What is Environment, Social and Governance (ESG)? – corporate governance – Advice Eating

To print this article, all you need to do is register or log in to Mondaq.com.

In this three-part Environmental Social Governance (ESG) series, we look at the origins of ESG, recent regulatory announcements, new emerging standards, and how to prepare your organization for the future of public reporting.

The term ESG may be trendy in 2022, but the concept of measuring, disclosing and analyzing the environmental, social and governance performance of companies has been evolving for decades.

The ESG performance criteria provide an indication of how much attention management has given to the environmental, social and governance risks and opportunities associated with operations. The process of preparing a company for a public ESG report can help identify missing policies and processes, but also new opportunities for waste reduction, stakeholder engagement, and innovation.

ESG encompasses a wide range of topics, but most commonly:

  • environment Criteria: greenhouse gas emissions, waste generation, water security, climate change risk strategy

  • Social Criteria: Employee and supplier diversity, community socio-economic impact, equal pay, worker health, safety and human rights

  • guide Criteria: transparency, policy development, board independence, diversity, anti-bribery and anti-corruption measures, tax practices and executive compensation

WHAT ARE THE ORIGINS OF ESG?

Traditional economists viewed environmental, social and ethical concerns as externalities and therefore not financially essential to a company’s performance, but in the 1980s and 1990s this began to shift. Numerous revelations about public safety, human rights abuses and environmental disasters attributed to corporate activities not only devalued companies but also forced society to look at the impact on business differently. A shareholder-centric view of a company’s responsibilities became inadequate to manage the full spectrum of risks.

Further prompted by calls from civil society to increase transparency and social responsibility, companies began to engage a more inclusive group of stakeholders and communicate their progress on corporate social responsibility. Reporting frameworks such as the Global Reporting Initiative (GRI) G1 standard, first published in 2000, have helped companies qualify and quantify stakeholder impacts. This practice of voluntary annual public reporting became the basis for all future corporate reports.

The United Nations Environment Program Finance Initiative (UNEP FI) used the acronym ESG in 2004 to describe their work on sustainable finance with banks, insurance companies and investors, and the concept has evolved since then. Multi-stakeholder consortia have continued to quietly build and refine disclosure frameworks that provide the transparency that society demands of a modern corporation and the consistency that the financial sector demands of environmental, social and governance claims. The Sustainability Accounting Standards Board (SASB), established in 2011, produced a financial materiality map of ESG indicators by sector that established credibility within generally accepted accounting principles. The financial importance of ESG was further supported by the creation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015, whose guidance on climate risk disclosures has now become part of mainstream finance.

ESG NOW

There were several significant ESG announcements in the first half of 2022, including:

  • The International Sustainability Standards Board (ISSB) has proposed uniform disclosure standards for capital markets.

  • Global Reporting Initiative (GRI) announced collaboration with ISSB; Alignment of the multi-stakeholder disclosure framework already used by thousands of publicly traded companies.

  • Canada’s 2022 federal budget included an announcement that mandatory climate-related reporting is planned for government-regulated financial institutions.

  • S. Security and Exchange Commission (SEC) proposed rules to standardize climate disclosures for investors.

Investor-centric capital markets standards and multi-stakeholder sustainability standards are aligning, and North American regulators are beginning to mandate ESG disclosures for financial institutions. While this may not affect your business today, it signals a demand for more transparency into ESG risks for your business and is expected to create climate disclosure requirements for financial institutions’ customers and suppliers.

Under the oversight of the Board of Directors, General Counsel and Senior Leadership have the opportunity to make your organization more resilient and proactively address a variety of issues. Organizations that establish committees, policies and processes to manage ESG performance have the opportunity to go beyond compliance and turn it into a strategic advantage.

By embedding environmental and social values ​​in your culture and prioritizing ESG as a center of excellence, you will learn from the insights, inspire employees and be better able to differentiate your company. Every company has the opportunity to contribute to an equitable, sustainable future, but leadership is essential to building an effective ESG practice.

In the 2nd of this 3 part ESG series we will talk about organizational leadership, engaging your teams and creating value for all stakeholders.

The content of this article is intended to provide a general guide to the topic. Professional advice should be sought in relation to your specific circumstances.

POPULAR ARTICLES ABOUT: Corporate/Commercial Law from Canada

Toolkit for planning and reviewing mergers

Blake, Cassels & Graydon LLP

This toolkit outlines the main competition law issues a company may face when conducting mergers and acquisitions. It also provides practical guidance on deal preparation, negotiations and the merger review process.

Leave a Comment