Does the ‘E’ in ESG Really Matter to Your Company?
Most corporate boards recognize the urgency of environmental, social, and governance (ESG) strategy and oversight. They also typically appreciate how social responsibility and governance can impact long-term business risk and growth.
But it’s not always clear how environmental concerns figure into the equation, especially for corporations outside of the oil, materials, and manufacturing industries or other sectors in which one might find an obvious relationship between business activity and climate impact.
In short, when it comes to ESG, the ‘S’ and the ‘G’ are relatively straightforward, but sometimes the ‘E’ remains elusive.
How do environmental issues figure into ESG strategy for corporate boards in sectors such as technology, financial services, and health care? The following are the core risks and opportunities, as well as actions boards can take to help navigate these environmental issues.
Risks Associated with Climate Change
ESG experts have identified three specific risk areas relating to climate and the environment. First, there is physical risk. Rising temperatures link to wildfires, resource scarcity, and flooding around the globe. In concrete terms, these natural phenomena caused by climate change can physically damage or destroy the large real estate footprints of health-care providers, data warehouses maintained by technology companies, and real estate or other physical assets on the balance sheets of banks and financial institutions. Inversely, increasingly frigid temperatures in certain parts of the world can lead to power outages and infrastructure breakdowns, which have the potential to affect entire swathes of customers, causing health problems and reducing access to technology. In addition, climate disruption can lead to widespread adverse health effects, including disease from poor air quality and pathogens in food and water. Sudden increased demand for health-care offerings could lead to under-capacity and ongoing strain on services.
Next is what experts call transitional risk. There will be disruption as corporations move to green technology and clean energy and as governments apply stricter climate and carbon regulations. Along with cost considerations, some corporations will need to perform more proactive vendor oversight and forge new business relationships. Consider, for example, that tech giants such as Apple or Microsoft Corp. have vast supply chains they will need to monitor and adapt to advance climate goals. Pharmaceutical companies will also need to explore new manufacturing processes.
In addition, technology and health-care companies with multinational operations are exposed to multiple jurisdictions of climate change regulations such as carbon taxes, emissions trading schemes, and other fossil fuel taxes, creating financial risks on several levels. Banks will need to make tradeoffs, too, as they shift commercial lending practices to favor climate-responsible companies. Health-care providers may need to reexamine energy and waste management practices. Taken together, the business and regulatory trend toward environmental responsibility could impact business strategy as much as any other risk.
Finally, there’s reputational risk. Company perception makes a big difference to valuation and long-term growth. Consumers are looking for more a sustainable delivery of products and services. Meanwhile, social media campaigns intensify pressure on perceived climate offenders. From a talent acquisition and retention perspective, companies will need to go beyond platitudes and truly walk the walk to entice workers who increasingly want corporations to get involved in issues outside the traditional scope of business.
Taking a wider lens, climate change will likely impact consumer behavior and economic activity, incite political unrest, and disrupt supply chains and shipping networks. In short, climate change creates uncertainty. And uncertainty—no matter the industry—creates near- and long-term risk for which corporate boards will need to account.
Where There's Risk, There's Opportunity
Each of these risk areas also creates incredible opportunities for businesses to capitalize on shifting consumer habits, evolving business models, and industry disruption. Consider the new American Express Green Card, manufactured exclusively from recycled materials. Not only does the card help to concretely reduce the company’s carbon footprint, but it also provides an opportunity to appeal to the next generation of credit consumers.
Of course, potential opportunities stretch far beyond brand perception. For example, Amazon.com recently announced an initiative to achieve carbon neutrality by 2040. To be sure, the pledge has garnered headlines and helps to promote consumer goodwill, but more importantly it reflects the enterprise’s huge investment in clean energy. In the long run, analysts expect the initiative could generate significant savings for the tech giant as solar and wind technologies vastly reduce fuel and energy costs. Companies will continue to find ways to maximize resource productivity and energy efficiency.
In a similar vein, health-care providers are tapping into new business models, making use of remote telemedicine technologies that do not require in-person office visits. This will help reduce overall real estate needs and significantly cut down on travel to and from the doctor’s office. For their part, banks and other financial services companies are directing more investment into clean technology firms. Again, these shifting strategies might be spurred by investor and consumer pressures, but they also embody efforts to drive returns from investments in new technologies and emerging business models.
Implementing 'E'-focused ESG Oversight
As a recent NACD BoardTalk blog illustrates, there is ample evidence that organizations do not take climate issues as seriously as they should. Reviewing recent survey data, the authors found that boards are not asking executives for information about climate risks—and executives are not appointing ownership for climate risk and strategy.
Clearly, there is a need for more urgent and decisive action. Here are five things your board can do right now.
Consult existing frameworks to help conceptualize climate issues and potential impact. Standard frameworks such as those from the Sustainability Accounting Standards Board or the Task Force for Climate-related Financial Disclosures provide insight into industry- and sector-specific disclosure criteria that can help guide conversations and clarify areas of focus.
Assign an environmental sustainability team or subcommittee. This might require the board recruiting for specific sustainability expertise. It might also require creating new leadership roles, up to and including a chief sustainability officer.
Establish metrics and goals. Boards will need to prioritize short- and long-term objectives. Consider financial materiality and environmental impact: how will you incorporate your growth strategy into a wider environmental purpose? Common metrics include the sales growth percentage of ESG-friendly products, the number of new ESG products developed, and reduced contribution to Scope 3 emissions.
Take stock and benchmark against established frameworks. Look across each metric to find out how you stack up both against internal goals and industry peers. The same frameworks used to conceptualize climate issues should also be used to measure and track progress.
Tell your story. Many boards find that their organizations are already doing a lot to advance more sustainable business practices. But companies must consolidate all of that work into a single narrative they can showcase to stakeholders
Joseph Vicari is managing director and ESG practice lead at Broadridge Financial Solutions.