In this first of a two-part series, adapted from a conversation between Angela Montez, Special Counsel, Eversheds Sutherland‘s Investment Services Practice Group, and Erin Williamson, Edison Energy’s Manager of Energy & Sustainability Strategy, at a Private Directors Association Metro DC Chapter event, Williamson discusses the evolving environmental, social, and governance (ESG) landscape, shifting expectations, and tackling climate risk within regulatory frameworks. Click here to read part two.
ESG – specifically climate management – is getting more attention at the corporate board level. Sustainability has grown from a siloed, overhead function often grouped under “Compliance” or “Environmental, Health and Safety,” to a more prominent profile on par with financial performance, risk management, and corporate strategy. However, boards of directors may feel poorly equipped to deal with climate risks and opportunities, greenhouse gas emissions management, and the navigation of disclosure expectations.
While private companies may not be subjected to the same impending regulatory requirements on climate performance and disclosure as public companies, there are many reasons that private companies should establish climate competency on their boards. Climate change is a global challenge that has potential implications across supply chains, on national and international policies, and across markets. By taking a strategic approach to climate, private and public companies alike can position themselves to manage risks and take advantage of opportunities in our emerging low-carbon economy.
Corporate interest around the impacts of climate change is on the rise, with regulators, corporate boards of directors, institutional clients, and individual investors pushing for greater transparency regarding companies’ sustainability practices.
This move towards broader corporate commitment to social responsibility and sustainability has been bolstered by the Biden administration’s emphasis on ESG performance, with the President issuing two executive orders on tackling the climate crisis and addressing climate-related financial risk. In April, the SEC proposed sweeping regulations designed to enhance and standardize climate-related disclosures for investors in alignment with financial disclosures.
Historically, private companies have enjoyed the advantages of operating in an environment with less regulation and narrower stakeholder exposure. Although private companies may not be subjected to the same regulatory disclosure requirements that impact public companies, stakeholders expect action on sustainability and climate.
Public companies are increasingly expected to manage emissions across their value chains. So, if your company is a supplier to a public company, your emissions are their emissions, making it an interconnected web of value chain emissions known as Scope 3 (Scope 1 emissions are direct emissions from combustion occurring onsite at a company’s facilities; Scope 2 emissions are indirect emissions resulting from purchased electricity, heat, steam or cooling; and Scope 3 emissions are indirect emissions resulting from activities in the value chain, such as embedded carbon in purchased goods and services, or disposing of products at the end of useful life).
As an example, we are starting to see automotive OEMs require their suppliers to set goals and improve sustainability performance in order to continue to do business with them. Increasingly, some countries are considering carbon taxes at the border, such as the EU’s carbon border adjustment mechanism, which essentially levies a tariff based on embedded carbon of imports. This would materially change the costs of doing business in that market. Domestically, we may see a cost of carbon or carbon tax in the future that will translate into a financial cost of emitting greenhouse gases and force financial penalties on emissions.
Incorporating climate risks into company decision-making and leveraging strategic oversight at the board level to drive management practices that drive sustainability are roles that boards can play to prepare for a low-carbon future.
Figuring out what matters
The first step for any company embarking on a sustainability strategy is to determine what sustainability or ESG means to them. What is relevant? What is impactful? What issues may pose future risks or opportunities? This will look different for every company depending on the sector they are in, the geographies of their supply chain, customers and operations, and their inputs and outputs, among several other factors.
While getting started can be challenging, understanding what is and is not material can help prioritize high-impact areas that customers or investors might be asking about, or that might require a strategic lens for doing business going forward.
Considering climate risk within existing risk frameworks
As we anticipate a transition from voluntary to regulatory disclosures in areas like greenhouse gas emissions management and climate risk, establishing a strategic process for embedding material sustainability issues into decision-making frameworks and future planning will help prepare businesses for not only understanding and disclosing sustainability performance, but for futureproofing for a low-carbon economy as well.
In light of anticipated regulatory changes, many private and public companies are starting to explore how sustainability expectations will impact their business and are considering proactive management strategies.
All businesses should start considering how cascading effects of climate change may present a new and significant risk profile to the way they do business. For companies to be financially sustainable in a changing world, they will need to understand a wide range of risks and opportunities.
The impacts of climate change will be broader than extreme heat, sea level rise, and melting polar ice, so it is critical to think through where those risks might manifest in the supply chain, at physical locations, and across customer segments.
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