Ahead of the 2nd Sustainable Energy Europe Summit, we asked Tom Rayner, CEO at Sillion, some of our key questions about sustainable investing: How deep is the trend of ESG integrated into every asset class, and what are the priorities around ESG for investors? How should sustainable energy companies in Europe be approaching ESG?
Sillion is a consultancy with two areas of focus: Communications Strategy for companies involved in the renewables, energy, and sustainability sectors; and Corporate ESG advice across all industries.
We see a tectonic shift of capital with ESG integrated into every asset class. How deep is this trend, and what are the priorities around ESG for investors?
I think in terms of understanding the depth of the trend, you have to understand where these pressures are coming from for investors as regards to ESG – and why there has been a tripling of responsible investor headcount at most investment managers over the last 18 months. I think that comes down to 3 main things from our conversations with the buy-side and they vary in their importance depending on which investment manager you’re talking to. Firstly, there is some components of moral obligation. They really do feel that this is the thing that the world needs to do in order to meet its environmental obligations and to operate sustainably because it’s the right way for societies to operate. Secondly, asset owners– that is, pension funds and insurer clients- are demanding it from their investment managers. They want them to demonstrate how they’re integrating ESG into their portfolios and how they’re acting as stewards and actively engaging investee companies. You certainly won’t capture many mandates without a 20 minute discussion about ESG as an investment manager currently. I think the last part is that investors are looking at ESG as a lens to uncover unpriced pots of risk and reward. The fundamental question is there: how well positioned is this company for the world of 5 years’ time given the jurisdictions in which they operate and the coming regulation and the macrotrends within those industries and geographies. So for most sustainable energy companies, not withstanding some fairly major questions about the fundamental makeup of the grid in 15 years time, I think the outlook is quite positive.
Do you think we are seeing a bubble in ESG valuations? If not bursting, are we witnessing a slight deflation?
There has certainly been outperformance in highly rated ESG companies over the last 3 years. I think, early on, that was a question of correlation rather than causation where you had high performing management teams generally doing a good job across the different parts of their business and one part of that for those management teams was ESG. So, if you were looking after that properly, probably lots of other parts of your strategy were in check also. I think what we’re seeing in the last 3 years or perhaps in the past 18 months is sustainability as a trend for investors. Just as they got behind other trends in the past, they like the prospects of companies that have got a significant sustainable component to what they do. You see impressive valuations for the likes of Foresight and Oatly in terms of recent IPOs and I think that is set to continue, although I wonder if we’ll see it come off a little bit from the peaks it’s been at perhaps after COP this year. Some of the heat might come out of the market slightly, but are we going to see a bursting? No, I don’t think so.
How do you approach ESG Communication at Sillion?
So, communication is where Sillion differs from other sustainability consultancies. Of course we do all of the technical work – strategy, net zero, operationalisation, scenario analysis, reporting, etc- but the other half of our business is in communications. In purely financial terms, operating responsibly costs money and in exchange for that, you get positive externalities outside of the company. But there is now an opportunity to turn that effort, money, and time into strategic value and the way you do that is through proper communication. So, if you look at your audiences: investors, internal audiences, customers, the general public – they all have different and important needs when it comes to what they expect of you in sustainability terms and these are shifting quite a lot. If you can communicate your efforts properly to them, you can create strategic value from all the effort you’re putting in to these sustainability initiatives.
How should sustainable energy companies in Europe be approaching ESG? And how wide is the range of solutions you can propose to them?
I think that a lot of sustainable energy companies are quite surprised when they come to reporting and they find out that they are not given the scores or accolades that they quite rightly deserve. And that’s because, unfortunately, there is more to being recognised as an ESG leader than operating in sustainable energy. There are lots of ways through that and a big component of it is disclosure and that’s certainly something that we help with. The other element to be thinking about at the moment is all the upcoming regulation that has the potential to significantly affect the cost of capital particularly for sustainable energy companies– so you have TCFD, the EU taxonomy, and the implications of SFDR, some of which I’m sure people will have heard of, but all of which are quite complicated and still being interpreted by most of the market. Getting those right will be a big opportunity for companies, particularly for those looking to secure investment over the next two years.
What are you looking forward to at the Sustainable Energy Europe Summit?
So much! I think session four in particular around steel, cement, and mobility and shipping – so the hard to decarbonise sectors that we really need to focus on next. Then the hydrogen session will also be interesting because that’s a focus for us in the coming years.