Environmental, social and governance (ESG) has grown over the past five years. Corporate commitments to all three parts of ESG are being increasingly expected from companies across all industry sectors by financiers, insurers and investors.
Although the social and governance aspects of ESGs are important, most public attention is given to the environmental part. Until recent times, a generally worded statement describing fairly vague and pleasing values may have been sufficient without much data backup. However, those days are coming to a close.
It’s placing a new burden on many companies, particularly in construction. Although the building industry has been gradually adopting better practices in order to reduce carbon emissions, for example, a meaningful ESG commitment is on another level entirely.
There are three types of emissions that need to be addressed. In simple terms, Scope 1 are emissions for which a company is directly responsible through its own operations. Scope 2 are indirect GHG emissions from the electrical grid or other centralized energy sources. The more complex Scope 3 involves all other emissions associated with the company’s activities and beyond, including those related to their supply chain.
For construction companies operating in Canada, the focus has been on Scope 1.
“They are the easiest to measure,” Conor Chell, head of ESG Practice for MLT Aikins LLP in Calgary, told the Daily Commercial News.
However, Chell says this will shortly change as regulators, particularly in the U.S., begin to mandate reporting on Scope 2 and 3.
Legal firms like MLT Aikins are ramping up their ESG expertise.
“We can make sure that all the questions have been answered appropriately in order to ensure compliance with the requirements requested by the relevant frameworks.”
Legal advisers can also offer counsel on how the company’s ESG quantitative analysis compares to peer groups.
However, the problem confronting many companies is sorting out the questions and sifting through internal or externally collected data in the first place.
“They might have some of it,” Chell said, “but it isn’t organized in a way that can be easily transferred into a sustainability report that will actually meet the requirements.”
That critical path to an acceptable ESG report has spawned a new industry. GreenWorks, an ESG advisory firm based in Calgary, is on that leading edge.
“What we do at GreenWorks is help companies manage the data side of it,” said Demian Newman, CEO and co-founder.
Newman explained currently the hard quantitative data that actually backs up the more prosaic qualitative elements of an ESG report represents only a small portion.
“Going forward a lot of leading money managers see this moving towards a 50-50 split of qualitative storytelling and quantitative data. You can imagine the strain this puts on companies. Right now, they’re having a hard time keeping their heads above water with perhaps five pages of data. Imagine if it was 30 or 40 pages of data.”
The problem according to Newman is that average-sized companies are “living and dying on spreadsheets,” reaching out to numerous subject matter experts and gathering data from others regarding safety and governance.
“There’s no organizational continuity for all that data.”
For many companies, particularly SMEs, the lack of budget and corporate ESG staff required to develop a company strategy is one of the biggest pain points, he said.
Newman explained GreenWorks software automates the entire process of stakeholder engagement, including vendors, insurance companies, banks, institutional investors, and relevant communities and relations contacts, either collectively or individually, in order to gain critical feedback.
There’s much more, of course. GreenWorks can help narrow down the over 700 global frameworks to the 30 or 40 most relevant to the company, deal with them simultaneously, and provide a detailed report complete with an audit trail suitable for both the frameworks and for the key rating agencies.
“That’s how you put out an ESG statement that has some substance to it,” Newman said.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.