As originally published in The Globe and Mail.
Doron Telem is a partner and national leader of environmental, social, and governance services at KPMG in Canada. Katie Dunphy leads KPMG in Canada's ESG and sustainable finance advisory services.
The last two years have seen unprecedented social and environmental challenges impact Canada and the world, placing increasing demands on business to implement comprehensive ESG (environmental, social, and governance) strategies. While many are making great progress, changing expectations around transparency and accountability, yet-to-be determined regulations and a lack of reporting standards have many businesses struggling with where to start.
Stakeholders, and in particular investors with longer-term investment horizons, are looking to ESG factors to determine how well businesses are positioned to succeed in an uncertain and complex future. Behind the wave of 'green' commitments and 'responsible' pledges is a business community heavily invested in change – and they are navigating uncharted waters.
ESG factors are broad and pervasive. Each business will likely need to tackle a different combination of aspects: from managing pollution, waste, and water usage, through to a robust approach to diversity, equity and inclusion, and finally ensuring there are effective controls for regulatory compliance and business ethics.
We recently surveyed business owners and decision-makers at 508 mid-sized companies across Canada about their views on ESG challenges and opportunities. Over 90 per cent said ESG considerations have had a greater impact on their competitiveness, reputation, and bottom line since the COVID-19 pandemic began, and more than four in five (82 per cent) said their financial lenders and investors are increasingly asking them for information on their ESG strategy and policies.
As leaders look to implement ESG principles into their decision making, it is critical that organizations don't implement these ad hoc; rather, they need to ensure they have long-term strategic integration, executive sponsorship, and investment.
This is easier said than done. Our research indicated that gaining a true understanding of the most-important ESG issues impacting business remains one of the biggest barriers to moving forward. The leaders also cited a lack of the necessary technology to effectively measure and track ESG initiatives, and a shortage of needed skills and expertise to implement solutions as other key barriers.
Before an organization invests in technology and people, it needs to gain a clear understanding of the complex and evolving policy, regulatory, and business environment impacting their business and their industry. Add to that, the wide-ranging landscape of ESG topics – from biodiversity, ethics in technology and AI to third party human rights risk – makes knowing where and how to start a challenge.
For example, the complexity of the risk companies face from climate change alone is staggering. Transition risk arises from the shift to a low-carbon economy, with investors, consumers and governments pushing businesses to decarbonize by choosing renewable energy sources to reduce emissions. Physical risk, exacerbated by rising global mean temperatures, include severe weather events such as floods, storms and droughts, are disrupting supply chains, impacting input costs and sourcing requirements.
An organization's financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations' premises, operations, supply chain, transport needs, and employee safety.
Getting an in-depth understanding of the impact of these issues is a key first step, but companies then need to successfully translate these into clear business plans and actions – to both mitigate risks and leverage opportunities.
Stakeholders are increasingly expecting better and more qualitative and quantitative information about an organization's contribution and exposure to climate change risks, how resilient their strategies are, and what adaptation measures they're taking to ensure they can succeed and deliver on their strategy. Companies that can present longer-term strategies can also potentially gain an advantage when attracting investment capital or selling their business.
While ESG has become an access to capital reality, there are clear benefits and opportunities to companies that become more sustainable and resilient. For example, an ESG assessment of a company's supply chain could also lead to diversifying suppliers based on climate factors, diversity objectives, or human rights risks, and consequently protect the company from costly disruptions or reputational brand damage. It can also help companies achieve better employee retention, improved customer loyalty and preferred business partner status.
How Canadian companies can navigate their ESG journey:
- Strong consideration should be given to embedding ESG in everything that you do, including your strategic discussions and investment plans. The journey takes time and advanced planning is critical, but the potential long-term benefits to your stakeholders and your business are considerable.
- Align your ESG approach with the corporate Mission, Vision and Values. Think of the role your organization will play in building a more sustainable and equitable future.
- Identify the most significant impacts (direct and indirect) of your operations and the related business risks. This is where you will need to focus. These potentially material topics are where the majority of your efforts should be focused to encourage meaningful change.
- Take a whole value chain view of ESG risks and opportunities. ESG thinking should expand to your decision-making regarding business partners and third parties, suppliers, customers, local communities and markets. Can these parties uphold your values and support you on your ESG journey? Choose to partner with the ones that will, and help each other out along the way.
- Set measurable and time-bound targets and goals to track your progress. This will require defining Key Performance Indicators (KPI). These KPIs should take into account emerging reporting and disclosure frameworks, peer practice, and stakeholder expectations.
- Share your performance in a balanced and fair public disclosure. ESG reports can run the risk of "greenwashing" by emphasizing the good stories while avoiding the challenges, gaps and limitations that exist. A balanced approach is best.
The time to engage with stakeholders on ESG topics, learn, and build your ESG foundation is now. We're at the precipice of a monumental shift in our economy and society, and although it won't be an easy road, it ought to be well traveled.
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