ESG Environmental Sustainability Factors
What is the ‘E’ in ESG?
The ‘E’ in ESG stands for ‘environmental’ considerations. These environmental factors concern the preservation of our natural world and companies’ contribution to the cause.
ESG environmental issues also take into account the use of natural resources by businesses and the effect their operations have on the environment.
See also:
How are environmental risks directly impacting companies?
The impacts of climate change might seem far removed from the C-suite, or indeed the bottom line, of organizations—but that’s simply not the case. Here are some of the very real ways in which environmental risks are impacting companies right now.
Impact on credit and lending
Due to risks to company infrastructure and property caused by climate change, organizations that haven’t accounted for such environmental considerations can expect difficulty getting funding, credit, and insurance.
Oil and gas operators in Alaska, for example, are facing serious threats to their infrastructures from thawing permafrost. This makes these companies high risk in the eyes of financial institutions.
It’s not just risk that’s the issue. Financial associations are committing to net zero. The result is that bodies like the Glasgow Financial Alliance for Net Zero (GFANZ), which is a coalition of banks, insurance companies, asset managers, and asset owners, have pledged to cut emissions from their portfolios and lending.
Supply chain disruption & increased costs
McKinsey wrote in 2020 that, “Greater frequency and severity of climate hazards can create more disruptions in global supply chains—interrupting production, raising costs and prices, and hurting corporate revenues.”
Since then, extreme weather events have been forecast to cost the supply chains of conglomerates hundreds of millions of dollars per year. Not only that but the movement towards low-carbon economies is set to increase transportation costs dramatically.
There have also been instances reported by PwC of corporations needing to redesign equipment to ensure it can cope with the dramatic changes in weather occurring due to global warming.
Harvard Business Review warns: “businesses that continue to sit on the sidelines will be badly handicapped relative to those that are now devising strategies to reduce risk and find competitive advantage in a warming, carbon-constrained world.”
Government mandates
90% of the global economy is now part of a net-zero pledge, and governments are starting to mandate ESG reporting and action from companies. The UK Treasury, for example, has stipulated that, by 2024, large UK companies must document how they plan to meet net-zero targets. In fact, companies in high emission sectors must do so in 2023.
The European Union's Corporate Sustainability Reporting Directive (CSRD) mandates ‘double materiality’, requiring companies to disclose how sustainability issues impact their business as well as how their business impacts people and the environment. While the new legislation currently affects 49,000 larger organizations, it’s expected the rules will encompass all small to medium sized enterprises by 2026 – and other countries are quickly following suit.
Response to environmental concerns across the world
ESG activity has been ramping up in Europe. Over the past three years, the EU has developed an initiative to emphasize ESG factors within capital markets by prioritizing sustainable investment.
In the UK, investment policies have been guided by the 2006 Stern Review, which provides an economic analysis of climate change related issues. It concludes that all financial calculations must factor in climate change and environmental issues, advising that the benefits of early action will outweigh the costs.
In the United States, there have been mixed responses to the Paris agreement, and, as yet, no unified federal policy on pressing environmental concerns has been created. However, the US government has a net-zero emissions by 2050 goal, so it would be folly for US-based enterprises to delay.
ESG environmental sustainability factors
The following are the most critical environmental & sustainability factors being considered:
- Climate change
- Carbon emission reduction (decarbonization)
- Biodiversity
- Water pollution and water scarcity
- Waste management
- Air pollution
- Deforestation
- Greenhouse gas emissions
- Diminishing raw materials
It’s not uncommon to see companies categorizing the vast array of compounding ESG sustainability factors into 4 buckets:
- Greenhouse gas emissions
- Water use
- Waste and pollution
- Land use and biodiversity
3 ways organizations can improve their environmental ESG ratings
1. Hire a Chief Sustainability Officer
For enterprises today, it’s no longer enough simply to have someone on the workforce responsible for sustainability and the environmental components of ESG. That person needs a seat at the executive table.
PwC has commented on the blurring of responsibilities between CFO and Chief Sustainability Officer. The Board may be responsible for overseeing ESG – and indeed we can think of the ‘G’ of ESG (Governance) sitting squarely with the Board – but such a mission-critical suite of duties and responsibilities is also deserving of a C-suite role.
2. Commit to net zero
The race for net zero is here. The latest report from the IPCC (the UN’s Intergovernmental Panel on Climate Change) finds that greenhouse gas emissions must peak before 2026 to avoid the most detrimental effects of climate change. Organizations are starting to respond by committing to science-based targets to reduce their emissions sufficiently to align with the 1.5 degree scenario as set out in the Paris Agreement.
Businesses leading the charge in terms of ESG environmental improvement are:
- Joining United Nation’s Race To Zero campaign
- Committing to Business Ambition for 1.5°C
- Seeking validation by the Science Based Targets initiative (SBTi)
3. Meaningful ESG reporting
Today’s high-pressure ESG business environment requires high transparency of tangible data relating to ESG criteria. Vague information, unsubstantiated claims, and vanity metrics will not be tolerated.
To facilitate the reporting of ESG data, the SASB emerged in 2011 and made available its set of ESG standards to 77 countries. Meanwhile in 2015, the TCFD developed a framework to help public companies and other organizations disclose climate-related risks and opportunities. The GRI Standards were also created, which cover topics ranging from biodiversity to tax, waste to emissions.
With no global ESG benchmarking available, consistency from company to company and country to country was impossible. However, in September 2020, the World Economic Forum and its International Business Council (IBC) published a consolidated set of standards, which organizations can now follow.