A Whole New World of Reporting: The ESG Paradox

The world of business loves a new reporting mechanism, and shipping while sometimes a little late to the party enthusiastically throws itself in with gusto. This is what we are now seeing with “Environmental Social and Governance”. What does it mean for seafarers, customers and shipowners?

WHAT IS ESG?

If you are fond of acronyms and word soup, then you will be thrilled that the good old CSR (Corporate and Social Responsibility) has been joined around the boardroom table by requirements with a green hue, that of “Environmental, Social, and Governance” (ESG).

Similar to what has gone before, ESG is a set of standards for a company’s operations but is even more important for investors as they increasingly screen potential investments. Despite the shared focus, there is a difference between CSR and ESG.

With CSR, it is about accountability within the organisation itself to an extent. More than that though, it is a voluntary extension of aspects of the corporate duty of care to those that it does not have mandatory responsibility for. So, in many ways, it is a character check which indicates how you treat those you aren’t legally held accountable for.

With that said, ESG looks to provide a measure of accountability relating to the things that already exist in the company. It can be thought that ESG holds up a mirror to the company, and CSR is an important part of what is reflected back. Indeed, good CSR will help shape or define the ESG reporting. You cannot perform well if you don’t care or do the right things.

GIVE ME AN E, GIVE ME AN S, GIVE ME…

You guessed it the “E” is the “Environmental” criteria. This considers how a company performs as a steward of nature. The “Social” criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. While last but by no means least, “Governance” deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

The environmental demands placed on shipping come with a wide range of roles, responsibilities, record keeping and reporting requirements. To comply, a company must develop and keep a range of management systems in operation, as well as making a range of statements to ensure that compliance is ensured, documented and communicated within the company ESG statement.

The focus is on bringing together a snapshot of the company. So, we can see a holistic view of what it looks like. This covers intangible assets such as how relationships are conducted, through to the tangible (in this case ships) and how they are operated in support of the wider positive aims.

All this means that the ESG statement is about capturing the health of a company, and sets out what we do and how we do it. Thereby giving investors a more rounded view of what they are buying into. They are vitally important to have, and every company needs to find the means to live with their fine words…and ultimately to be audited against them.

PERFORMANCE MATTERS

ESG is coming to the fore, especially as investors seek to gauge not just performance, but potential too. This makes it a key topic for all stakeholders within the shipping industry, and the assessment of how these are managed and complied with will impact all manner of company interactions. From operations, such as port calls, through to satisfying clients and charterers, and accessing finance.

Implementing an ESG strategy that aligns with the likes of IMO emissions targets and UN Sustainable Development Goals (SDGs) ensures that companies are seen as responsible and that they understand their responsibilities not just as a business but their relationships and the physical environment they are operating in.

Depending on your level of cynicism, this is about finding companies that are doing the right things, or conversely, it is about giving companies enough rope to hang themselves, making statements that are likely to be challenged in court if/when investments turn sour.

Banks, investors and financial institutions have been the driving force, and there is a desire to wrap the value of investments in an ethical cloak. So, the emphasis is on shipowners to say what they do, how they do it and to confirm that everything is wonderful.

GETTING IT RIGHT

An ESG strategy is a key aspect of building a sustainable and resilient company, and product. In this case, the product is safe, secure, clean and efficient shipping. So, the aspects of how environmental issues are managed must be embedded in the company strategy and form the overall identity and purpose not just of what is done, but what is said.

This means that sustainability reporting is vital, and given the move to digitalisation and the embracing of maritime informatics, then there are ways, means and drivers to make sure what is done on and indeed by the ship are collected, collated and considered.

This reporting allows shipowners to set out and demonstrate awareness of their current impacts, but also the mechanisms by which they will make improvements moving forward. It is like shipping’s confessional booth. “Father, it is 2 days since I allowed my engines to breach their load limits”.

The focus is on ensuring that data flows from the vessel, that there are effective mechanisms for capturing it and for analysing…and then ultimately reporting. The reports, naturally, need to then match the spirit, letter and ethos of the ESG statements and commitments. Where there are gaps they need to be closed.

DATA FOR DECISIONS

The cornerstone of good maritime industry management is a commitment from the top, and both big and traditional shipping companies alike have reacted well to the need for clear, unequivocal commitment to positive ESG reporting.

That isn’t much of a surprise, as the financial whip which the banks/financiers wield is bound to force a response. Where there is a slight stumbling block is in the ways and means of marrying the desire to the design. This is where the carrot of doing things well can help speed and improve the whole process.

It is fairly apparent, we have a dangerous gap between the focus and chatter in shipping offices ashore, and the message which is heard onboard. Much of the ESG development does see paper shuffled on desks in Glasgow, Hamburg and Singapore, et al. It can all too often seem remote from the vessel, and the people making a difference.

We see in ESG a host of different kinds of reports — and many do not impact the ships overly. Yes, high minded and handed statements on sustainability will be written in some folder, but you would struggle to get them quoted back to you. The same for business models, strategic aims and stakeholder management.

What we do need from the ships is performance data, the application of environmental policies and management systems, and the focus of seafarers to make all the things happen that should. This neatly brings us to the need for companies to report not just to banks, or to executives ashore, but to the fleet too. To make sure that seafarers feel part of the good, that they can work to remove the bad, and can spot the ugly from a nautical mile away.