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How to Align Your Company with ESG Ratings

Jun 22, 2022

EisnerAmper Director of ESG and Sustainability Solutions at EisnerAmper, shared insights into creating a company aligned with ESG ratings at the Hart Energy - Energy ESG Conference. Watch the session highlight recording to hear EisnerAmper offer an overview of existing ESG frameworks and their differences. She covers what it takes to get real value out of your ESG framework and how to properly integrate it into your company's business operations for maximum impact.


Danielle Barrs:

Thank you. When I say we are looking at a company's ESG performance, what does that mean? It means that we are looking at how corporations address the issues that we as investors, consumers, and lenders have deemed important. Things like how companies respond to climate change, how they treat their workers, how they build trust and foster innovation, and how they manage their supply chains, especially in times of uncertainty. A group of established framework and standard setting organizations recently published a report stating their intent to work together towards a common vision for ESG disclosures. The purpose of this report was to provide, one, a joint commitment to drive towards this goal of standardized ESG performance through collaboration and a stated willingness to work closely with one another. Also joint market guidance on how frameworks can be applied in a complementary and additive way, as well as a joint vision of how to complement financial gap and serve as a natural starting point for a better corporate reporting system.

In order to do this, we need information being reported to follow some important criteria. These reports need to be fit for purpose as determined through appropriate consultation and due processes. These reports need to be comparable across companies and geographies. The data needs to be assurable, providing reliable information that we can use, adaptable as issues evolve, and supplemented by regulatory requirements. So in the energy industry these things matter. Climate action and affordable energy are material to this industry. The sector that we are looking at matters to the issues that we focus on.

So what came of all this is a concept called double materiality. You may have heard of it, but some corporations essentially focus on something called impact materiality. This means that organizations are reporting on matters that reflect their significant impacts on the economy, environment, and people. You can think of these as inside out impacts. This is where I come from. You might call it traditional sustainability reporting. On the flip side, some companies are focusing on reporting on the subset of sustainability topics that are material for enterprise value creation. We call this financial or industry first materiality. You can think of these as the outside in impacts. These companies are focusing on ESG in terms of how these issues affect their business. Materiality is, of course, dynamic. It varies by industry and could change at any given time. But much of this information we use to disclose ESG is already nested in the very fabric of our organizations, which we already include in financial accounts.

If you hadn't heard of TCFD a month ago, you've probably heard of it now. The SEC created this task force last year to develop recommendations for how companies can disclose climate related financial risks. In March of this year the SEC announced a proposed rule that mandates these disclosures. The TCFD has divided these disclosure recommendations into four thematic areas. Corporate governance around climate related risks and opportunities, strategy, your impacts of climate related risks and opportunities on operation strategy and financial planning, risk management, your processes used by the organization to identify and manage climate related risks, and your metrics and targets are essentially the connective tissue that connects all of the other thematic areas. Another metric category might be transition risks. These are the risks associated with the shift towards a low carbon economy, mostly related to policies and regulations. So a target for this might be to reduce your percentage of asset value exposed through these transition risks, again, relative to a certain baseline year.

Physical risks are the climate related risks associated with things like extreme weather events, wildfires, droughts, floods. For this your target might be to ensure that a percentage of your flood exposed assets have risk mitigation strategies in place. Climate related opportunities would be looking at the proportion of your revenue or other business activities aligned with climate related opportunities. A target here might be to increase installed renewable energy capacity in proportion to your total capacity. Again, all of these are industry agnostic and can for the most part be applied to a wide range of stakeholders.

Now, SASB has a slightly different approach. The Sustainability Accounting Standards Board provides industry specific standards across 77 industries and enables businesses to identify and communicate these financially material sustainability information risks to investors. So here we have an example of what is called a SASB materiality map, specifically for the oil and gas sector. So SASB provides examples of disclosure topics recommended for businesses to factor into their ESG strategies. Within the environment category the most important metric according to SASB is GHG emissions, specifically scope one and methane.

Another material topic for this industry is reserves valuation and capital expenditures. For example, estimated carbon embedded in hydrocarbon reserves. Within the social capital category, also important, you would look at things like human rights, for example, the percentage of proved reserves in indigenous land. Within the human capital category you would look at workforce health and safety, for example, how your company is integrating a culture of safety throughout exploration and production. Within leadership and governance you might focus on business ethics and transparency, for example, proved reserve in corrupted countries. So with all of this information, where do you go from here? How do you decide which standards and frameworks are right for your business?

First and foremost, leadership needs to decide why they're doing it. It's important for you to understand what it means for your business. If your organization wants to report, for example, on industry agnostic impacts that consider a wide range of interests and stakeholders, GRI might be the best way to go. If your organization wants to align climate related risks with the needs of investors, you might look at TCFD. If your organization chooses to report on material sustainability information specific to that industry, you might look at SASB. And if you are looking to report on industry agnostic impacts, you might look at GRI.

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