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Energy and utility companies are adjusting their long-term plans in light of a dynamic market impacted by both volume and velocity of issues coming from customers to regulators and the financial market. In addition to traditional financial risks is a growing array of financially material risks which are equally — if not more —– critical to success or failure. As you take a critical look at your strategy, ask yourself about the role of Environmental, Social and Governance (ESG) issues in your organization. ESG is taking an increasingly important role for businesses in every industry. Learn why ESG is getting more attention now than ever, and how your organization can adapt.
Capital markets, financial institutions, regulators, and customers are demanding more from the energy and utility sectors to focus current decisions on long-term sustainability - and this demand is driving the need for identification, measurement, and disclosure of financially material Environmental, Social, and Governance (ESG) issues. And considering the capital-intensive nature of energy and utility companies, debt/equity financing required for infrastructure sustainment and build out are being directly influenced through both access and financing costs related to corporate sustainability strategies.
In 2019, the United Nations Environment Programme Finance Initiative established the Principles of Responsible Banking that has now seen adoption by 190 banks, representing more than 1.6 billion customers worldwide and around 40 percent of global banking assets. These principles focus on driving change by the banking community through a positive contribution to people and the planet that society now expects.
Large banks are drawing a line for net-zero financed emissions. This means they are applying a climate lens to all investments and debt financing decisions. On September 21, 2020, Morgan Stanley announced their strategy of net-zero financed emissions by 2050 through embedding potential risks and opportunities of climate change into their core business. HSBC followed suit, making a similar declaration on October 9, 2020, seeking the same net-zero goal across its entire portfolio of investments and debt financing.
Beyond solely banking, the world’s largest asset manager — BlackRock — with $7.4 trillion in assets under management has publicly committed to “place sustainability at the center of its investment approach.” And they are delivered on that promise last year by voting against or withholding votes from 4,800 directors at 2,700 different companies where BlackRock feels “…companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues.”
Delaying acceptance of the reality of ESG issues will only exacerbate the risks you face which will negatively impact your company and force you to play catch-up.
MNP has created a sustainability maturity model to assist companies with evaluating their approach to ESG. This model evaluates your current status and helps you create a target for your future state of desired sustainability. Once you have an established your desired level of maturity, you can then begin building ESG directly into strategy and operations.
In a world of increasing complexity, regulatory requirements, and reporting expectations, adding more disclosures seems to be the least desired outcome. However, many companies are surprised at uncovering what they are already doing, recording, and managing but hasn’t yet translated into a formal disclosure strategy utilizing a globally accepted sustainability framework.
The key to creating adoption of ESG measures is simplicity. Your leadership team, starting with the board of directors, needs to clearly understand what is being done to meet ESG standards and to gain comfort in discussing your organization’s targets and actions to external stakeholders. Our team can help by:
Approaching ESG is not about volume, it is about value to stakeholders. Being meaningful, deliberate, and authentic in ESG targets and disclosures will minimize the risk of being seen as an organization that uses environmental causes for positive public relations instead of being actually committed to creating change.
Now is the time for meaningful, financially-material ESG disclosures to be embraced. Getting ahead of this trend can create new opportunities down the line. Targets should be established to tie issues to strategy and the bottom line. ESG issues need to be embedded and considered within the right risk context of your company’s enterprise risk management framework. And with clarity on issues and strategy will come the need for culture to turn sustainability into purpose.
To learn more about ESG and your energy and utilities organization, contact Edward Olson, CPA,CA, Regional Leader, Enterprise Risk Services & ESG, at 250.718.8687 or
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