ESG Insights: The fast-changing world of the “E” in ESG

Environmental, Social, and Governance (ESG) are the criteria used to evaluate an organisation’s overall health or ‘sustainability’ for its stakeholders. The concept of sustainability looks to a company’s ability to survive, thrive and deliver value to stakeholders in the long term. This includes the ability to deliver value under a variety of conditions without succumbing to a cycle of “booms and busts” that deliver large short-term gains to some stakeholders to the detriment of others. Chasing the “boom and bust” cycle not only endangers the interest of investors during a “bust”, but also the viability of the company itself, the jobs of employees, and the well-being of the community around it.

For the forward-looking company

A company seeking to become more sustainable will compare their current operations, policies, and practices against one or more published ESG standards that define optimal performance. The company will then identify and prioritise areas for improvement, develop a strategy to make the improvements, and implement the strategy. Stakeholders of the company are kept informed of ESG progress and planning when the company publicly publishes an ESG Report[i]. Annual ESG reporting aims to describe a company’s efforts to date and plans for future improvements.

What about the “E” in ESG?

All three ESG criteria reward legal compliance and ethical actions as they pertain to each criterion. However, the environmental criterion by far has the most restrictive legal underpinning. However, environmental actions in many countries are first driven by the need to comply with a complex network of federal, state, and local laws and regulations spanning a wide range of media. And, these laws and regulations are implemented utilising policies specific to individual agencies and permits specific to individual plant, and even individual pieces of equipment. It is a challenge to determine how this legal system applies to your operations, and an even bigger challenge to ensure compliance with it.

After the exhaustive effort required to meet environmental compliance obligations, many companies have little motivation remaining to “go beyond” compliance to meet the additional metrics of an ESG standard. So, what prompts some companies to put forth the extra effort to voluntarily disclose additional environmental information in an ESG Report?

What does going “beyond compliance” mean for environmental issues?

In some cases, ESG standards recommend reducing releases to the environment and changes made in the environment than the minimum required by law. In some cases, ESG standards only recommend reducing releases to the environment to comply with the minimum required by law. However, in other cases, it’s advised to do more environmental monitoring, recordkeeping, and reporting than is required by law. Being subjective, these are not regulations that require the same activities of all participants.

ESG standards allow each company to determine what issues are material to their company, their operations, and their stakeholders. Going “beyond compliance” is expected only when the company’s stakeholders are not being well served by compliance alone. For the traditional environmental metrics of air emissions, water discharges, and waste management, compliance reporting alone is often an adequate effort.

Where compliance reporting alone is often viewed as insufficient is with the emerging environmental metrics that are not regulated at all, or not as heavily regulated on the governmental level. These emerging environmental metrics are greenhouse gas emissions, energy efficiency, ecological impacts (which encompass land and water use and habitat preservation), and biodiversity. For these metrics, ESG standards provide a basis for developing a robust management system on par with regulatory compliance programmes for these important but “extra-regulatory” environmental metrics.

To be sustainable from an environmental standpoint, a company must respond to material environmental risks, opportunities, and stakeholder demands whether it is required by law or not. For example, energy efficiency may not be required by law, but if your plant uses more fuel or a more polluting fuel than your competitor, there will eventually be financial implications. Flood mitigation measures may not be required by law, but if your plant is flooded out and shut down multiple times, there will eventually be financial implications. Also, your investor stakeholders are keenly aware of the extra-regulatory environmental risks to your business, and if you do not act on them investors may take their money elsewhere.

Finding what matters

Identifying material environmental issues is not easy. Identifying material extra-regulatory environmental risks and opportunities in the noise created by competing stakeholders and the media can be a daunting challenge. SLR’s technical strength and years of experience in the environmental realm combined with our experience in ESG management makes us an ideal ESG partner. SLR has the technical depth to cut through the noise to evaluate environmental risks and opportunities for organisations and help them determine with confidence what is material and worthy of action.

Our knowledge and ability to implement environmental management technologies allow us to assist our clients in selecting improvement projects that deliver the most environmental benefit for the least financial investment. Our ESG professionals then assist companies in communicating these efforts in their ESG Reports to appeal to their most important stakeholders. SLR offers a full-service package for navigating the fast-changing world of the E in ESG.

[i] The terms “ESG” and “Sustainability” as well as the terms “Report” and “Disclosure” are used interchangeably.