Blog

 

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:

1. ESG applies to how a company does business.

What is its environmental, social and governance track-record and performance.  This begs questions such as:

• Does it clean up any environmental damage caused by making what it makes or selling what it sells?
• Is it reducing its carbon and greenhouse gas emissions in line with science-based targets?
• Does it treat all the people involved in its value chain with dignity and respect, provide proper health and safety, and ensure diversity and inclusion?
• Does it have clear and effective governance and accountability structures in place?

2. ESG applies to what a company does.
   Does it make products with known toxins or life-saving medical equipment? Does it sell products that increase social anxiety amongst teenagers or provide healthy food to lower income communities? Or something between the poles of “obviously bad/good”. Simply ask, would the world be better or worse off if the product or service it sells no longer existed?
3. ESG applies to how a company uses its influence.
   This applies to lobbying and supporting industry associations that lobby. For example, does the company directly lobby against climate mitigation regulations or water conservation efforts? A company’s influence also comes from the CEO’s public voice. Does the CEO demonstrate leadership on diversity by speaking about its importance and sharing publicly what the company is doing to support minority- and women-owned small businesses?

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:

• Capital expenditures. What are current and future capital expenditures for climate-related projects, including energy-conservation measures and investments in new energy sources?
• Direct impacts of physical effects of climate change. This section calls for foresight into climate trends in key regions for your business.
  Where is severe weather expected to impact your business operations? This includes operational closures due to floods, fires or heat domes. It also includes the risk of energy rationing due to intense hot or cold weather.
  Will water shortages cause problem for hydroelectric and nuclear energy production you rely on? Will low water or unpredictable weather increase the shipping costs?
• Indirect consequences of climate-related regulation and impact.  What are current and expected future changes in demand for your company’s products and services, impacts on your supply chain, the need to innovate and reputational risks related to climate change.

For example, if the company uses cotton from India or Texas, how will it manage expected shortages in 2023 from the 2022 heat waves?

• Carbon credits/offsets. If the purchase (or sale) of carbon credits is financially material, it needs to be included in the MD&A.
• Regulation. What are the new or existing changes in climate-change related legislation, regulation and international accords that will impact a company’s financial position? To assure consistency, close collaboration with Government Affairs department is required.

What you’ll need to prepare your MD&A:

1. Analysis of direct and indirect impacts and responsive strategies. For many companies, this requires starting work now to develop the analysis and strategies for next year’s reporting cycle.
2. A balanced view. Although the MD&A section of a Form 10-K is not audited, it must provide a balanced point of view of the positive and negative aspects of the potential climate impacts, including risks to the company’s financial prospects.
3. Up-to-date data-driven climate models tailored to your specific geographies and industry. Most companies will need to seek input, analysis and foresights from climate scientists and climate strategy experts. Taking this approach enables a richer analysis and better foresights than one based on previously published IPPC reports and generalist climate predictions.

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:

1. The best information available on probable climate impacts
2. Preparedness for increased disclosures
3. Governance structures that support these new demands.

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:

• What do models indicate for the risk of disruptions in the companies supply chain, transit routes or client base?
• How can the company capture innovation opportunities?
• Is the innovation process ready for this new challenge?

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:

• Not yet published voluntary greenhouse gas disclosures or reduction goals, it’s time to get the Board ready for and comfortable with the need to disclose more on the Form 10-K. Executives need Board support to move quickly and prepare immediately.
• Aspirational greenhouse-gas reduction goals but has not done much work to advance towards these goals, the Board needs to see an updated plan to dial up activities.
• Goals in line with science-based targets and progress towards significant milestones, the Board needs to be ready for any additional disclosures required by the SEC regulation.

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.

ESG may be all the rage, but what about retail banking?

The deposits you make at your retail bank for personal and business accounts sustain the bank’s ability to make loans and investments. Loans and investment fuel growth. Put simply, a bank’s capital can flow towards fossil fuels or renewable energy, towards local business loans or financing environmentally damaging projects.

Imagine if all retail banks required environmental impact assessments for loan applications. Or committed a certain percentage of loans and investments for renewable energy projects.

Certainly, this is a vision all climate-concerned citizens can support, and the opportunity to influence banking as citizens is large. Most U.S. households (93 percent) have a checking or savings account while only 52 percent own stock …

To continue, read my guest blog on GreenBiz.

Most people’s wallets are slammed shut right now, and an unthinkable number of people face unemployment and loss of business. The coronavirus pandemic offers a painful and unique opportunity to re-envision the economy we want and how we get there.

Business is driven by consumer demand. When there is a great demand, business expands. When there is little demand, business contracts. Government policy aside, this is what shapes the economy.

The good news is that the majority of U.S. consumers want to buy purpose-driven brands that support sustainability. However, despite our intentions, the vast majority of us don’t consistently shop in a way aligned with our values or desires for a sustainable economy.

Here’s how to think about changing consumer demand: Imagine a rider on top of an elephant, trying to get the elephant to go down a specific path. Our mind, intellect and will power (the rider) and our emotional body (the elephant) need to be aligned to make any progress …

To continue, read my guest blog on Green Biz.