Contributors weigh-in on ESG

Canada Climate Law Initiative

Companies face increasing pressure from investors, customers, shareholders, governments, and the public to report on climate, and attention is also turning to biodiversity.

Businesses, especially in the food and beverage, agriculture, and construction sectors, depend on natural resources to provide goods and services. According to the Taskforce on Nature-related Financial Disclosures, more than half of the world's economic output, US$44 trillion of economic value generation, is dependent on nature.

Positive performance on biodiversity can enhance a company's reputation, improve productivity and resilience, and create value for the company. At the same time, biodiversity loss can disrupt supply chains and undermine a company's ability to operate.

As regulation and societal expectations change, the risks to business from biodiversity issues are likely to increase. Companies and financial institutions need to be proactive to understand how biodiversity and natural capital can impact their organizations' strategy, operations, and financial performance.

The world is transitioning towards a net-zero economy and companies will also be increasingly expected to demonstrate how they are reducing negative impacts on biodiversity and creating positive outcomes for biodiversity. Now is the time for the leadership of businesses to consider and manage biodiversity risks, alongside climate-related financial risks.

Creative Fire

We realize ESG is different than sustainability. ESG is about the management of environmental, social, and governance-related risks to increase company value. However, it is often conflated with sustainability, which was defined by the United Nations Brundtland Commission as "meeting the needs of the present without compromising the ability of future generations to meet their own needs." At Creative Fire, we believe companies have the duty to manage ESG risks with the intention to contribute to true, multi-generational sustainability.

Enter, context-based sustainability management. This approach to corporate sustainability accounts for global environmental, social, and economic thresholds in its prioritization and management of sustainability topics. What positive impact will come from a goal to reduce carbon emissions marginally year-over-year, if this objective is not aligned with the greater need to limit global warming to 2 degrees Celsius and avoid the most catastrophic effects of the climate crisis? Who benefits when companies have slightly more ambitious Indigenous hiring targets than their peers but are not committed to advancing Reconciliation through greater recruitment and advancement of Indigenous talent.

Global Reporting Initiative standards include some consideration of sustainability context in the materiality process; however, implementation guidance is lacking. One encouraging recent development is the publication of the United Nations Research Institute for Social Development's Sustainable Development Performance Indicators (SDPIs), the first framework for embedding environmental and social thresholds in sustainability reporting. Only time will tell whether this context-based approach is adopted amongst a plethora of alternatives.

We cannot afford to continue developing ESG approaches detached from greater sustainability needs. As depicted by Kate Raworth's Doughnut Model, they must support the maintenance of our social foundation while respecting our planetary boundaries. Our companies, and our humanity, relies on this.

SOOP Strategies

As we enter 2023, decarbonization will be at the centre of ESG efforts for businesses. The process to reduce emissions from Scope 1 and 2, and to identify, quantify and plan for reductions for Scope 3 will be a key focus, particularly as regulations tighten and investors demand greater disclosure, action and performance.

As an increasing number of businesses adopt climate-related disclosures, such as the Task Force on Climate Related Financial Disclosures (TCFD), the sheer act of benchmarking will push companies into action, with the need to demonstrate decarbonization plans, at a minimum.

As the number of companies and nations adopting Net-Zero targets increases, the pressure from various stakeholders to demonstrate actionable roadmaps to reach said targets will increase, pushing for companies to seek innovative and efficient solutions to decarbonize operations as well as value chains.

From a governance standpoint, the drive from investors and the public for action in Diversity, Equity and Inclusion (DEI) in the boardroom, not just relating to gender but also to age and BIPOC (Black, Indigenous and People of Colour) will grow ever stronger.

Astute companies are recognizing the benefits of diversity in experience and perspective at the board level to combat ‘group think' and as a pathway to more effective risk and opportunity planning, and more innovative and effective solutions. DEI is no longer a ‘should have' or a ‘nice to have', and will likely receive a push from regulations, much like the climate change movement.

Manifest Climate

The advancement of climate and sustainability reporting. Once a fringe topic, now disclosure of information aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework has become an integral part of the annual reporting cycle. In 2023, TCFD-aligned reporting requirements will enter into force in more jurisdictions and encompass a larger share of private and public companies.

Furthermore, investors and other stakeholders will ramp up their scrutiny of these disclosures. Companies won't be able to get away with treating their TCFD-aligned reporting as a box-ticking exercise. They will instead have to be able to demonstrate through these disclosures that they have a plan for addressing climate risk and maximizing climate opportunities. These plans will have to be supported by appropriate climate scenario analyses and furnished with commonly accepted climate metrics and targets.

In addition, the climate-related information these reports provide will have to be credible, aligned with emerging best practices, and verified by appropriate third parties where possible. This is because investors are increasingly on the hunt for decision-useful climate information on which to base their capital allocation decisions.

Responsible Investment Association (RIA)

Our latest research, from The 2022 Canadian RI Trends Report, captures the responsible investment (RI) industry at a critical stage in its maturation. As the industry continues to mature, increased sophistication and clarity on RI and ESG will be the focus of investor conversations and industry developments through 2023.

Canadian and international groups will focus on efforts to refine and harmonize key RI definitions, taxonomies, standards and ESG disclosures, leading to improved market clarity. This will allow investors to act on critical issues, such as climate change, which, according to the report, has risen sharply to become the number one driver to anticipated RI growth in Canada. While minimizing risk remains the top motivation for considering ESG factors in investments, investors continue to demand the clarity and certainty required to do so confidently.

From the evolution of new standards such as those from the International Sustainability Standards Board (ISSB), to clarity on definitions created by new taxonomies, to movements toward mandatory disclosures—the future of responsible investing is being written as we speak. This is the time to get it right.

To support progress on this topic for 2023, the RIA will continue to engage with its members, investors, policymakers, regulators and other industry leaders and stakeholders. 

Coeuraj

2023 is the Year of the "S" and Greater Human Collaboration. ESG continues to provide a broad set of parameters for companies seeking to take climate action and leverage equitable and sustainable business practices that generate value. In recent years, the "E" has garnered the most public attention and investment interest.

But course-correcting climate change is not just an environmental challenge; it is an inherently human challenge that requires human-driven solutions and systems-wide collaboration. Company leaders are becoming more conscious of the reality that progress cannot be made if the people at the heart of enabling change—from direct employees to community members at-large—are not meaningfully considered and involved.

In 2023, companies may find themselves proactively considering the social issues and conditions to which they contribute, from unlocking shared value with communities impacted by business decisions and operations, to advancing the fair treatment of workers on the road to a "just transition", and ensuring the health and diversity of supply chains amidst sociopolitical and financial crises.

Tangibly measuring social impact and understanding the depth of social risk has long been a challenge. But, 2023 presents a real opportunity for business leaders to move the dial forward on issues of social concern.

Against the backdrop of worrying environmental trends, COP27 ended with a firm message: the fight against climate change requires collaboration, accountability, and transparency across non-state actors that can move pledges into action.

In more ways than one, 2023 is primed to be the year of the "S" and an opportunity for companies to truly develop their capacity for collaboration with diverse groups of people to solve the complex challenges that the new year will continue to bring.