Environmental, social, and governance: Everything you need to know
In its historical context, environmental, social, and governance (ESG) served as an expression of business priorities, aiming to bring positive change to the communities in which they worked and the stakeholders in which they engaged. However, the delivery of meaningful outcomes often lacked substance, resulting in corporate inaction.
Today, ESG standards have shifted. The ever-growing number of ESG drivers is motivating companies to act swiftly and decisively to not only meet evolving expectations and regulations but also to strengthen their overall performance. This shift reflects a recognition that ESG is no longer just a gesture — it's a crucial aspect of responsible and sustainable business practices that can be measured, evaluated, and reported.
Table of Contents
What is ESG in business?
ESG encompasses the three pillars stakeholders are increasingly using to measure the degree to which an organization impacts and is impacted by a host of topics. Ranging from environmental to social, including the suitability of its governance structure to understand and adapt to the associated risks and opportunities. They are also strategic imperatives to drive long-term, sustainable value in our changing world.
The demand for an organization to act in a more responsible, equitable and sustainable way is becoming hard to ignore. The key is to undertake this journey in a meaningful way that still makes for profitable and innovative business decisions.
Organizations are facing increased demands from:
- Investors
- Regulators
- Community stakeholders
- Employees
- Boards of directors
- Consumers
- Governments
- Financial institutions
Why is ESG important?
Governments, investors, lenders, regulators, employees, and consumers are now calling on companies to act more transparently, equitably, and sustainably. There is growing pressure for businesses, when creating economic value, to consider the interests not only of their shareholders but those of all stakeholders.
Around the world, governments are exploring different policy measures around ESG issues. Some environmental policies, like Canada’s carbon pollution pricing system or carbon tax, have already been enacted and forced organizations to catch up.
Some major investment firms have started to factor ESG issues into their decision-making process and more changes could be on the horizon.
Defining ESG
The E: Environmental
The "E" in the ESG framework stands for environmental, emphasizing the imperative for organizations to align with an economy transitioning to net zero. This entails a commitment to understand and quantify greenhouse gas emissions both within the organization's direct control and throughout its supply chain. Moreover, it involves establishing precise targets to mitigate the organization's carbon footprint.
This commitment aligns with Canada's climate objectives, as outlined in initiatives like Bill C-50: An Act promoting accountability, transparency, and engagement to foster the development of sustainable employment opportunities and economic expansion within a net-zero greenhouse gas emissions framework.
Businesses of all sizes are increasingly expected to play their part in addressing key environmental impacts like energy efficiency, carbon footprint, water consumption, waste management, packaging, and biodiversity.
Many large Canadian organizations are elevating their climate disclosure efforts in response to regulatory and stakeholder pressures. This reflects a broader trend of heightened awareness and action towards environmental considerations. By prioritizing sustainability in these key areas, businesses can meet evolving expectations and contribute to a more eco-friendly and resilient future.
Learn more about the environmental aspect of ESG.
The S: Social
The "S" in ESG stands for social, encompassing an organization's values and relationships, including labour and supply-chain standards, employee well-being, product safety, diversity, equity, inclusion, and more. Elevating social engagements beyond superficial gestures like charitable donations and volunteer work is essential. True social responsibility involves meaningful actions aligned with your organization's purpose and values, going beyond grand gestures for authentic, sustained impact.
A nuanced understanding of the social landscape should drive corporate social responsibility and community engagement. It's about consistently doing the right things for the right reasons, recognizing that the "S" in ESG signifies a commitment to standing for more than maximizing profits. Simultaneously, it involves recognizing the value generated by understanding and addressing social topics.
Leveraging your position, visibility, and influence, your organization can contribute to making the world a better place. Breaking down the "social" component into specific areas clarifies social responsibilities, enabling initiatives that are not only relevant but also genuinely impactful.
Learn more about the social aspect of ESG.
Canada’s Supply Chains Act (Bill S-211)
The G: Governance
The "G" in ESG represents governance, encompassing crucial aspects such as the structure and diversity of the board of directors, executive compensation, cybersecurity, reliable financial disclosure, and formal policies on lobbying, political contributions, bribery, and corruption.
Stakeholders are gradually adjusting their governance expectations and what the role of boards of directors should look like — the prevailing norms that dictated your behaviour in past decades may not be sufficient now.
Today's boards of directors need to take a more hands-on approach to ensure that their organizations adopt the right strategy and that the plan is successfully executed.
Even today, governance is still too often centred around checking boxes of items that fall under the purview of executives and board members.
Learn more about the governance aspect of ESG.
ESG strategies
Initiating your ESG journey is a proactive step towards corporate sustainability. Beyond mere compliance, it's about building resilience, maintaining relevance, and contributing positively to society and the environment.
A well-defined corporate ESG strategy serves as the guiding force for sustainable business practices. It aligns the organization's operations with stakeholder expectations, identifies areas for innovation, and ensures that sustainability efforts are woven into the fabric of the business.
The following principles are critical to ESG planning and starting your journey.
1. Understand and define the business footprint
Where does the business operate? What are its primary sustainability concerns? How do products and services impact sustainability?
2. Identify stakeholders
Who are the organization’s internal and external stakeholders, and how are they affected through operations, products and/or services?
3. Identify ESG topics
Which topics across the ESG spectrum are most important to your organization and stakeholders?
4. Assess maturity
Which of these topics are financially material to the business and the stakeholders?
5. Understand existing initiatives
What is the business already doing (e.g., safety statistics)? How well is the business approaching each topic? Where can the business improve both in terms of data collection and management activities?
6. Gather data and build management and governance systems
Does the business have the right data to manage the ESG program and meet disclosure requirements?
7. Report and verify
How will the business communicate and validate progress on ESG priorities?
Learn more about how to set an ESG strategy and create lasting value.
ESG and culture
Culture is pivotal in translating ESG principles into action within an organization. An ethical and values-driven culture promotes responsible decision-making and transparent communication.
When ESG values are woven into the fabric of a company's culture, employees become champions of sustainability, attracting top talent and strengthening stakeholder relationships. This approach enhances reputation, attracts socially conscious investors, and mitigates risks associated with environmental and social issues, fostering long-term success.
As investors and other financial stakeholders (such as creditors and lenders) attribute more value to culture, more capital will be driven towards companies demonstrating strong ESG standards. A tectonic shift is happening in the finance world, with the focus shifting from traditional to sustainable finance.
Explore the significant benefits of managing your team's culture in today's dynamic business environment.
ESG and profitability
Integrating ESG principles is not just a regulatory requirement but a strategic move toward long-term profitability. By aligning business operations with sustainability goals, companies can enhance their reputation, attract socially conscious investors, and mitigate risks associated with environmental and social issues.
The focus on ESG factors is intensifying globally, with regulations like the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and the U.S. Securities and Exchange Commission (SEC) emphasizing the importance of transparency in communicating how ESG impacts investments.
Aligning your business model with ESG
To truly move the dial on sustainability, companies need to go beyond superficial measures and consider their business model. For instance, divesting high-emission assets might reduce immediate risks but does not contribute to global sustainability goals.
Instead, a comprehensive approach involves examining the entire business strategy and culture. Identifying financially material ESG factors that align with strategic goals is crucial. Engaging with stakeholders, understanding their perspectives, and aligning business objectives with their expectations creates a foundation for a sustainable ESG business model.
ESG disclosure requirements in Canada
Canadian businesses may face unique ESG disclosure requirements. Navigating these standards is crucial for organizations adapting to evolving expectations and responsibilities.
IFRS Sustainability Disclosure Standards
The International Sustainability Standards Board (ISSB) is ushering in new sustainability reporting standards through the International Financial Reporting Standards (IFRS) Foundation. These standards, known as IFRS S1 and IFRS S2, emphasize disclosing sustainability-related financial information, spanning governance, strategy, risk management, and metrics.
IFRS S1 covers general requirements, while IFRS S2 zooms in on climate-related disclosures, encompassing a company's climate targets, mitigation efforts, and greenhouse gas emissions. Effective January 1, 2024, these standards mark a pivotal shift toward sustainability in financial reporting. While they are not mandatory in Canada, regulators are looking to adopt similar disclosure standards in the near future.
Explore their impact on businesses and potential responsibilities.
Bill S-211 Fighting Against Forced Labour and Child Labour in Supply Chains Act
The Canadian Parliament's enactment of Bill S-211 marks a significant development in human rights and supply chain transparency. This strict new law aims to eliminate human trafficking and forced labour from Canadian supply chains.
Effective January 1, 2024, this legislation imposes stringent reporting requirements on Canadian businesses involved in producing, selling, or distributing goods in Canada or internationally.
More information on the impact of Bill S-211 on businesses and explore potential responsibilities.
Are ESG reports required?
Requirements vary across industries and jurisdictions and the landscape is constantly evolving. To learn more about your obligations, contact a member of our team.
ESG reporting
Financial reporting captures only a portion of a company's value creation potential and organizational risks. ESG reporting is critical to communicate the urgency your organization places on sustainability and quantify and validate your sustainability efforts. Well-formed ESG reports deliver:
- Integrated reporting by providing a fuller picture of your value creation potential and enterprise risk landscape.
- Commitment to driving sustainability and competitive advantage among dimensions of cost leadership, product / service differentiation, and intellectual capital development.
- Environmental impacts of the organization, possibly including reports on greenhouse gas emissions.
- Disclosure of intangible yet financially material factors such as strategy, innovation, capacity, reputation management, commercial risk mitigation and resource efficiency.
- Enhanced performance by strategically embedding certain risks, uncertainties, challenges, and trends that may affect financial performance and long-term sustainability.
Evaluate your ESG maturity
The journey toward robust ESG practices is unique for every organization, recognizing that success is an ongoing progression rather than a fixed destination. View our ESG maturity model to learn about the different maturity levels within an organization.
ESG Maturity Assessment
Contact our ESG team
Want to know more about ESG or how our team can help your organization? Fill out the form to speak with a member of our team. We look forward to connecting with you.