ESG: A Fundamental Shift in Capitalism

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On the path to discovering Atria’s place in the community impact ecosystem, I felt drawn to look into ESG (Environment Social Governance), three new categories that businesses (initially public ones) must report on beyond their financial performance. First, there was Corporate Social Responsibility. Then, a focus on Diversity, Equity and Inclusion. Now, ESG: an umbrella heading for the first two metrics and many more. ESG is here to stay and is fundamentally changing capitalism... in a sneaky by-the-numbers kind of way. I am sharing an overview of my research: What ESG means, why it matters, where we are going, what’s coming, the impact on businesses, and my take on all this ESG stuff. Thanks for reading!

WHAT ESG MEANS

ESG represents new performance metrics that companies are required to report on for short- and long-term sustainability assessment by governments, citizens and investors. Here is a breakdown of each component:

Environmental (E): This factor assesses a company's impact on the planet. It includes considerations such as the company's carbon footprint, energy consumption, waste management, and overall environmental sustainability practices.

Social (S): The social aspect looks at how a company manages relationships with its employees, suppliers, customers, and the communities in which it operates. It covers labour practices, diversity and inclusion, human rights, and community engagement.

Governance (G): Governance evaluates the company's internal policies, leadership structure, and overall corporate governance. This includes aspects such as board composition, executive compensation, shareholder rights, and adherence to ethical business practices.

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WHY ESG MATTERS

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These data requirements are coming into place because of pressure from governments, the public, and investors. These stakeholders are well aware that corporations have the greatest impact on the health of our world, whether you look through the lens of the environment or community. In a survey by PWC of almost 10,000 individuals, 76% of consumers say they will discontinue relations with companies that treat employees, communities, and the environment poorly (2021).

Corporate negligence can be directly tied to environmental disasters and catastrophic community outcomes. Consider the impact of the 2010 BP Deep Horizon 5-month-long, 4.9 million barrel oil spill killing millions of marine animals and impacting our oceans and shorelines to this day. Consider Purdue Pharma’s intentional and systematic approach to Oxycontin sales, which precipitated the opioid addiction crisis of North America, resulting in almost 300 overdose deaths per day across the United States (CDC, December 2023).

As the core drivers of our socioeconomic systems, businesses hold the greatest responsibility for the well-being of the planet. For the majority of companies in our current system, the only measure of success has been profit. We are all learning that the extent of responsibility and integrity required by a company is much greater. It is time to pay the piper, or Mother Earth in this case.

Slowly over the last few decades, companies have started to be held to a higher performance standard beyond the bottom line. More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies (McKinsey, August 2022). Today, the external impacts of business are so apparent that investors are concerned about the risk companies run by neglecting these short- and long-term external impacts. “To me, the real evolution has been the transition of short-term thinking to long-term thinking,” said Bill McNabb, former Chair of Vanguard in an interview. Investors are using the ESG criteria to make more informed and socially responsible investment decisions. Investors are protecting their assets by demanding more information beyond the dollar.

This may sound like just another thing companies need to think about. ESG does add pressure and more requirements to run a business. The great thing is that the companies that are most thoroughly measuring ESG today, have been shown to produce, albeit slightly, 3% more profit than companies that do not measure ESG (BDC, March 2023). Other benefits include a better reputation, increased accountability, improved trust, greater access to capital, and an enhanced competitive advantage. Operating consciously is good for business.

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WHERE WE ARE AT AND WHAT’S COMING

Companies are legally having to report on something other than profit and with the same level of rigour and due diligence. Australia, Europe and the United States have already begun to regulate ESG for public companies. The Canadian Federal Government announced in 2022 that Canada will begin to require ESG reporting starting with large banks and insurance companies in early 2024 and will grow to include other companies over time (ESG Today, April 2022).

Like anything new, it is a little messy right now. We are past the honeymoon phase and ESG is being politicized. Certain groups say that ESG is just a way to push a political agenda or personal beliefs about climate change and goodwill. However, in an email to his network, Mark Wiseman, Senior Advisor at the Boston Consulting Group and former CEO of the Canada Pension Plan Investment Board, points out that “ultimately ESG helps identify risks and opportunities that traditional measurements of long-term value missed.”

There are also major gaps and differences in the reporting requirements. It is unclear for many organizations what they should even be reporting on. There is a range of certifications available and reporting structures to choose from. Eventually, we will see consolidation and synchronicity. As a reference point, even today there are two different accounting reporting structures and the world still goes ‘round. Ironically, the International Financial Reporting Standards Foundation (IFRS), one of the two major accounting governing bodies, is a primary organization tasked with standardizing sustainability metrics and reporting (IFRS, Retrieved January 2024). It makes sense. The IFRS Foundation already has systems set up to manage and implement rigorous and robust reporting structures. They are working with the International Sustainability Standards Board, and in Canada, we have the Canadian Sustainability Standards Board.

Companies also face growing pressure to demonstrate the credibility of their reporting by obtaining external assurance, especially as investors, lenders and regulators rely more on ESG disclosures. “Assurance helps stakeholders trust your ESG reporting and reduces the risk of critics accusing your organization of greenwashing” (PWC, retrieved January 2024).

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THE IMPACT ON BUSINESSES

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Practically speaking ESG impacts every department. For example, an engineering department that is utilizing large amounts of electrical energy impacts ESG. An accounting department that has yet to go paperless impacts ESG. A Marketing department with several cases of sexual harassment impacts ESG. Every department will need to report on their ESG efforts. This is a tremendous amount of data to collect, consolidate and articulate, which is why the leading companies implementing ESG practices are leveraging Finance and Accounting teams. They are already tapped into every other department and have the data management structures in place to succeed in ESG reporting. They also understand the ways investors receive and review information.

As mentioned, only the leading companies are utilizing their Finance and Accounting teams for ESG management. Most companies are still not doing enough. PWC found that 81% of Canada’s top companies do not financially quantify their climate-related risks (PWC, November 2023). But you can see where this is all going: Accounting teams receiving training for ESG reporting, Accounting schools with semesters or classes on ESG, and ESG reporting becoming a standard practice of Finance and Accounting departments across the public, private and even non-profit sectors. Imagine that, the department that traditionally focused only on ensuring the bottom line is looking good, is now focusing on ensuring the environmental and community impacts are looking good too. This is a significant operational change for businesses! Finally, companies can be held accountable for the full impact of their operations. Perhaps the impacts of Purdue Pharma, BP, and other companies could have been prevented if their stakeholders had comprehensive ESG reports.

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TIPS FOR PRIVATE COMPANIES

Canadian Private companies take note: Unless you operate in Europe (in which case you may need to report to the European Commission under their Corporate Sustainability Reporting Directive), you are not required to report on ESG anytime soon. However, the regulation will have a trickle-down effect impacting your business. If you partner with banks or public companies, your operations impact their ESG performance. You can bet they are eventually going to ask partners to share ESG data and/or look for partners with sustainable operations and the data to back it up. If your company is already monitoring your ESG metrics, you might be ahead of the curve and have a competitive advantage.

If not, here are three tips:

1. Join and get certified by regulatory organizations (For example B-Corp or 1% for the Planet).

2. Gain external help to operationalize, and validate, sustainability and ESG in your company.

3. Leverage your finance team.

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MY TAKE

I believe this is a fundamental shift in capitalism. No longer is profit the only measure a company must follow, legally. We have three seemingly mundane new measurements E S G. It’s funny, even these letters sound like a boring, dry corporate way of defining beautiful and deeply meaningful metrics. Conscious action has been corporatized folks.

More resources will flow from the corporate sector to the non-profit sector as companies seek to align themselves with organizations making positive impacts in the world. We may see greater synergies where we once saw divides. This is so important as our communities experience growing and widespread poverty, and our planet continues to show the increasing effects of climate change. Businesses are one of the keys to change, and more people are understanding this. I look forward to the future of ESG and the retribution owed to Mother Earth.

In regards to Atria, this project is being put on hold for the time being. I have been working on another project called Burro Outdoors. We are creating a portable kitchen box for outdoor enthusiasts to get organized and enjoy nature faster. Check it out here. Burro has gained momentum and is requiring more time and energy. If you are interested in following along, click here. Supporting companies on the journey towards ESG integration and more sustainable and equitable operations is still a passion of mine. I am open to helping companies navigate their impact through consultancy, advisory and network reach. I will also continue to stay involved in poverty reduction efforts in Vancouver.

I’d like to thank Elizabeth The, Katherine Tang and Nolan Buchanan for their thorough reviews and feedback on this article. I greatly appreciate you three!

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With love,

Evan