communities, and that was admirable.

And then we focused on various elements of the E, the S, and the G, you come through various stages, depending on what was the hot topic.

I guess the E is very strong for everybody right now. Everybody knows the planet is warming up and we've got to do what we can to be more environmentally responsible and how we do that. I think the S is the one that really resonates with me right now as to how it would impact society, how you also focus on things like modern-day slavery, human trafficking, illicit trade in wildlife goods. There’s so many aspects of what happens in society that as an investor, as an individual, as a parent, you need to be very mindful of.  

When you're buying goods can you actually check the authenticity of the manufacturing processes that those goods came from? Are you aware of the social impact for those who are involved in the manufacturing of them, the environmental impact over the processes in securing the product, manufacturing the product, and then disposing of the product?

I guess for many people on the street, the G is the less important part because G is much more about how does it all come together and what's really important there. I think for the organisation, we’ve always spent a bit more time on the G because that's what we’re used to. Governance is part and parcel of doing the job.

So when I explained to my children and other stakeholders, the G aspect, they get it. But they get it from the lens of, they’re all for advocating for gender diversification on boards, women representation, and all these things which I think are really important. But I think as an investor, the G is the part that holds it together. People may say they're very good advocates of the E and the S, [but] the G, is the how it all comes together, how they are able to demonstrate that. And is it actually coordinating and in the system, [where] you can hear it from the board level down. And so that's how we look at it.

As an organisation, we spend a lot of time now looking at ESG — what does it mean, do we believe in the values and the culture of the organisation we're looking investing with or partnering with or working alongside — to make sure the values of those individuals or companies or the company itself has resonate with us. Success, particularly in business, comes when there is a partnership that's born by like-minded views and opinions and cultures and values.

So we look now even on any investment appraisal, of course a balanced scorecard where we assess many, many different things, but ESG now is part and parcel of that. And therefore we take a balanced scorecard approach as to where the companies are in adopting ESG principles, how far advanced they are in reporting them, and how genuine are they in the actual desire to see continued improvement in all those factors.

See Tho: It’s interesting that you’re taking a more holistic approach in looking at ESG. You said you’re looking at ESG from the lens of your children. But I’m curious in your conversations with others in the investment or financial services sector, would you say that more people are looking at ESG simply because there’s a good business case to take care of the environment, to take care of people?

Hurn: I think it is demonstrated there is a good business case for ESG. I take your comment, but actually if you don't demonstrate ESG, then again taking my daughter's principle, you lost a customer. Because they're actually trying to work through that when they’re buying products that they know have been ethically sourced, are organic, have been produced in an ethical way.

They spend a lot of time researching where they're getting things from. So if you if you only look at it from a business perspective and don't look at it holistically I think you potentially will alienate some stakeholders.

But I also think, if you don't look at it holistically, you run the risk of ESG at a corporate perspective becoming a box-ticking exercise, where you feel compelled to do it because someone's asked you to do it and therefore you're going through the motions rather than living the values.

So I think myself and Mubadala as an organisation, we're not there to do a box-ticking exercise; we actually wholeheartedly believe in what we do. Part of our business has been investing in the renewable space now for over a decade. We’re the largest investors in renewable energy and the technology behind all of that. So it [ESG] resonates very much with us.

About a year ago we actually created responsible investing unit who actually support all of the commercial teams when they're assessing a potential investment opportunity, to help explore the what the ESG aspects are.

There's a whole list of things we look to assess and score and rank and we have colour-coded balanced scorecard which helps us inform the decision. But not everybody is going to be a 10 out of 10, or a green on every aspect, and we have to be mindful of that. But it's [about]: Are we aligned in terms of the journey and the approach that people are taking? And if the spirit and the intention is genuine, then let’s work together on trying to improve some of these things.

Even in this part of the world [Middle East], we know historically, where the economy is built by the fossil fuel industry. And so actually our starting point is probably at a different place for many. But if we understand where our starting point is and we have a very clear aspiration as to where we want to go, that road map and that journey and the milestones where we measure success are easy to do.

So as an organisation we’re actually determining what is our carbon footprint, what is the target that we want to have, how are we going to get there, how do we hold people accountable for it, how do we cascade those goals and objectives into the units and into individuals to make sure that collectively we are all driving the same agenda, and collectively we’ll succeed?

See Tho: So at Mubadala, when did ESG start becoming more prominent? What were the reasons for Mubadala’s attention on ESG? Is it something that took off after the Paris Agreement? Was there something similar to ESG before ESG became more significant?

Hurn: We’ve seen it more and more with our organisation within the last 18 months, and that’s been [with] people we want to invest in, people who may want to engage with us as partners. To be successful in business you need to build partnerships; partners to invest in, partners to collaborate with, and it’s like all relationships — are we aligned, do we share the same views and opinions, are our culture and beliefs the same? If they are, then you create harmony and you deliver an optimum outcome. If they’re not, what we’ve seen in our personal lives and relationships, they don’t quite work, people go their separate ways.

So I would say over the last 18 months, you’ve really seen an uptake here. And I also think with some of the awareness that’s coming out on TV channels whether it’s the impact on the oceans — Sky News did a great one there — the promotion of COP26, which is going to be in the UK later this year, you’ve seen it.

You can just [say], “I can sit back and ignore it and pretend it’s not real, or I can actually make sure that I play my part and therefore, what is the part I want to play?”

Well, I think, before ESG when people were focusing on corporate social responsibility; being a good corporate citizen in the neighbourhoods in which you operate. And so we're always actively involved in the communities around the world where we have investments, trying to support social initiatives, the community, focusing on charity, etc.

But as an investor, we mix with other investors [and] other global organisations, and you start hearing thematically what's changing in the world. When you're talking to some of the largest investors in the world, they're telling you that they’re really focusing very much now on ESG.

We’re hearing from sovereign institutions similar to ours in Norway that say they would never invest in anything that's kind of tobacco, gambling, hydrocarbon-related, we’re moving away from that. Then actually you start seeing this is not an exception, is it becoming the norm.

So how do you implement it in an organisation? That's when we said, “OK, if we want to embrace this, we actually want to try to pull together all of the great work that we have been doing.”

And trying to manage it probably more holistically than we had in the past, we had really good pockets and great examples where we have been a very responsible investor.

But if you want to start reaching out to external stakeholders, to banks, to other providers of capital, to other business partners, we want to be seen in their eyes as a great partner. Because again, we're portraying values that are really important in today's society. So now [in] these responsible investing units, we actually pull together what we think are the requirements to do an assessment of the individual company —their approach, and their successes on ESG — and we would pull that together.

I think we’re in a fascinating journey now for the next couple of years as an organisation, as we get to know more about ourselves. What is our carbon footprint? We know we’ve been recycling and we've been sensible with water and trying to do the right things, but you need data. You need that data to give you the benchmark of this is where you currently are.

What are the targets that I need to try to reach? How am I going to get there? I think, particularly in the finance community, where we are a data-driven industry — we like data, we like numbers, we like metrics — these are really important. So we’re fascinated, we’re fully committed as a leadership team of Mubadala to really get behind this and show continued improvement.

We have to be mindful [that] it's not going to happen overnight. This is a journey. But we think we're actually making the right steps in the right direction and we will be publishing these as part of our annual report and accounts and telling all of external stakeholders what it is we've been able to achieve.

See Tho: Speaking of the finance and accounting community, there’s a lot of people who would say that finance and accounting professionals play an absolutely key role in providing that data, identifying what metrics to track, putting it together, analysing it, creating dashboards and tools. Would you say that that’s the case?

Hurn: I think it's incredibly important, but if you said it was only responsibility of finance, it means others absolve themselves of responsibility. So I think everyone is responsible for it.

I think, finance, just by the very nature of the skill set they have, the tools and the toolkits they've had from kind of the education they received, it's part of their qualification — analysing data, reporting data, benchmarking data has always been part and parcel of that — so I think they are probably one of the most logical custodians of that.

And a good finance professional has now moved away from that siloed back-office approach to actually be with the commercial teams as a full partner with a seat at the table, trying to help kind of articulate the message and then collect that data, so people can see the impact it's having on the business decisions.

Is there a better part of the organisation? Maybe the corporate strategy team are sensible about it, maybe the risk team. We've got a team that's focused on enterprise risk management where for many CSR is part of that because it's literally looking at everything to determine what are the risks of all aspects, what’s the mitigants and how are we going make some decisions to mitigate or offset some of that risk.

But I think finance probably do play key role given also they will be the gateway to the external world through the financial community. So if you're going to start making available in your reports and accounts your CSR statement that's evidence-based that also have to be audited, then finance does probably seem to be the logical approach in which to house the data.

See Tho: There’s a lot more companies putting out ESG information these days. In assessing companies to invest in, how do you ensure that the ESG information reported reflects the reality of the business, that it’s not a form of greenwashing, for instance?

Hurn: We follow our own data due diligence processes. We look always to what’s publicly available, we do background checks, we hire external consultants to undertake reviews for us as well. But we also have deep, meaningful conversations with the investment team, the management committees, in all the businesses we’re going to invest in.

With ESG, you can tell really quickly that it’s not authentic. So I think for many people [they’ll say], “Of course we’re ESG.” But what does it really mean? And if you double click, does it hold true? And for many organisations that we invest in now, ESG has to be reflected in the company culture and the company values.

And therefore, when you start looking at doing the due diligence at these companies before investing, it’s easy to double click and really [ask], “What is your track record?” I think the harder part is how do you quantify and measure it sufficiently and in a comparable way? Because at the moment there isn’t necessarily a standard, but it’s more [of] if you see it, and you and you hear it, believe it, then actually the quantification thereafter is something that could follow up.

So I think there’s a role that we all have to take: Having had meaningful conversations, having engaged and assessed the culture, the language, the passion for it. Do we believe it’s lip service? Or greenwashing, as you say? Or is it authentic? And can it be substantiated in such a way that we’re comfortable and confident that they really are following up and doing what they say they do?

The E aspect is really easy to do. You can assess now people’s carbon footprint. You can determine what is it they’re doing, the impact it’s having on the environment, whether it’s water usage or the CO2 emissions, whether it’s raw materials, whether it’s food waste. There are so many elements of the E aspect that you can determine what’s there.

The G part is actually easier to do background checks on. If you want to do background checks on individuals, or the way the companies operate, or the board structures or the appointment of the board, senior management, making sure it’s fair [and] reflective of society and gender equality, and the business is run in accordance with best practice from a governance perspective. That’s much easier to do.

I think we all as society are more prepared and aware of those aspects than the we are probably the E side. It’s more of an art than science. In general, this is where I think the ESG aspect moves into. We’ve looked into ERM [enterprise risk management] for a long time. ERM, if you go back a decade, that didn’t really exist. People were managing risks, and now you look at risks holistically under ERM and you start trying to say, “What is the true exposure we have as an organisation of risk? And how is that risk linked to my risk tolerance and my risk appetite?” It’s only when you then put all the risks together can you determine, am I aggregating risks as a business, or if I aggregate the risks, because there’s an offset, I actually manage and mitigate risks by the virtue of that.

Now if you think about how long it’s taken for ERM to become mainstream and acceptable within organisations, CSR was always part of that. People wanted to see CSR: Are companies making charitable donations, supporting the local community?

The challenge really is, where does ESG sit in terms of ERM? Should it report into ERM? Should it report somewhere else? Where does ESG sit in terms of a reporting hierarchy? And who ultimately is accountable for it? In all organisations, the CEO and the board are ultimately accountable for the ESG aspects, but you’ve seen obviously there’s been some environmental disasters, where the boards have been held accountable and management teams and there’ve been fines imposed on them. Very hard to do for the S part and even on the G side you’ve seen some of those aspects where shareholders, investors, they will just dump the stock. You see some of these real-time movements as people assess.

I think a great one is if you look recently at the Deliveroo IPO in the UK. It didn’t go down as well as analysts had expected. The take-up of institutional investors in it wasn’t as good as people had hoped because there were concerns around the treatment of the employees, the Deliveroo drivers themselves.

Today’s society, the Millennials, the Gen-X’s, they look at things very differently. And they can have such an impact. Obviously, with the spread of data and news that can circulate so quickly by way social media, messages get out very quickly.

See Tho: Where do you think this focus on ESG is heading toward in the next few years? Do you expect to see more regulations where companies will start looking at this from a compliance perspective, or more technologies and frameworks that will solve the challenges in getting the right data to make the right decisions?

Hurn: I’m hoping that there are tools and data, [and] systems available to capture data, and to help you analyse it in which you can make better informed decisions. That's what we want data to do.

What I would hate for this to become is a regulatory administrative burden. And therefore, I think if there was a way where all related or interested parties, whether the regulatory aspects or the banks or stock exchanges, standardise the approach and application. Because if we don’t harmonise on that, then there’s going to be various formats of reporting and classification and quantification. And it'll become an administrative burden, and I think when things become that, obviously the cost on companies to maintain that, to report against it, you start losing the value.

So we need to try to standardise across everything: How is ESG going to be reported, how is it going to be regulated, how is it going to be assessed [and] how is it going to be audited?

And I think, to start with, you want that to be relatively light touch but standardised. Because you really want to encourage entities to pick up the challenge of ESG and drive some of the improvements and process changes that are required, to make sure that whether it's the climate goals that have been set, or whether it's really trying to have a zero tolerance on modern-day slavery, human trafficking, they’re dealt with. Whether it's trying to make sure that you got the right people running the organisation, focusing on a nice, balanced board and issues from a governance perspective.

That's the right outcome. That's the goal we’re trying to do. Let's not try to burden organisations with the cost and the headache of multiple aspects of regulatory reform in the reporting process. Because we've seen that historically, with various reporting standards that have come through, particularly in our industry in the finance world, you start questioning the logic, questioning the value: What is the value of this reporting? What’s it going to do to help me [or] anyone make a better informed decision?

So let's try to keep it authentic, let’s try to keep it genuine, and let people really see the value from it and hopefully the reporting becomes a much lighter touch, [a] simpler thing to do, to adopt.

See Tho: What’s your advice to companies that have not started looking at ESG issues?

Hurn: Has the lightbulb moment happened? Is it a fad? Is it going away? Do I really need to do this? Is there something else that will come and overtake it?

What is the cost of implementing it? I mean, often, that’s the biggest part. I believe in it but — particularly for small companies — do I have the ability to do anything here?

The question and the answer I have is, I look at the world a lot now through my children’s eyes because they see it very differently from how I grew up and how I do things. And therefore, you have to realise that if you don’t adapt and evolve, we’ve seen this movie before, we’ll be dinosaurs and effectively, they become extinct. And I think some companies face that risk because their customer base, or their investors, will just avoid them.

If I look now, like the example of Deliveroo, [and] you’ve seen others with cheap fashion, where actually my children would avoid cheap fashion, much to my horror because I have to pay for it. But they would rather spend money on a quality product knowing that the materials are sustainable, that it’s been manufactured in a socially responsible way, not using sweatshops or cheap labour, and the manufacturing process isn’t polluting the seas with dyes and etc. So [that’s] one shopping experience and that’s multifaceted. What happens in the end, how do you recycle it responsibly?

My children would say the product didn’t meet those criteria, and they wouldn’t buy it, and they wouldn’t invest in the company that was making it. I think that’s the interesting part now.

If I look at my children and their approach to life and future life, they’re not going to invest in many of the traditional companies that you see listed today. They don’t resonate. The big banks, for example. My children never step foot inside a bank. They’ve got Monzo; it’s all done on a phone. They live in a digital world. But they’re also very conscious of … what their role is.

We have essential conversations, often at a dinner place, where I say, “You’ve got to leave this planet in a better situation than you found it.” And I think if we can all adopt that basic promise, then all these things will become genuine, authentic, and we wouldn’t even think about it. If you overthink it, it often misses the point. It should just be a second nature. It needs to come across very fluid, very genuine, very authentic.

I’ve not yet met anybody who says, “I don’t believe in it.” So OK, if it’s all decided and they say, “Yes, I understand and I think it makes sense,” let’s start the movement.

Someone mentioned to me many years ago in my career, it’s like trying to eat an elephant. You can do it as long as you slice it thinly enough. So don’t be daunted by the task. If you can break it down into bite-size pieces. Then you will get through it and you’ll make progress.

But also, I think if you are an organisation that can demonstrate it, you’ll find that even attracting staff becomes easier; to make sure that you’re hiring people that really believe in the values and the direction you’re going if you’re a big adopter of ESG.

So I can’t see any reason why people wouldn’t do it. But I can understand that you need to identify a champion in the organisation who says: “I will take responsibility for this, I will set the framework. I will engage with ESG champions across the organisation to make sure [of] a wide pool of talent and views and ideas, and we’ll do this collectively.” If the task is split by team mentality and team effort, if everyone feels included, empowered, then actually I think you can make some great strides.

People would be motivated by quick wins, by progress. So I think everyone should be doing it. There must be very few companies that are completely turning a blind eye to it right now. But I think every organisation really can look inside and say, “We’re doing some really good things, so how do we want to try and capture that and tell that story.” But it’s never too late, that’s for sure.

As I said from the outset, I look at this not necessarily purely as a CFO or as an investor, I look at it as a person on this planet. So let’s take it all upon ourselves to play our part within our professional capacity, within our personal capacity, and what are the things we can do in our own lives that actually help improve society as a whole, whether it’s focusing on our efforts to be more conscious about recycling, utilising renewables, focusing on the social issues that are still prevalent today and trying to make sure that we see it, we call it out.

I don’t look at it necessarily as a professional, I look at this as a member of the human race on this wonderful planet.