ESG leadership: responding to the call to action
Oil industry giant just lost a proxy battle that toppled incumbents and installed at least two new independent board members in a move that should emphasize the company’s approach in terms of climate action and emissions reduction, thus putting an end to the doubt in which companies operate has been fundamentally transformed.
It is now widely recognized that companies have a moral, social and economic imperative to invest in environmental, social and governance (ESG) issues. To fuel this company’s call to action, key stakeholders (investors, customers, employees and shareholders) also demand concrete ESG results and reward those who take the lead. These rewards increasingly take the form of access to capital, reputation gains, and employee retention and satisfaction.
Evaluate, define, implement, measure and report
Some companies were founded on sustainable development or are already ESG leaders in their field. Others, including many start-ups and small businesses, may have fewer resources to invest or are only in the early days of their ESG planning.
Whatever the stage and whatever the sector, companies will benefit greatly from the development and adoption of an ESG framework that includes a continuous cycle of: (1) assessment of ESG issues, (2) definition of priorities, (3) implementation with commitment, (4) measure progress and (5) report 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 the changing legal landscape. There is also a lot to be said for taking the lead in defining your ESG commitments before others aim for no commitment and / or fill in the gaps by defining the ESG universe for you.
ESG metrics – Measure
In 2020, the International Business Council (IBC) of the World Economic Forum developed a set of 21 core ESG measures in four categories: governance principles; planet; people; and prosperity. Together with the Big Four Accounting Firms, the IBC created these metrics to help companies align their corporate values and strategies with the United Nations Sustainable Development Goals (SDGs).
Another important goal was to define a common set of standards to improve ESG measurement, reporting and accountability. The commitment of any business to use these or other metrics is an implicit belief that the business can create value, reduce risk, and be more successful in the long run by embracing ESG elements. For the most part, this is also just the right thing to do.
In addition to IBC metrics, there are also many private sector sustainability rating companies that use a variety of ESG metrics to assess and rank companies. A legitimate criticism seems to be that the lack of uniformity makes it more difficult for companies to be fairly measured, and for stakeholders to assess and compare the overall ESG achievements of a given company.
However, stakeholders believe that the lack of uniformity of measures is no longer a valid reason for a company to postpone serious engagement in ESG management.
Quantify 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 addressed through efforts to measure the increase in brand value, customer loyalty, employee retention and the cost savings associated with the reducing waste and improving a company’s risk resistance.
One of these leading efforts is the Sustainable Return on Investment (ROSI) model developed by the NYU Stern Center for Sustainable Business. This open source methodology aims to help companies assess the positive monetary impact of their sustainability efforts by measuring improvements in customer loyalty, employee relations, operational efficiency, risk management, etc.
Reports and regulations
Companies are increasingly being watched both for their lack of sustainability reporting and for the accuracy of what they report. In March, the SEC announced the creation of a Climate and ESG Task Force within the Division of Enforcement, which is likely to seek to identify material gaps or inaccuracies in the information provided by issuers on climate risks.
This announcement was followed in April by an SEC risk alert from the Reviews Division regarding concerns it sees regarding the way advisers and funds disclose their ESG investing approaches, the vagueness of ESG definitions of industry and the potential for investor confusion. Globally, the specter of climate-related litigation and shareholder lawsuits is growing rapidly.
In May, the International Accounting Standards Board proposed a significantly revised International Financial Reporting Standards (IFRS) practice notice on management commentary (practice notice 1). The reviews recognize that current reporting practices do not provide sufficient information on ESG matters.
The UK also recently announced its intention to make the Task Force on Climate-related Financial Disclosures (TCFD) mandatory for a broad category of UK companies from April 6, 2022.
Now is the time to act
Companies with well-established ESG programs and looking to become leaders will want advice on challenging their metrics and increasing their transparency. Those in the early stages will also find the support of an external ESG legal advisor to be an effective way to start. Everyone must be sincere in their efforts and avoid delays. 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 of Perkins Coie with a global practice responding to government enforcement actions, conducting internal investigations, managing crisis response, advocating commercial disputes and white collar cases, and advising on ESG and a wide range of issues corporate compliance. He was a federal prosecutor for 18 years before joining the cabinet.