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Environmental, social and governance: what’s coming and how to be ready

While the United States is a worldwide leader in many areas, it lags behind the international community regarding environmental, social and corporate governance (ESG) issues and disclosure related to ESG.   

Many business and governmental leaders in the U.S. do not fully understand what ESG is, why it matters or how to best prepare for it. To answer these pressing questions, Baker Tilly leaders Scott Miller, Partner, and Susan Borries Reed, Managing Director, co-hosted a panel discussion at the Crossroads of America Leadership Summit. This article summarizes that discussion. 

What is ESG? 

ESG is generating a lot of attention lately as the Biden administration continues to place a high priority on these initiatives.  

ESG is generally defined as opportunities and practices relating to the success and sustainability of an organization. That said, there is no universally agreed upon definition. There are standards and guidelines that are more prevalent and generally accepted, but rating agencies, investors and businesses across the globe have varying ways to measure and define ESG. 

“Environmental” includes climate change, natural resources, pollution and waste and environmental opportunities. One notable company that excels in this area is Subaru, which has a zero-landfill manufacturing facility in Lafayette, Indiana. Additionally, Reed noted that the band Coldplay only plays at venues that meet their environmental requirements.   

“Social” focuses on human capital and strength in diversity, human rights and community relations, social opportunities and product liability. Baker Tilly US has a strong focus upon the creation of an environment and programming to internally support its employees and a strong corporate environment. Our firm places a high priority on diversity, inclusion and belonging initiatives, as well as community stewardship and social opportunities. As an additional example, Reed highlighted companies such as Roche Diagnostics and Eli Lilly and Company that made their presence felt at Indiana’s recent Pride Parade.  

“Governance” encapsulates corporate governance, corporate behavior and risk management. For example, cybersecurity and digital training have become increasingly important for the sustainability of an organization.   

Developing your ESG strategy 

The list of parties interested in an organization’s ESG strategy is not a short one. Market participants such as investors and rating agencies are certain to take note of ESG strategies, while regulators (such as the SEC and other governmental agencies) are interested as well. Additionally, ESG creates transparency around the sustainability of an organization, which in turn gives potential investors another factor to evaluate. An organization’s current and prospective employees may also pay attention to ESG efforts, as well as customers of that organization. And finally, do not discount the community interest – from competitors and local interest groups to members of the media.  

When building an effective ESG strategy, organizations can attract investors by (1) compiling a known and potential risk assessment and disclosure and (2) creating an investment opportunity that is based on issues and principles.  

The combination of these two efforts creates an ESG story that assists with ratings, official statement development, identifying ESG designation opportunities and direct investor outreach. 

As part of the ESG lifecycle, your organization should consider questions such as: 

  • What is your ESG vision and how does it align to your organizational strategy? 
  • What ESG topics are most relevant to your organization and where do you stand with those today? 
  • What are the next steps to achieve your organization’s ESG goals? 
  • How will you manage and measure the execution of ESG projects? 
  • How will you ensure lasting adoption and momentum for your ESG goals? 

Baker Tilly is going through this exact process at the moment – internally, that is – as we continue to evaluate the sustainability of the organization and strengthen our ESG program.  Our ESG strategy is a living, breathing process in which we are constantly evaluating and improving.  

Why ESG? 

Developing an effective ESG strategy has a long list of quantifiable benefits, including:  

  • Savings: Future risk mitigation through ESG initiatives can result in direct savings, such as reduction in costs to address disasters or cyber attacks, and indirect savings, for example, lower insurance premiums).  
  • Employee retention and productivity: As the organization embraces an ESG mindset, employees often are more likely to remain with the company and generally are more likely to be happier and healthier.  
  • Investor and community goodwill: ESG initiatives can help build relationships in the corporate world and throughout the community, which may have benefits such as generating additional consumer interest and creating positive PR about the organization. 
  • Reduction of regulatory oversight: A focus on ESG activities could potentially create measurable results through a minimization of oversight and could also lead to additional funding opportunities down the road. 

Baker Tilly assists clients at every stage of their ESG journey through targeted consulting services aimed at achieving the specific ESG goals of each organization. To learn more about Baker Tilly’s ESG services, visit our homepage. And to further discuss the benefits of ESG for your organization, feel free to contact us

Scott A. Miller
Partner
Susan Borries Reed
Managing Director
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