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    Corporate Governance (Environmental Social Governance – ESG)

 

  • The concept of environmental social governance (ESG) is a philosophy that apparently evolved through the United Nations sometime around the turn of this century, hopefully involving a benign desire to influence leaders in the business community to promote business practices (such as lending, manufacturing, operations and the like) that might have the effect of improving daily life on this planet, while simultaneously attempting to stifle any business practices that might have the opposite effect, through a “carrot and stick” economic approach.

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  • The “environmental” aspect of the ESG philosophy generally focuses not only on physical environmental global issues, but also with any activities of the global population that might negatively affect the global environment, such as: agriculture; biodiversity; carbon footprint; circular economy; climate change; deforestation; energy inefficiency; energy transition; fair trade; greenhouse gas (GHG) emissions and all other forms of man-made pollution; environmental fraud and greenwashing; supply chain parity; waste management; water pollution; water usage; and the like.

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  • The “social” component of the ESG philosophy is the most broad category, and focuses on both business issues and also on issues that may affect the quality of global human existence in general, whether within the physical workplace or in general society, such as: civil rights; community relations; compensation; cultural heritage; data protection; data security; diversity; education; employment benefits; food security; gender equity; global population health; human rights; inclusion; indigenous peoples; labor standards; pay equity; pensions; racial justice; supply-chain management; urban development; workforce diversity; workforce health; workforce management; workplace safety; and the like.

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  • The “governance” component of the ESG philosophy relates to how companies, entities of authority and governments may enforce compliance with ESG-related international directives, guidelines, laws, opinions, policies, regulations, rules, statutes and treaties in the environmental and social categories, including: brand protections; corporate governance; crisis management; impact analytics; justice; soft law (meaning guidelines, protocols, recommendations and the like, which are not promulgated by governments, so they do not have the force of law, and so any compliance therewith is purely voluntary, but nonetheless contain useful information and insights); sustainable finance.

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  • In the United States, under the current Securities and Exchange Commission (SEC) disclosure requirements for publicly-traded companies, there is currently no mandatory duty for non-financial companies to provide ESG disclosures to the public (although very recently, the SEC has proposed a framework of ESG reporting requirements for financial entities dealing in ESG-related funds, investments, securities and the like), although there is no apparent prohibition against any company doing so voluntarily.

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  • Surveys of companies before and after voluntarily ESG compliance have suggested that there may be some common unanticipated benefits resulting from voluntarily ESG compliance, including: decreases in governmental interference and interventions; growth of operations; increased employee productivity and well-being; increased profitability; noticeable cost reductions; optimization of investment capital.

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  • There is also currently no single governing body that has jurisdiction over the global ESG rating community, and thus there is no mandatory minimum list of ESG disclosure documents (unlike the massive lists of the disclosure documents the SEC requires for particular situations) that a company seeking an ESG rating must submit to ESG rating entities when requesting an ESG rating.

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  • Since ESG policy is generally influenced by current public opinion, ESG disputes are often related to innuendo and reputation, not to established standards in laws and regulations, and are thus difficult to adjudicate.

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  • Thus, companies currently generally provide only whatever particular ESG disclosure documents may be required by the particular ESG rating entity to which the company is applying for the ESG rating.

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  • The concept of environmental, social governance (ESG) is often used interchangeably with the concept of corporate social responsibility (CSR), but that is incorrect since there is a fundamental difference in the practical implementation of those frameworks – although both frameworks use various ratings systems to gage the levels of achievement of the respective participating companies seeking ratings, in ESG it is external third-party ESG-rating entities that rate the companies seeking the ESG ratings, but in CSR each participating company rates itself, using internal rating mechanisms; thus, the ESG rating system is more objective, whereas the CSR rating system is more subjective.

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  • Confusion in terminology also often occurs when referencing either a certified B corporation or a certified benefit corporation; a corporation achieves B certification after the non-profit B Lab company certifies that the company seeking the B certification has voluntarily complied with B Lab proprietary B Impact Assessment standards, whereas a benefit corporation is an entity designated currently by thirty-one (31) states, allowing the company seeking the benefit corporation certification to self-certify to the particular state that the company seeking the benefit corporation certification has voluntarily complied with whatever requirements that particular state has established in order to achieve the benefit corporation status; thus, the B corporation certification is purely objective (in that B Lab itself hypothetically tests the company’s practices against the B Lab proprietary B Impact Assessment standards), but the benefit corporation certification is somewhat subjective (in that the company seeking the benefit corporation certification makes a self-serving representation that it voluntarily adheres it whatever framework the particular state has established) and somewhat objective (in that there is at least a framework of goals established by the particular state, against which the company seeking the benefit corporation certification hypothetically must measure itself); also, the B Lab proprietary B Impact Assessment may generally seek to take into consideration the global impact of ESG issues, whereas the frameworks established by the particular states for benefit corporation certification may generally be more-limited to CSR considerations – including localized impacts that the social actions of employees such as philanthropic giving, charitable services and the like may have on the community in which the benefit corporation may be actually located; also, since the respective certifications are awarded by unrelated sources (B Lab and a state) it is possible that a company may achieve certification as both a B corporation and a benefit corporation.

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  • The practical goal of the environmental social governance (ESG) philosophy is to use an enhanced ESG reputation to increase corporate profit through: a higher credit rating; increased ability to access new sources of capital; increased brand recognition and reputation; increased operational efficiencies; social license to operate (SLO) – meaning an increased industry acceptance of a company’s operational practices, as models of efficiency and social responsibility; the opportunity to access new markets.

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  • Proponents of ESG strive to advocate for voluntary global corporate cooperation, consciousness and responsibility to improve the global environment and population well-being through compliance with the seventeen (17) sustainable development goals (SDGs) originally-developed by the United Nations: (1) no poverty; (2) zero hunger; (3) good health and well-being; (4) quality education; (5) gender equality; (6) clean water and sanitation; (7) affordable and clean energy; (8) decent work and economic growth; (9) sustainable industry, infrastructure and innovation; (10) reduced inequalities; (11) sustainable cities and communities; (12) responsible consumption and production; (13) climate action; (14) sustainable aquatic ecosystems; (15) sustainable land ecosystems; (16) peace, justice and strong institutions; and, (17) partnerships to achieve sustainable goals – the reward for which voluntary compliance being a high ESG rating for the company from an ESG rating entity, resulting in access for the company to discounted ESG-supportive capital, provided by a global network of ESG-supportive private and public lenders, that the company may then use for ESG-supportive operations, products and projects.

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  • ESG-supportive capital is abundant for ESG-compliant companies, since there are currently at least one hundred eighteen (118) global stock exchanges pushing the stocks of more that sixty-two thousand (62,000) ESG-compliant companies.

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  • There are also ESG-supportive investor networks – such as the Ceres Investor Network of more than two hundred twenty (220) institutional investing entities – that specialize in providing ESG-supportive capital to ESG-compliant companies.

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  • In general, all ESG rating entities encourage companies that may eventually be interested in seeking ESG ratings to integrate the corporate best practices sustainability principles embedded in the documentation for all the SDGs noted above into the companies reporting methodologies, in order to acclimate all corporate personnel involved in compiling the annual corporate ESG report to think in a manner consistent with the goals of the SDGs.

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  • The company seeking ESG ratings demonstrates the extent of its compliance with the 17 SDGs noted above through an annual corporate ESG report that the company may voluntarily provide to one or more self-appointed, industry-accepted ESG rating entities.

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  • There are numerous well-known global ESG rating entities of one form or another, each rating various key performance indicators (KPIs) of a company’s performance, across various industries and global sectors, such as: Alliance for Corporate Transparency (ACT); Bloomberg ESG Disclosure Scores; Calvert; Climate Registry General Reporting Protocol (CRGRP); Corporate Knights (CK) Global Climate 100 Index; Corporate Social Responsibility Hub (CSRHub); Dow Jones Sustainability Index (DJSI); Dow Jones World Sustainability Index (DJWSI); EcoVadis; Environmental Performance Index (EPI); Ethical Investment Research Services (EIRIS) Foundation; Euronext Vigeo Eiris Indices; Finvex Sustainable Efficient Europe 30; FitchRatings; Financial Times Stock Exchange (FTSE) Russell; FTSE4Good Index Series; Global Green Economy Index (GGEI); GRESB (f/k/a the “Global Real Estate Sustainability Benchmark”); Institutional Shareholder Services (ISS); Moody’s; MorningStar; Morgan Stanley Capital International (MSCI) Indices; MSCI Canada ESG Leaders Index; MSCI Europe & Middle East ESG Leaders Index; MSCI KLD 400 Social Index; MSCI Pacific ESG Leaders Index; MSCI USA ESG Leaders Index; MSCI World Leaders ESG Index; Nasdaq OMX Clean Edge Global Wind Energy Index; Refinitiv; RepRisk; Sustainalytics; Sustainalytics STOXX Global ESG Leaders Index; Standard & Poor’s (S&P) Global; S&P/TSX Renewable Energy and Clean Technology Index; Thomson Reuters; UN Global Compact 100 Index; Vigeo EIRIS; World Benchmarking Alliance (WBA).

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  • There are also numerous specialized and localized global entities, indices and rating entities that promulgate ESG ratings of various complexities and forms, such as: Ardour Global Alternative Energy Index; Borsa Istanbul (BIST) Sustainability Index; Building Research Establishment Environmental Assessment Method (BREEAM); Carbon Disclosure Project (CDP) Climate Disclosure Leadership Index; Climate Disclosure Standards Board (CDSB); CDSB Climate Change Reporting Framework (CCRF); CDSB Framework for Reporting Environmental Information, Natural Capital, and Associated Business Impacts; Climate Bonds Initiative (CBI); Climate Public Expenditure and Institutional Review (CPEIR); Corporate Reporting Dialogue (CRD); Corporate Sustainability Index (ISE); Corruption Perceptions Index (CPI); DAXglobal Alternative Energy Index; Deutschland Ethik 30 Aktienindex; Energy Savings Opportunity Scheme (ESOS); Environmental Management System (EMS); Equator Principles; Ethical Investment Research Services (EIRIS); Forest Stewardship Council (FSC) guidelines; General Reporting Protocol (GRP); Global Food Safety Initiative (GFSI); Global Footprint Network (GFN); Global Sustainable Investment Alliance (GSIA); Global Water Disclosure Project (GWDP); governance factors; green bonds; Green Climate Fund (GCF); Greenhouse Gas Inventory (GGI); Greenhouse Gas Protocol (GGP); Happy Planet Index (HPI); Human Development Index (HDI); India Responsible Business Index; Intergovernmental Panel on Climate Change (IPCC); International Accounting Standards Board (IASB); International Finance Corporation (IFC); International Financial Reporting Standards (IFRS); International Institute for Sustainable Development (IISD); International Standards Organization (ISO) 14001 EMS framework; ISO 14064-1:2018 greenhouse gas reporting; ISO 26000 social responsibility reporting (a/k/a “ISO SR”); International Union for Conservation of Nature (IUCN); International Social and Environmental Accreditation and Labeling (ISEAL) Alliance; IW Financial Sustainability Reports; Jantzi Social Index (JSI); Johannesburg Stock Exchange (JSE) Socially Responsible Investment Index; Just Capital; Leadership in Energy and Environmental Design (LEED); Lempert-Nguyen Indicator; Maala CSR Index; Marine Stewardship Council (MSC); Newsweek Green Ranking; Performance Standards on Environmental and Social Sustainability; Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions; Principles for Responsible Banking (PRB); Sustainable Development Goals (SDG) Index; sustainable development indicators (SDIs); sustainable finance; Sustainable Forestry Initiative (SFI); Sustainable Industry Classification System (SICS); Sustainable Stock Exchange Initiative (SSEI); SXI Switzerland Sustainability 25 Index; The Climate Registry (TCR); TCR Information System (CRIS); The Natural Step (TNS); United Kingdom (UK) Sustainable Investment and Finance Association (UKSIF); United States (US) Green Building Council (USGBC); Rainforest Alliance UTZ Certification (UTZC); Water Quality Association (WQA); Western Climate Initiative (WCI); World Intellectual Capital Initiative (WICI); World Water Index (WOWAX).

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  • Generally, each of the ESG rating entities uses its own proprietary methodology to arrive at a final ESG rating, and all of them are competing with each other to promote their own proprietary methodology in the hope of gaining market share and establishing dominance in the ESG rating industry.

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  • Through the information provided in such annual corporate ESG report, the company requesting the ESG rating seeks to achieve as high of an ESG rating as possible from one or more ESG-rating entities.

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  • Once such ESG rating entities receive the report from the company requesting the ESG rating, such ESG rating entities will attempt to perform their own complex individual due diligence audit of the statements in the company’s ESG report, measuring the veracity of any ESG-related claim in the report against one or more frameworks (general sustainability guiding principles to promote compliance with general ESG aspirations, generally used by ESG rating entities in the absence of standards applicable to a particular ESG category), standards (actual sets of hopefully-objective sustainability benchmarks, generally-accepted within the global ESG-supportive community, which are used by the ESG rating entities to measure the compliance of a company requesting an ESG rating with such benchmarks, in numerous defined ESG categories) or hybrid guidelines (combinations of sustainability frameworks and standards), theoretically using only the data provided by the company requesting the ESG rating in their annual corporate ESG report to test the veracity of any such claim of ESG compliance.

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  • It is important to note that there is no single over-arching global governing body with jurisdiction over any or all the numerous ESG rating entities, that might have any authority to adjudicate any disputes between any ESG rating entity and an aggrieved company that had requested an ESG rating, in the event the aggrieved company did not think that the ESG rating entity’s final rating awarded to the requesting company was high enough; the requesting company’s only recourse in such a situation is to try to work things out amicably with the ESG rating entity, for example by perhaps making improvements to some aspects of the requesting company’s operations in which the ESG rating entity felt that the requesting company fell short in its annual corporate ESG report, and then resubmit the annual corporate ESG report to the ESG rating entity for reconsideration.

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  • If ESG rating entities award a high ESG rating to the company requesting an ESG rating, then such company may be rewarded with global access to borrow discounted capital from the global community of ESG-supportive lenders, at lower rates than are available to ordinary, non-ESG compliant, commercial borrowers.

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  • Thus, the accuracy, content and presentation of the report provided to the ESG rating entities by the company requesting the ESG rating is absolutely critical when determining the final ESG rating awarded to the company requesting the ESG rating by the ESG rating entities, since the higher the score the more prestige the company requesting the ESG rating may have in the relevant ESG-supportive business circles, and the greater will be the potential savings to the company requesting the ESG rating, in terms of lower borrowing rates, which may result in millions of dollars saved by the company requesting the ESG rating, and thus the greater the profitability will be for the company requesting the ESG rating when implementing projects generated through such ESG-supportive capital.

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  • Such ESG-supportive capital is then typically used by the ESG-compliant company to fund ESG-supportive projects promoting the noble aspirational principles, generally expressed in the seventeen (17) SDG general categories upon which the ESG-supportive frameworks, standards and hybrid guidelines used by the ESG rating entities may be based.

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  • Also, since the amount and availability of ESG-supportive capital is contingent upon the level of the ESG rating awarded to the company requesting such ESG rating, it is imperative that potential ESG-supportive lenders have confidence not only in the veracity of the ESG rating entities themselves, by also in the consistency of the information and structure of the frameworks, standards or hybrid guidelines used by such ESG rating entities.

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  • Otherwise, the use of any particular such framework, standard or hybrid guideline by any particular ESG rating entity might result in drastically inconsistent ESG ratings than if some other particular ESG rating entity, framework, standard or hybrid guideline were used by such ESG rating entity.

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  • Such inconsistency might be used to advantage by a company requesting an ESG rating, through selective cherry-picking by that company in the hopes of finding the most-sympathetic ESG rating entity that is using the frameworks, standards or hybrid guidelines most-favorable to the company, resulting in in an ESG rating purposely-biased in favor of the cherry-picking company requesting the ESG rating.

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  • If such purposely-biased results were later to be discovered by the global ESG-supportive community, it would cause a loss of confidence by global ESG-supportive lenders in the accuracy of the ESG rating system in general, and in particular towards the ESG rating entity which had awarded the purposely-biased rating to the cherry-picking company requesting the ESG rating, since it would have been the supposed accuracy of such ESG rating upon which the global ESG-supportive lenders had relied when making their ultimate decision about whether or not to make ESG-supportive discounted capital available to the cherry-picking company that had requested the ESG rating.

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  • Such situations have unfortunately occurred previously, when the global ESG-supportive community in general has been duped and victimized by a pernicious practice of unscrupulous entities seeking inexpensive capital – which may be informally referenced as either “greenwashing” or “green sheen” – in which such unscrupulous entities may use exaggerated and false claims about alleged adherence to “green” principals, sometimes even in the annual corporate ESG report itself, in an attempt to persuade both the ESG rating entity and the general public that such company is more ESG-supportive than it may actually be, if at all.

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  • Such annual corporate ESG report – somewhat similar in content and layout to a financial prospectus for filing with the Securities and Exchange Commission (SEC), except with more emphasis on social issues and sustainability rather than finances, and generally at least several hundred pages in length – may generally include sections on typical corporate and ESG-related topics such as (in no particular order of precedence):

    • message from executive management outlining the company’s current ESG philosophy;

    • company business and financial profile;

    • general discussion about the company’s aspirations and strategies to achieve ESG accountability and compliance;

    • highlights about specific company programs that achieved such accountability and compliance during the previous year;

    • company initiatives to interact with the community (in which “community” would refer to all the domestic states and international countries in which the company had operations);

    • new and innovative ESG-related company operations and products;

    • specific company sustainability initiatives and goals;

    • the company’s environmental performance (for example, including performance gains from the previous year);

    • details regarding the company’s overall sustainability strategy;

    • explanation regarding all the methods the company employs to ensure the protection of the climate to the greatest extent possible in all operations throughout the company’s global enterprise operations;

    • how the company strives to reduce emissions in general and the company’s carbon footprint in particular;

    • the company’s efficient use of water;

    • biodiversity initiatives promoted by the company;

    • the company’s participation in and promotion of the circular economy (an economic model regarding production and consumption, involving activities such as leasing, recycling, refurbishing, repairing, repairing, reusing and sharing existing materials and products for as long as possible, in an attempt to decrease the energy that would be expended to constantly manufacture new materials and products);

    • discussion of increased safety in the materials and methods of production developed by the company;

    • specifics regarding improvements in the occupational safety, health and welfare of the company’s workers;

    • advancements in the company’s inclusivity, diversity and equity (IDE) initiatives;

    • statistics regarding the company’s workforce diversity and compensation;

    • company programs to hire diversity personnel and develop diversity programs;

    • company supplier diversity practices;

    • statistics about company investment in and development of communities;

    • details about the what sustainable solutions the company supports;

    • the company’s environmental and social key performance indicators (KPIs);

    • the company’s engagement with stakeholders;

    • the company’s accounting methodologies;

    • the company’s ESG corporate governance policies;

    • the company’s ESG disclosures, metrics and reporting;

    • the company’s independent assurance statement and analyst data summary.

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  • Such annual corporate ESG report may also include disclosures prepared in accordance with one or more commonly-referenced standards, such as the Global Reporting Initiative (GRI) Sustainability Reporting Standards Comprehensive option, which requires that a reporting entity report all the General Disclosures described in the GRI Standards.

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  • If such annual corporate ESG report follows the GRI reporting standard noted immediately above, then the company requesting the ESG rating will have to include topic disclosures in such annual corporate ESG report that may be relevant (depending on the company’s global operations) to as many of the forty-two (42) sectors, currently organized into four (4) named groups, identified in the GRI reporting standard, as follows:

    • Group 1: Basic materials and needs – GRI 13 - agriculture, aquaculture and fishing; asset management; banking; GRI 12 - coal; food; forestry; insurance; metal processing; mining; GRI 11 - oil and gas; renewable energy; textiles and apparel; utilities;

    • Group 2: Industrial – aerospace and defense; automotive; chemicals; construction; construction materials; electronics; machinery and equipment; pharmaceuticals;

    • Group 3: Transport, infrastructure and tourism – airlines; media communication; packaging; real estate; shipping; software; trading, distribution and logistics; transportation infrastructure; trucking;

    • Group 4: Other services and light manufacturing – commercial services; educational services; household durables; managed health care; medical equipment and services; non-profit organizations; restaurants; retail; security services and correctional facilities.

  • Other GRI sectors not yet included in any named group, but for which the company requesting an ESG rating must report topic disclosures in its annual corporate ESG report, if using the GRI reporting standard and if relevant to the company’s global operations, are:

    • GRI 201 - economic performance; GRI - 202 Market Presence; GRI203 - Indirect Economic Impacts; GRI 204 - Procurement Practices; GRI 205 - Anti-corruption; GRI 206 - Anti-competitive Behavior; GRI 207 - Tax;

    • GRI 301 - Materials; GRI - 302 Energy; GRI 303 - Water and Effluents; GRI 304 - Biodiversity; GRI 305 - Emissions; GRI 306 - Effluents and Waste; GRI 308 - Supplier Environmental Assessment;

    • GRI 401 - Employment; GRI 402 - Management Relations; GRI 403 - Occupational Health and Safety; GRI 404 - Training and Education; GRI 405 - Diversity and Equal Opportunity; GRI 406 - Non-discrimination; GRI 407 - Freedom of Association and Collective Bargaining; GRI 408 - Child Labor; GRI 409 - Forced or Compulsory Labor; GRI 410 - Security Practices; GRI 411 - Rights of Indigenous Peoples; GRI 413 - Local Communities; GRI 414 - Supplier Social Assessment; GRI 415 - Public Policy; GRI 416 - Customer Health and Safety; GRI 417 - Marketing and Labeling; GRI 418 - Customer Privacy.

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  • Such annual corporate ESG report may also include disclosures and references to any of the myriad of other frameworks – such as those promulgated by the: Carbon Disclosure Project (CDP); Equator Principles Association (EPA); Greenhouse Gas (GHG) Protocol; GHG Protocol assurance statement; International Finance Corporation (IFC) Sustainability Framework; Principles for Responsible Investment (PRI); Sustainability Accounting Standards Board (SASB); Task Force on Climate-related Financial Disclosures (TCFD); United Nations (UN) Global Compact; UN Environment Programme (UNEP); UN International Standard Industrial Classification (ISIC) of All Economic Activities; UNEP Finance Initiative; UN Sustainable Development Goals (SDGs); World Business Council for Sustainable Development (WBSCD); World Economic Forum (WEF) Stakeholder Capitalism Metrics – standards – such as those promulgated by the: European Financial Reporting Advisory Group (); Financial Accounting Standards Board (FASB); Global Reporting Initiative (GRI); GRI Due Process Oversight Committee (DPOC); GRI Global Sustainability Standards Board (GSSB) Due Process Protocol; International Accounting Standards Board (IASB); Industry Classification Benchmark (ICB); International Financial Reporting Standard (IFRS); International Sustainability Standards Board (ISSB); Partnership for Carbon Accounting Financials (PCAF); Standard & Poor’s Global Industry Classification Standard (GICS) – and hybrid guidelines (including combinations of frameworks and standards) – such as those promulgated by the Organisation for Economic Co-operation and Development (OECD) – and the like.

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  • Compiling, drafting, managing, legal support, negotiating and presenting all ESG-related activities and documents, such as the: annual corporate ESG report; audits; checklists; compliance assessments; compliance change management protocols; corporate policies; governance assessments; risk assessments; risk strategies; reports; training programs.

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