Creating value with purpose
You can do more than you think about climate change. Yes, it’s a big hairy systemic issue. And yes, there are many things you can do today to reduce the greenhouse gas load and help shift our systems. Listen to my conversation with the insightful, articulate Elena Brower about The Carbon Almanac.
It is an honor and a privilege to be on her podcast. Take a listen…
We push hard as leaders to tackle climate change and other systemic issues. Working on The Climate Almanac, I learned how to make difficult choices in a deeply collaborative effort and how to rotate back so others could lead. Unlike writing a book, sustainability efforts don’t have a single deadline or finishing point. We need work models, such as the V formation discussed in this article, that will enable leadership over the long, and often tiring, term.
LINK TO ARTICLE: https://www.fastcompany.com/90822301/lessons-from-a-project-with-no-managers-no-boss-and-everyone-is-a-leader
ESG attracts more and more attention. The proponents and the critics, investors and analysts, regulatory agencies and non-profits. Everyone seems to have a point of view on ESG. I certainly do.
In the large array of discussion and argument, what ESG really means gets confused.
I use a simple “three bucket” model to capture what ESG covers:
What is its environmental, social and governance track-record and performance. This begs questions such as:
Next time you discuss ESG, be clear about which “bucket” of activity you’re really discussing. And if you’re not certain, pause long enough to get clear.
In September I emceed a session on the “S” in ESG at the Clinton Global Initiative. Check out the session here.
How will you integrate climate change risks and opportunities into your company’s Form 10-K Management Discussion and Analysis (MD&A)? It’s the trickiest part of the SEC’s new reporting process.
To get it right takes a comprehensive understanding of climate risks to operations, supply chains, partners and customers. Plus the ability to talk analysts and investors through your climate change strategy.
What to expect MD&As will include
Going forward, we expect that companies will need to cover these aspects of climate change action and risks in the MD&A:
For example, if the company uses cotton from India or Texas, how will it manage expected shortages in 2023 from the 2022 heat waves?
What you’ll need to prepare your MD&A:
Questions? For answers, contact us.
The SEC is expected to release new climate change disclosure regulations in November 2022. Your company’s Board of Directors needs to effectively oversee climate change risk and new regulatory disclosures.
Which begs the question: are they ready?
To be ready, Boards require:
Insight
Climate risk is real for companies across almost all sectors. So are potential opportunities to innovate with new products and services and to reconfigure supply chains and partnerships.
To get a handle on the near- and medium-term financial and operational risks, directors need a solid understanding of climate change, one that goes well beyond what’s covered in standard media and IPCC summary reports. They’ll need to address these questions:
Drafts of SEC regulations suggest that Boards should designate a Climate Expert, either an internal resource or an external advisor. If you designed a Climate Expert, triple-check that he or she is truly an expert, not just a generic ESG consultant. Companies require region-specific and up to date data, much more granular than that which is commonly available.
Governance
New SEC reporting requirements are expected to require a heavy lift across many parts of a company to perform data gathering and analysis. The Board needs to get comfortable with this new level of disclosure.
This increased disclosure leaves nowhere to hide for companies that have not yet adopted advanced climate change goals or set appropriate goals.
If your company has:
The Board may need to update its governance structure and ensure that the roles are clearly defined. Do the roles and responsibilities of the board committees that oversee climate risk need to be revisited? Does this responsibility reside with the best committee?
For example, If the Governance Committee has general environmental, social and governance (ESG) oversight, climate risk might be added to this committee’s mandate. If so, what role will the Audit Committee play under this new regulation?
Regardless of committee structures, most boards will find that they need to change their meeting agendas to ensure regular reports to the full board and at the committee level. We recommend that climate risk be on the Board Meeting agenda at least twice a year, so that the committees and executives can keep the entire board updated.
Summary
Changing investor expectations and new regulations in the United States, Europe and elsewhere are driving new disclosure needs.
Boards need to prepare for this. But this is only a fraction of the effort required.
An effective Board will oversee and guide the company to manage the risks and opportunities inherent to climate change, since these risks and opportunities directly impact the company’s financial performance.
It’s time to make sure that your Board is ready for this new agenda.
If your company is publicly traded, you need to know about the new regulations in Europe that affect companies in the U.S. and around the world.
Recently the European Union (EU) established rules to regulate sustainable finance. Now in effect, the rules cover fund managers that apply environmental, social and governance (ESG) criteria. The regulation applies to all funds raised in the EU, no matter where they are managed or based.
The new rules, known as the Sustainable Finance Disclosure Regulation (SFDR), aim to provide more transparency on sustainability within the financial markets. The goal: to prevent greenwashing and ensure comparability. SRDR also covers the possible adverse sustainability impacts of investments.
The SFDR requires all EU-based fund managers that apply ESG criteria to report how they integrate sustainability risks into investment decision-making and investment advice. Furthermore, the SFDR requires disclosure by fund managers on any ESG issue that could impact the value of their investments.
For example, companies may find reporting only on climate change insufficient because investors want to understand performance across a broad range of ESG issues. Depending on the company and industry, investors might ask about issues such as biodiversity and land use change, breaches of ethical behavior, and diversity, equity and inclusion (DEI).
The SFDR requirements impact the lion’s share of new ESG funds. EU investments in ESG funds consistently outpace investments from other regions.
For example, EU investors put an estimated $142 billion into investments marketed as ESG in the fourth quarter of 2020. That compares to $49 billion from investors in the U.S. and other parts of the world combined.
EU investors that fall under the SFDR requirements will need to know about the sustainability performance and risks for all the companies they invest in. Investors tend to collect sustainability-related information from published reports and surveys.
Responding to surveys is time-consuming. Most companies try to avoid this by publishing the information in stand-alone sustainability or integrated annual reports.
SFDR will prompt more companies to publish sustainable impact data to satisfy the needs of their investors. More than 20% of publicly traded companies don’t yet publish information about their carbon emissions, waste, or other types of impacts.
Over 80% of S&P companies and 76% of NASDAQ companies report at least one ESG metric. But not all of these companies report the information that European-based investors now need.
The best course of action is to ensure your company reports on material issues. Following reporting frameworks and standards ensures that investors can easily locate pertinent information about your company. These standards and frameworks include:
However, carbon emissions data alone may not suffice, since investors need to track impacts for social and governance issues as well as environment.
Depending on your company’s industry and material issues, investors may look for DEI performance data, labor and human rights information, supply chain risks related to sustainability. For this reason, reporting only TCFD or CDP may be necessary but not sufficient to meet your investors’ needs.
If you have questions about sustainability performance and what investors need, contact Diane Osgood at diane@osgood.com