ESG – What It Is and Why It Matters
What is ESG, exactly? And how is it going to matter for your business? You’ve heard enough about it to know you need to know more (you’re here reading this blog post, after all) and while you may not be hearing much about it yet, that’s about to change – in a big way.
Environmental, Social, and Governance (ESG) factors – and how they can be measured and reported, are gaining ground quickly. The number of global companies obtaining independent assurance on ESG increased from 51% in 2019 to 58% in 2020 – a 14% increase in just one year. On top of that, a recent McKinsey Report says 90% of the S&P 500 talk about ESG in their disclosures. The momentum is there and building.
So what’s considered ESG? Writ large, ESG can be any business output not on your balance sheet. And yes, that could be a lot. How are you going to make that practical for what you do every day? We’ll explore more about that in this blog series.
Public companies feeling the heat
Thomson Reuters notes that risk and compliance aren’t just about operating your business, but also about investors – what they’re looking for and how they measure companies and investment opportunities based on ESG factors.
On top of the dramatic increase in public companies adopting ESG reporting, the SEC has proposed the adoption of measures requiring public companies to include ESG in annual reports issued in 2024 – and that means the clock would start ticking on January 1, 2023 – less than 90 days from now. Again, they’re just proposed measures, but they’re a strong leading indicator.
Cincinnati-based Fifth Third Bank has committed $100 billion through 2030 to ESG-related spending.
Impact on privately held companies and not-for-profits
We get questions all the time about the components of ESG that can be measured and audited – and as more and more public companies adopt ESG reporting, there are best practices and lessons learned that private companies can use to streamline their own ESG reporting and procedures – including what’s material, what matters, and what we’re able to do practically in the privately held space.
It’s important to note that many privately held companies are vendors for public companies – and those companies are starting to ask for more information, as we noted above.
Real-world case study
Allinial Global President Mark Koziel shared this story with us: A regional ice cream manufacturer that had long been white-labeling its products for a major retail chain’s house brand suddenly had a new water reduction requirement clause in their contract – and those reductions needed to be documented for the company to retain the contract, which was a significant percentage of their business.
The major retailer includes global responsibility in its reporting to investors and the general public, and water usage was a big part of that – including auditing the retailer’s supply chain, which includes the ice cream manufacturer.
Suddenly, this relatively small, privately held regional ice cream manufacturer had to figure out how to measure its water reduction efforts, document progress, and provide assurance to the public company. More and more companies are going to be facing similar requirements, and getting ahead of the curve is a smart move that can provide you with a competitive edge.
Start your ESG journey
In our next post, we’ll talk about risk and asset management in the ESG space. In the meantime, if you’ve got a question about ESG or would like to talk about what your auditing requirements could potentially be, get in touch. We’re happy to talk and as always, we’re here to help.