An oil industry giant just lost a proxy battle that unseated incumbents and installed at least two new independent board members in a move that is expected to put a focus on the company’s approach to climate action and reducing emissions—putting to rest any doubt that the landscape in which businesses operate has been fundamentally transformed.
It is now widely recognized that corporations have a moral, social, and economic imperative to invest in environmental, social and governance (ESG) issues. Helping to fuel this corporate call to action is that key stakeholders—investors, customers, employees and shareholders—are also demanding concrete ESG results and rewarding those who take the lead. These rewards are increasingly taking the form of access to capital, reputational gains, and employee retention and satisfaction.
Assess, Define, Implement, Measure and Report
Some businesses were founded on sustainability or are already ESG leaders in their field. Others, including many start-ups and smaller companies, may have fewer resources to invest or are in the early days of their ESG planning.
Whatever the stage, and whatever the industry, companies will greatly benefit from developing and adopting an ESG framework that includes an ongoing cycle of: (1) assessing ESG issues, (2) defining priorities, (3) implementing with commitment, (4) measuring progress, and (5) reporting to stakeholders.
The scope, cost and complexity of this framework will vary, and evolve over time, but it is fundamentally important to be both engaged in the process and aware of evolving legal landscape. There is also much to be said for taking the lead in defining your ESG commitments before others take aim at the absence of engagement and/or fill the gaps by defining the ESG universe for you.
ESG Metrics—Measuring Up
In 2020, the World Economic Forum’s International Business Council (IBC) developed a set of 21 core ESG metrics in four categories: principles of governance; planet; people; and prosperity. Working with the Big Four accounting firms, the IBC created these metrics to help companies align their corporate values and strategies with the U.N. Sustainable Development Goals (SDGs).
Another important goal was to define a common set of standards to improve ESG measurement, reporting, and accountability. Implicit in any company’s commitment to use these or other metrics is a belief that the company can build value, decrease risk, and be more successful in the long-term by embracing ESG elements. For most, it is also simply the right thing to do.
In addition to the IBC metrics, there are also numerous private sector sustainability rating companies that use a variety ESG metrics to evaluate and rank companies. A fair criticism seems to be that the lack of uniformity makes it harder for companies to be equitably measured, and for stakeholders to evaluate and compare the overall ESG achievements of any given company.
However, stakeholders believe that lack of measurement uniformity is no longer a valid reason for any company to put off serious engagement in ESG management.
Quantifying Your Investment
Translating ESG values into actionable policies, procedures and behaviors is a challenge. Quantifying the return on your ESG investment can be even more complex.
For the first challenge, it is essential to develop a framework as described above that will assess, define, measure, implement and report on ESG factors.
The second challenge—quantifying the positive impact derived from ESG—is being answered with efforts to measure increases in brand value, customer loyalty, employee retention, and cost savings associated with reducing waste and enhancing a company’s risk resilience.
One such leading effort is the return-on-sustainable-investment (ROSI) model developed by the NYU Stern Center for Sustainable Business. This open source methodology seeks to help businesses assess the positive monetary impact of their sustainability efforts by measuring improvements in customer loyalty, employee relations, operational efficiency, risk management, and more.
Reporting and Regulation
Companies are coming under increasing scrutiny for both their lack of sustainability reporting and for the accuracy of what they do report. In March, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement that will presumably look to identify material gaps or misstatements in issuers’ disclosures of climate risks.
This announcement was followed in April with an SEC risk alert from the Division of Examinations regarding concerns its sees with how advisers and funds are disclosing their ESG investing approaches, the imprecision of industry ESG definitions, and the potential for investor confusion. Globally, the specter of climate related litigation and shareholder suits is rapidly rising.
In May, the International Accounting Standards Board proposed a significantly revised International Financial Reporting Standards (IFRS) Practice Statement on management commentary (Practice Statement 1). The revisions recognize that current reporting practices provide insufficient information about ESG matters.
The U.K. has also recently announced its intention to make the Task Force on Climate-related Financial Disclosures (TCFD) mandatory for a broad category of U.K. companies starting with financial years on or after April 6, 2022.
Now Is the Time to Act
Companies that have well established ESG programs and seek to be leaders will want advice on challenging their metrics and increasing their transparency. Those that are in the earlier stages will also find the support of an outside ESG attorney advisor is an efficient way to start. All need to be genuine in their efforts and avoid delay. Now is the time to act.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kevin Feldis is a partner at Perkins Coie with a global practice responding to government enforcement actions, conducting internal investigations, managing crisis response, litigating business disputes and white collar cases, and counseling ESG and a wide range of corporate compliance issues. He served as a federal prosecutor for 18 years prior to joining the firm.