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  • Writer's pictureMagali Depras

About the importance of the G in ESG


In recent weeks, I've been asked several times about the G in ESG. What is good Governance? What should be measured, and why? There are many reasons as to why the governance of a company's environmental and social commitments is necessary. It supports the company's strategy and the creation of financial and extra-financial value, while enabling to better meet the expectations of its stakeholders.


Investors

The proportion of responsible companies in investment portfolios has increased over time.

ESG criteria enable financial analysts to assess the inclusion or exclusion of a given company in their portfolio. In this context, investors need detailed information on companies' ESG practices and performance, so they can make informed decisions.

New financing tools, such as green loans, have also emerged and are now available to companies. In the case of a sustainability-linked loan (SLL), the interest rate may vary upwards or downwards depending on whether the company achieves the ESG objectives defined in the contract. To validate the accuracy of the data disclosed, an annual verification by an external auditor is required. This involves considerable groundwork for teams who have never experienced ESG data audits, but it can be a very useful exercise for the company to be better prepared for future disclosure requirements.


New ESG standards

Companies have long been faced with a multiplication of standards for ESG reporting. This is a real headache for teams in charge and it is often perceived as an activity that creates little to no value. The good news is that steps have been taken to move towards harmonization and the adoption of a common language to facilitate the work of reporting and analysis of these disclosures.

In Europe, the new Sustainability Reporting Directive (SRD) will apply starting 2025, covering the 2024 financial year. In concrete terms, companies will be required to report environmental and social information which will have to pass a systematic audit process before it is published. An estimated 1,300 Canadian companies will be subject to the European rule.


The ISSB (International Sustainability Standards Board), whose North American head office is based in Montreal, published two standards this year, IFRS S1 and IFRS S2, which will come into force in January 2024. IFRS S1 requires a company to disclose information on its governance, strategy and risk management, as well as measurable objectives, in relation to the risks and opportunities associated with sustainable development. IFRS S2 requires information on the risks and opportunities associated with climate change.

In the United States, the Securities and Exchange Commission (SEC) recently proposed requiring companies to disclose information on climate-related risks likely to have an impact on their business, as well as on the processes the company has put in place to address climate risks.

In short, the regulatory framework is evolving fast, and expectations on companies are set to rise.


Interdependent supply chains

When it comes to procurement, companies experience a cascade effect. A large public company with ESG commitments will seek the support of its suppliers and partners to achieve its objectives. This is the case, for example, with carbon footprint, for which a company will not only monitor its own greenhouse gas emissions, but also seek to understand those of its suppliers. This is part of what is known as Scope 3 in GHG accounting.

This also applies to the social and ethical aspects of value chains. For example, a company will want to know where and under which work conditions the products it purchases are manufactured.

Tools and platforms for the ESG assessment of suppliers are becoming increasingly sophisticated. It is also common for a company to receive detailed questionnaires submitted by its customers, who sometimes even require a minimum threshold of ESG performance from their supplier. It is also important to note that small and medium-sized companies are facing the same sets of requirements and will need to prepare themselves and anticipate the resources, particularly human and IT related, required to collect and communicate their data, particularly in environmental terms.


Towards operationalizing governance

The articulation of a robust strategy paired with an efficient governance of environmental and social objectives can trigger new opportunities for a business, ensuring a positive impact for stakeholders while maximizing its value.

It's not so much a question of collecting and disclosing ESG data once a year for this or that report, which is not an end by itself, but rather of managing indicators proactively and dynamically across the company's various sectors. Gains in energy efficiency and waste reduction, a more innovative range of sustainable products, improved employee health and safety, attractiveness as an employer with greater diversity and inclusion, a positive impact on communities. All of these contribute to increasing the company's financial and extra-financial value.


Take action now!

Let's end with a little self-assessment exercise. I invite you to reflect on these questions:

  • What is your company's ESG governance structure?

  • Are your objectives and performance indicators aligned with your strategy?

  • How do you integrate your stakeholders' needs?

  • Which functions are responsible for the execution of various ESG indicators?

  • What are the incentives in place?

  • How are data measured and collected?

  • Are internal controls in place to ensure data integrity?

I look forward to hearing from you and to continuing the conversation.


Sustainable regards,

Magali


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