ESG can be viewed as a threat or an opportunity
The talk about sustainability is becoming more and more frequent in companies, management teams, and boardrooms. Some find it interesting; some see it as a tool, and some as guidance. The fact remains that we have to focus on sustainability and compliance.
The 17 SDGs (Sustainable Development Goals) launched in 2015 initially drove the increased focus on the seventeen goals. However, in 2023 the focus has changed slightly for the better as ESG (Environment, Social & Governance). As the ESG is not a statement, but measurable on far more levels dependent on your industry where some have more than 200 MEI (Material ESG Issue)
An ESG rating measures a company's exposure to long-term environmental, social, and governance risks. These risks involve energy efficiency, worker safety, and board independence, which have financial implications. But they are often not highlighted during traditional financial reviews. Investors who use ESG ratings to supplement financial analysis can gain a broader view of a company's long-term potential.
A good ESG rating means a company is managing its environmental, social, and governance risks well relative to its peers. A poor ESG rating is an opposite — the company has relatively higher unmanaged exposure to ESG risks.
In 2022 and recent years, there has been a tendency to focus on the E (Environmental)…. Most ESG key environmental issues fall under climate change, natural capital, pollution and waste, and environmental opportunities.
Climate change issues include:
· Carbon emissions
· Product carbon footprint
· Financing environmental impact
· Climate change vulnerability
Natural capital issues are:
· Water sourcing
· Biodiversity and land use
· Raw material sourcing
The pollution and waste category encompasses:
· Toxic emissions and waste
· Packaging material and waste
· Electronic waste
Environmental opportunities are:
· Clean technology
· Green building
· Renewable energy
Most ESG key social issues fall under four categories: human capital, product liability, stakeholder opposition, and social opportunities.
Human capital issues are:
· How labor is managed
· Health and safety practices and protocols
· Worker training
· Supply chain labor standards
Product liability areas of focus include:
· Product safety and quality
· Chemical safety
· Consumer financial protection
· Privacy and data security
· Responsible Investing
· Ensuring health and demographic risk
Stakeholder opposition includes:
· Controversial sourcing
· Community relations
Social opportunities are:
· Access to communication
· Access to finance
· Access to healthcare
· Opportunities in nutrition and health
Most ESG key governance issues fall under two categories: corporate governance and corporate behavior.
Corporate governance includes:
· Composition of the board in terms of diversity and independence
· Executive compensation
· Accounting practices
Corporate behavior includes:
· Business ethics
· Tax Transparency
An example of emissions measurement: An organization should measure its Scope 3 emissions as there are several benefits associated with measuring Scope 3 emissions. For many companies, most of their greenhouse gas (GHG) emissions and cost reduction opportunities lie outside their operations. By measuring Scope 3 emissions, organizations can:
· Assess where the emission hotspots are in their supply chain.
· Identify resource and energy risks in their supply chain.
· Identify which suppliers are leaders and laggards in terms of their sustainability performance.
· Identify energy efficiency and cost reduction opportunities in their supply chain.
· Engage suppliers and assist them in implementing sustainability initiatives
· Improve the energy efficiency of their products
· Positively engage with employees to reduce emissions from business travel and employee commuting.
Fuel combustion, Company vehicles, Fugitive emissions
Purchased electricity, heat, and steam
Purchased goods and services, Business travel, Employee commuting, Waste disposal, Use of sold products, Transportation and Distribution (up- and downstream), Investments, Leased assets, and franchises
We offer a range of services to help you measure and manage your value and supply chain emissions:
· Value and supply chain sustainability (includes building a low-carbon strategy and supplier engagement)
· Footprint measurement and analysis (Includes calculation of your organization or product carbon footprint)
· Carbon Trust Standard analysis (Certification for organizations that are reducing greenhouse gas (CO2e) emissions in their supply chains)
ESG is a framework of strategy, tactics, and documented being better than yesterday
It is all about documentation and documented improvements. In order to document improvements, you first need to document your baseline. Without a baseline, you cannot document improvements.
An ESG officer or employee can help set the direction, but the whole company, organization, or department must be committed to the task and assist with the reporting. The values must be reported in the same way as financial numbers for the monthly and annual reports. Often it is a completely "new" employee who does not have his/her own budget, lacks the right references in the organization, and has difficulty getting through in relation to other and also important agendas.
If the board really wants sustainability, then there is no way around dealing with it more strategically and on an ongoing basis.
Strategic and tactical considerations:
Has the company dealt with the SDG sustainable development goals and underlying sub-goals? The goals are an inspiration for where your company can make a real difference - and also a good checklist of areas where you might actually be working towards sustainability.
Sustainability is a large and very comprehensive concept. What does that mean for you? Is it something to do with climate, social conditions, decent workplaces, or something else entirely?
Do you in the company have plans or a framework for how you want to work with sustainability? What do you want to achieve? Where does the responsibility lie? How often do you on the board or management get reports on work, compliance, and results?
Do you have a handle on relevant legislation in the area? Both Danish legislation and legislation originating from the EU?
Do you have the right resources? Do you have the necessary knowledge and experience? Where and how is the work anchored, and who takes care of the necessary reporting?
Self-assessment – Do you have good finance, sales, and management skills, etc.? But who knows anything about strategic work with sustainability and perhaps even has experience with it? If the answer is no, then perhaps you should look at it the next time new members join the management or board.
Do you know what your customers, suppliers, employees, investors, etc., think about you and sustainability? How important is it to them that you meet sustainability requirements?
Do you have control of your reporting? In the future, there will increasingly be demands that you have control over climate impact, but also in a number of other areas. Are you compliant with your approach and framework?
Have you investigated the possibilities of getting public support for the sustainability work? For example, various sector organizations support with framework and assistance to further develop a sustainability strategy. ESG can be viewed as a threat or an opportunity; regardless of your experience, an increased demand for how you measure and improve on your baseline is inevitable! The ESG train is moving quickly, and new changes are continuously being added. In 2023 the largest listed companies to report on ESG work based on the EU's CSRD directive. Later in October, the EU's reporting standards for sustainability are expected to land for SMEs. The standards are implemented under the adopted CSRD directive, which forms the framework for large, listed companies' reporting in this area. Further, The EU is expected to begin a test phase of the world's first climate tariff, also known as the Carbon Border Adjustment Mechanism (CBAM). Customs imposes a tax on industrial goods produced with a higher climate impact than regulations in the EU allow.