Another tsunami of change is coming - prepared?
Another tsunami of change for your business is on the horizon and this time, you need to walk into it, eyes wide open. 2019 was a year of waking up unprepared on so many levels. Though the dust seems to be settling … a little bit ... the trajectory of business is shifting radically and, birthing pains are tough.
Sadly, a notable percentage of our businesses have traditionally shown little regard for social issues (those concerning the people they affect). They have had blinders on in a myopic world focused solely on profit, more profit, and just a little more profit please.
It’s not their fault, historically companies existed for one reason only, to provide investors with a return on their investment and were they to deviate from that mission, they risked being sued.
But … this choice is no longer the only choice, much less the best one. There is a new standard in town, ESG (Environment, Social and Governance) and it is the hot topic in every board room and almost every functional division of companies, both public and private.
You may think that ESG reporting requirements only affect public companies, roughly 3000, not the millions of private companies - but think again. Even if the only regulatory filings you make are tax returns, I guarantee that your customers, employees and investors are watching carefully to see if you are exercising best practices, care about the things they care about and are considered best in class.
They want you to report your efforts to them and to explain your impact. There is a trickle-down effect, one you will not escape no matter how small. So please, don’t get knocked over by this next big wave.
Part of a supply chain with your services and products?
Recently, Exxon Mobil was the first US oil super major to disclose greenhouse gas emissions data related to customer use of its petroleum products. How many of you are selling to public companies or government entities, either directly or indirectly? Vendor expectations and supply chain agreements will continue to evolve as larger companies respond to regulatory pressure to report and begin enforcing new standards “down the line” in their purchasing agreements. Stay competitive, be prepared.
Impact investors are on the rise. They want a solid rate of return but, they want to do well by the world. If you need extra funds to scale, will you be prepared to show that you are the kind of company they want to invest in? Have you been disclosing your efforts all along about all three prongs?
The world’s largest asset managers are taking a proactive stance on issues across the ESG spectrum, and that will continue to drive discussions around disclosure and how you measure your data. In his annual letter, BlackRock’s Larry Fink urged companies to disclose how they are preparing for a "net zero world" where net greenhouse gas emissions are eliminated by 2050.
According to S&P Global Ratings, global sustainable debt issuance (i.e. green bonds) is expected to surpass $700 billion in 2021, up from $500 million from 2020. Investors want to know that their investments are doing something good for the world as well as returning a solid rate of return. Do your financials reflect a triple bottom line (people, profit and planet)?
Facing a talent gap?
A thriving corporate culture, one attractive to Next Gens faced with the resolution of a myriad of social issues, will be critical to your success in recruiting and retention. How are you disclosing your efforts? If not voluntarily, corporate hands are about to be forced with a myriad of regulations heading our way.
Diversity, equity and inclusion (DEI) should be a no brainer but there are still some laggards out there even though competitive success is contingent on it. Please don’t forget the trickle down from public companies to private. Standards start out in regulatory arenas and then become part of the “norm” and best practices.
In December 2020, Nasdaq proposed a rule that that will require most of its listed companies to have at least one director in the coming years who identifies as a woman and another who is Black, Hispanic, Native American, LGBTQ+ or part of another underrepresented community. California and Washington already have regulations requiring a percentage of women on boards and other states are considering same. You may be private, but what is your board makeup?
As workers transition back to the office, the pandemic has heightened awareness of what it means to feel safe in the workplace and OSHA standards are addressing these issues. The S in social will include a deeper consideration for work environments that meet your most important assets welfare.
Offices in other locations around the world? The Sustainable Finance Disclosure Regulation (SFDR) applies to European Economic Area (EEA) member states. It requires a wide range of finance organizations to disclose how sustainability risks are incorporated into their decision making, from carbon footprints to human rights policies. Are you prepared to evaluate and discuss your strategies with investors or partners?
If not, consider that an even stricter set of reporting requirements, the Corporate Sustainability Reporting Directive has been proposed and would cover all large companies that meet certain revenue or balance sheet metrics, or that have more than 250 full-time employees. Yes, that goes for US companies with EU subsidiaries. And the U.K. government is continuing to work towards its own ESG regulatory framework.
Manufacturing in China, the world’s second largest economy? They are more determined than ever to make progress in the area of sustainable investment issuing their first set of green financial regulations and committing to be carbon neutral by 2060.
Back on our turf, the SEC has indicated that ESG disclosure regulation will be a central focus as it works toward a “comprehensive ESG disclosure framework”. The Federal Reserve recently joined the Network for Greening the Financial System, a group of central banks and supervisory authorities from around the world that are collaborating to develop climate risk management tools for the financial sector.
It can be confusing and there is a flurry of activity. It doesn’t help that ESG data can be inconsistent - composed of a patchwork of reporting frameworks that make it difficult to collect and compare. There is a demand to create a cohesive global ESG accounting standard against which to measure performance with a number of initiatives leading the way such as SASB and IFRS.
This is just the tip of the iceberg, a glance at what is going on. It’s up to you to do some research and quickly get engaged before you are swept away completely unprepared.
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All rights reserved – Linda Lattimore