Environmental, social, and governance (ESG) is the new generation of sustainability and includes the more environmentally focused aspects of sustainability as well as social aspects, human rights, engagement, and diversity. Regulations are coming requiring companies to apply and report on these concepts in standard ways.
Global adoption of ESG is driving this expansion and regulation. Canada’s initial regulatory plans focus primarily on publicly traded companies and regulated financial institutions—but the impact will be felt across the supply chain.
As companies implement ESG and tap into the benefits–including real dollars–how do we prevent “green-washing” for marketing purposes?
Conor Chell from MLT Aikins is part of this evolving area of the law. “We help companies develop ESG programs and strategies right from the ground up. If they have nothing, we’ll go and we’ll build it for them. For companies that have an ESG program in place, we’ll look at it and try to identify areas where they can improve or optimize it.”
ESG has real world risks around public claims and disclosures.
Many of the ESG mandatory reporting requirements are climate-based and aimed at large companies but those companies are going to impact the smaller companies. There has already been action from the Competition Bureau on claims that amount to false advertising. Litigation has started and is accelerating the adoption of these regulations.
“Obviously, the bigger companies tend to get pursued more often but it could apply to anybody.” says Jason Mohrbutter, a partner at MLT Aikins who specializes in class action defense and commercial litigation.
Chell adds that, “typically it’s the heavy emitting sectors that are affected but it’s making its way up and down value chains and across a number of different industries.”
Since a lot of the ESG requirements began in Europe and they’re expanding their requirements, it is anticipated that additional regulations will include frameworks for things like diversity, equity, and inclusion with substantial penalties for non-compliance.
“Some people in the past may have considered ESG a marketing scheme. That may even have been true in some cases but with the standardization of ESG frameworks and reporting that is going away for good. Businesses can no longer make these blanketed statements about green performance,” says Gabrielle Schubach, of Benson Badger Advisory Group Inc., “these standardized frameworks… are really going to weed out people that are just making vague and unauditable statements as it relates to ESG.”
Schubach goes on to explain that in relation to the “E” in ESG, there are three scopes to measure greenhouse gas emissions. “It’s important to understand where you fall on the scope. If you have a key customer, a supplier, or a bank you borrow from that falls under one of these regulated industries–and you probably do–their scope three reporting is going to fall under your scope one and two reporting.”
In simple terms, scope one is direct emissions; scope two are emissions purchased to run a business; and scope three involves everyone else along a business’s supply chain.
Big companies with detailed reporting requirements need to work with companies that know what their emissions are.
Despite the threat of litigation and the potential damage to a business’s reputation from green washing, there are concrete financial incentives to comply with regulations.
“We’re seeing the introduction of sustainability linked loans. Banks are having rates and terms based on a reduction in carbon or a sustainability level that’s being achieved,” says Schubach.
From a marketing and public relations standpoint, Melody Lynch of Symmetry Public Relations says, “the age old ‘walking the walk’ is core. You need to be really clear and specific in the language you use when advertising regarding ESG initiatives. You need to communicate what ESG really means to and for you–not just speaking in broad strokes.”
Gabrielle Schubach finishes with an important point: “Reporting is the culmination of your efforts and programs. So having that strategy and programming in place before the reporting requirements come is critical.”