Aligning values and value through ESG

Author:
Shelley Gilberg, ESG Markets & Consulting Leader, PwC Canada

Most organizations in Canada know about the environmental, social and governance (ESG) factors that are increasingly top of mind for investors and customers. But what they need to understand is that they may have a head start.

This is because Canada—particularly BC—has had higher standards and more progressive regulatory and reporting environments in some areas compared to other parts of the world, particularly in natural resources sectors. Whether they’re aware of it or not, many Canadian companies have already made strides on their ESG journey. What may have seemed like a regulatory burden in meeting a high bar on the environment, labour practices, health and safety, and working with Indigenous communities, can now be leveraged as a competitive advantage. BC and Canadian companies need to embrace it, measure it and leverage it to seize that advantage.

Here’s how companies can refine their ESG processes and performance, and why it’s so important for the public sector and private sector to collaborate.

Approaching ESG from different perspectives

Broadly speaking, companies can be categorized into four groups based on their ESG mindset and maturity:

Those that are getting started typically approach ESG from a reporting and disclosure perspective. They primarily measure performance for compliance purposes and largely focus their ESG efforts on environmental issues such as energy transition and net zero.

Pragmatists often aim for quick wins and typically focus more on managing risks than identifying opportunities. They may publicly report targets and promised actions, but these goals and activities are generally segregated across the organization.

Those that see strategic opportunities elevate ESG responsibilities to the C-suite and develop ESG-differentiated products or services. Their reporting and disclosures are more mature, contain science-based targets and are aligned with executive compensation.

Purpose-led organizations integrate ESG across the business, placing it at the core of their purpose, strategy and products or services. They integrate financial and non-financial reporting using ESG KPIs as well as enhance standards and regulatory frameworks through public advocacy and participation.

I predict the third and fourth groups will see more sustainable progress and growth because the actions they take will have both social and business value—yet recent survey data collected by PwC Canada shows that ESG is a lower priority for Canadian business leaders compared to their counterparts elsewhere in the world.

For example, ESG maturity is more advanced among EU companies than Canadian ones. Like Canada, the EU has stricter regulations—but unlike Canada, this has resulted in EU businesses moving from an obligation mindset to an opportunity mindset simply because ESG has become embedded in their culture over time. In order to see this same shift happen in Canada, there are several challenges that need to be overcome.

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Challenge #1: Many standards and a complex regulatory environment

Standards and regulations aren’t uniform across sectors, and neither are the processes and requirements around reporting and auditing. Well-established industries, for example, frequently have too many regulatory and standards frameworks. Conversely, emerging industries tend to have too few standards to uphold. This is an advantage initially, as it puts organizations in a “design your own standards and expected behaviour” environment—but given the level of trust placed in business right now, it’s unlikely to stay that way.

Compounding matters is the fact that while most industries do face regulatory oversight, there are some that are effectively expected to regulate themselves. ESG can’t mature in such a fragmented environment, which is why it’s necessary for the public sector, private sector and standards bodies to work together to harmonize regulations wherever possible. When everyone is aligned, then Canadian businesses can demonstrate the good work they’re already doing and differentiate themselves on the global stage by creating a level playing field in terms of performance.

I’m excited to see that firms like ours have started making strides toward this by mapping certain international standards against some of Canada’s regulatory frameworks. This kind of work allows companies to focus on their performance and outcomes as opposed to investing time and resources in interpreting how they align with standards and regulations. It also helps regulators understand where there’s ambiguity or opportunity to help Canadian companies do the right things, demonstrate compliance and be competitive.

Challenge #2: There’s more than the “E” in ESG

Organizations tend to conflate ESG initiatives with their net-zero and carbon footprint targets. This is understandable given the high profile of the current climate crisis and that carbon footprints can be measured—but even though environmental factors are an important part of ESG, they’re just one piece.

In the mining sector, for example, investors tell us they want to ensure companies have ESG built into the core of their culture, corporate strategy and operational mindset. This includes objectives around climate risk and long-term decarbonization, to be sure, but also assessing companies’ work with Indigenous communities—an important relationship for many businesses on their ESG journey.

At the end of the day, every element of an ESG strategy is about earning the trust and confidence of shareholders and stakeholders through transparency, accountability and responsibility. There’s pressure—from customers and partners, employees and investors, government regulators and the general public—on both B2B and B2C companies to execute on ESG.

Exactly which dimensions of ESG, and where the pressure or opportunity is being driven from, differs by industry and sector—but for all organizations, there’s more to trust than just net zero. Companies can thrive under this pressure because research shows that businesses today enjoy higher levels of trust compared to the government; but of course, that trust has to be deserved and preserved.

Challenge #3: Focusing on the wrong outcomes

Companies can be their own biggest obstacles by viewing ESG as non-financial initiatives and measures. From this perspective, ESG projects incur human and capital costs without returning quantifiable results that align stakeholders and shareholders. And without a disciplined process for determining what actions to take, sustaining long-term action and outcomes is tenuous.

But we know this perspective isn’t true. ESG can enhance operational efficiencies and raise a company’s profile, attracting capital, customers and top talent in ways that can be evaluated with quantifiable KPIs and ROI. It’s also worth noting that new economic opportunities are emerging for ethical, renewable and sustainable products—a good example being copper, a key component in many of the clean technologies supporting the energy transition. These emerging alternatives are even cleaner when raw inputs such as copper have a lower emissions profile. This is leading supply chain buyers to consider premiums for low-carbon copper, which in turn creates opportunities for lower-emitting copper providers to price their products in a similar fashion.

Ultimately, Canadian businesses need to make sure they’re understanding and measuring the right things—and take a more holistic approach to ESG. There’s a tangible benefit when your corporate values and philosophies resonate with the public and help you win the war for talent, just as there are material cost savings when you reduce waste and invest in products and processes that can be reused or renewed. ESG is really about bringing together our principles with our balance sheets and income statements, generating value for all stakeholders and shareholders.

Assessing opportunity and risk

As I mentioned before, some EU-based companies have a head start. They began with a compliance and disclosure mindset and have evolved towards an opportunity mindset, while still recognizing the risks of noncompliance. This indicates ESG is here to stay, and that it’s essential for Canadian and BC businesses moving forward.

I’m proud that firms like ours evaluate the entire spectrum of risk and opportunity versus just one part, to provide clients with a holistic perspective. What does ESG mean for disclosure and reporting? How does it impact tax planning both in Canada and globally? What effect does it have on operating models and costs? What does it mean for attracting and retaining talent and customers?

No one knows everything, and the ESG landscape will continue to evolve. But the right partners and advisers, who have a global perspective and a deep understanding of their clients, can offer vital support. Specifically, they can help identify which areas have the greatest potential for optimization and growth—and where the biggest barriers exist:

● Companies leading the way can benefit from guidance mapping, measuring and quantifying the holistic value they’re delivering to stakeholders and shareholders. Advisers can help them look around the corner to what’s next for ESG.

● Companies that are just starting may need insight into which ESG levers to pull in order to drive the greatest impact and the actions that will most benefit cash flows, operations and balance sheets with respect to discount rates on debt and equity.

But most companies exist somewhere in the middle of a broad spectrum of ESG maturity, and one of the main challenges for them is setting concrete metrics against abstract goals. Stating intentions or disclosing measurements isn’t the same as taking action—it’s the actions of organizations and the outcomes that will ultimately matter. Decisive actions, specific to the sector and the organization, that build long-term trust will be the key differentiator for top performers.

For example, setting a net-zero target for 2050 might look good on paper and is granting some organizations a noticeable lift in brand and share price—but 2050 is 114 quarters away from the summer of 2021. It’s critical to understand and unlock value and demonstrate outcomes along the way to both stakeholders and shareholders.

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The natural resources sector in BC is a perfect example of the challenges that exist in calculating and reporting on ESG. Because of BC’s progressive policy environment, many companies already have a track record of major ESG metrics—except this information isn’t easily shareable to downstream purchasers, investors or consumers.

That’s starting to change with the launch of the BC Mines Digital Trust Marketplace. Using blockchain-based technology, this new platform will provide a way for producers of raw materials to share verified ESG credentials with the investors and supply chain customers who need to view them. The first to participate in the proof of technology program will be BC’s mining companies, who can get started with as little as their Mines Act permit and greenhouse gas profile from the BC Government. From there, the Digital Trust Marketplace plans to expand to add other credentials and more participants who can confirm the validity—and the value—of each other’s verified ESG credentials.

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Uniting the public and private sectors

While all organizations may be at different stages of the ESG journey, let’s not lose sight of the fact that we’re all on this path together. Leaders across all sectors need to understand and trust that government and industry are united in a common goal and shared purpose; it’s up to policymakers and business decision makers to set the standards that will position Canada, and BC especially, as an ESG leader.

Collectively, we’ve already done so much work to create a competitive advantage with ESG—now we need to share it more broadly, align on it and use it. Canadian companies are passionate about their values; with ESG, we can leverage those to create sustained value for everyone.

Questions to consider:

If younger, technologically enabled companies have an advantage when it comes to ESG, what are some ways that older, well-established companies can use partnerships, collaborations, acquisitions and digital adoption to keep up?
Because ESG is all about building accountability and trust, how will you show shareholders and stakeholders what your actions are achieving? How can companies share their progress more transparently and in a more integrated way with other reporting? How can technologies such as blockchain support this?
A holistic approach to ESG means thinking not only about net zero, but also about other governance and social considerations. Have you considered other dimensions of ESG and how they may impact your organization in the future?