ESG world elements

As one of the emerging trends in the public sector – and all industries, really, environmental, social and governance (ESG) has left many business and government leaders feeling confused (“What is ESG?”), uncertain (“How does ESG impact us?”) and overwhelmed (“Where do we even begin?”).

With these legitimate concerns in mind, Baker Tilly recently hosted an ESG-focused webinar, the first in a two-part series this month. Principal Scott Miller and Managing Directors Susan Reed and David Erdman hosted a comprehensive discussion on the impact and importance of ESG.

The key topics from the webinar are summarized below.

ESG is an umbrella term that encompasses environmental, social and corporate governance strategies, reporting and action plans that impact an organization’s sustainability.

As ESG is reviewed and discussed further, it becomes evident that many typical governmental tasks and functions are very similar to those included under the ESG umbrella. The ESG concept has gained momentum in recent years due to increased international investors’ interest in corporations’ disclosure and transparency on these issues. These days, ESG is now a critical focus within the U.S. market and has been embedded in organizations’ and governmental entities’ operations and strategies.

Leadership teams everywhere prioritize ESG initiatives– internally and externally – as they strive to connect with their customers and employees, seize growth opportunities for their organization, and of course, make a genuine impact from a sustainability standpoint.

In fact, therein lies the importance of ESG. In the past, it was viewed as a responsibility. Now, corporate stakeholders and governmental leaders see an opportunity to create more sustainable operations while building relevancy and trust among their internal and external stakeholders. As importantly, data indicate corporations with ESG strategies have outperformed their counterparts.

In short, ESG creates value within organizations, communities and the planet for years to come. The key components of ESG go way beyond basic sustainability. As it exists today, ESG includes such concepts as:

  • Stewardship/community relations
  • Business ethics
  • Recycling
  • Supplier code of conduct
  • Cybersecurity
  • Corporate social responsibility
  • Worker safety
  • Good governance
  • Fraud prevention
  • Employee development

These concepts are not new, of course, but ESG combines them under one framework that is simultaneously core to an organization’s mission, values and strategy while also being critical to its long-term sustainability.

The list of ESG stakeholders – parties genuinely invested in an organization's sustainable strategy – can be quite lengthy. It typically includes:

  • Investors (i.e., institutional investors and private equity firms)
  • Regulators (i.e., SEC, ISSB, and state and federal government)
  • Community (i.e., competitors, media, interest groups)
  • Employees (i.e., current and prospective employees, and business partners)
  • Customers (i.e., retailers, consumers and end users)

Of note, within the regulator’s category is the SEC’s proposed rule that public companies must disclose greenhouse gas emissions, climate-related risks, impacts, and risk management processes within their registration statements and annual filings. Naturally, this rule also impacts private companies and government entities that are in the supply chain of larger public companies.

The global market for interest in ESG and sustainable funds has exploded in the last five years to more than $2.2 trillion. Furthermore, some market data continues to suggest that funds placing a higher priority on ESG have done slightly better than those that don’t prioritize ESG factors.

The growth of ESG in the municipal bond market can be seen in numerous ways, including:

  • Bond Buyer visibility – This daily publication for the municipal marketplace conducts weekly stories that indicate the impact of ESG on the municipal marketplace
  • Municipal Securities Rulemaking Board – The MSRB’s Electronic Municipal Market Access (EMMA) website has made changes to reflect investors’ growing interest in ESG-designated bonds. Additionally, the MSRB completed a recent Request for Information to gather ESG feedback from many different market participants
  • Designated bonds – Pricing of bonds that carry an ESG-related designation have experienced increased order flow and, as a result, potential pricing benefits
  • Rating agencies – Leading agency’s focus on ESG-related risk factors are impacting overall bond ratings for municipal issuers
  • Financing – Improved ESG disclosures could generate more interest in the financing of ESG bonds, which also impacts financial institutions as they look to add sustainable investments to their portfolios

The general popularity of ESG is expected to continue in 2023, although some could speculate that ESG will underperform this year despite the various metrics indicating that ESG continues to grow in popularity. In either case, virtually everyone agrees that ESG is not going away.

The first step in developing an ESG strategy is ensuring that multiple parties across your organization have a seat at the table. Bringing department leaders together, including your Finance, Legal and IT departments, is important because the strategy should include the desires, needs and opinions within the organization as a whole.

As an organization, you need to keep in mind that ESG has quantifiable benefits across many key areas, such as:

  • Savings: Risk assessments provide for future risk mitigation and savings (both direct and indirect) and sustainability often reduces waste and unnecessary costs
  • Employee retention and productivity: Employees are more likely to remain with organizations that embrace and connect with their needs
  • Investor and community goodwill: ESG initiatives help build corporate and community identity, generate consumer interest and assist from a PR standpoint
  • Reduction of regulatory oversight: ESG can create measurable results that open funding opportunities

ESG planning also provides non-quantifiable benefits to businesses. For example, ESG allows organizations to:

  • Better understand the known risks the organization faces and develop a transparent strategy to address those risks
  • Prioritize projects and initiatives with the organization’s governing board and management team
  • Create a roadmap for stakeholders, demonstrating how it plans to address ESG issues
  • Demonstrate to potential funding agencies and investors that the organization has developed and is committed to its ESG plan

A basic ESG framework outlines the high-level steps an organization needs to take in order to create and maintain an ESG strategy.

ESG infographic

  • Assess the current state of sustainability efforts and evaluate what topics and initiatives are most relevant to your organization
  • Develop an ESG strategy that aligns with your organizational goals and values
  • Communicate your story by sharing ESG strategy, goals and execution plans to organization stakeholders
  • Execute the plan. Let’s go there.
  • Report reliable information to stakeholders and various regulatory and compliance agencies

Additionally, organizing your entity’s focus on ESG better positions you to take advantage of additional sources of funding.

For instance, the Inflation Reduction Act (IRA) offers $738 billion in funding and $499 billion in new spending through 70 separate tax credits (that are effective through 2032). The IRA impacts virtually all entities and their sustainability, ESG and renewable initiatives.

Finally, bond designations such as green bonds and social bonds are available as well.

Many types of projects/financings are eligible for a green designation, including

  • Certified eco-efficient products
  • Clean transportation
  • Climate change adoption
  • Energy efficiency
  • Environmentally sustainable management of living natural resources and land use
  • Green buildings
  • Pollution prevention and control
  • Renewable energy
  • Sustainable water and wastewater management

Social bond projects include those that:

  • Offer access to essential services
  • Provide affordable housing
  • Offer socioeconomic advancement and empowerment
  • Provide affordable basic infrastructure
  • Generate employment opportunities
  • Assist with food security and sustainable food systems
David Erdman
Managing Director
Scott A. Miller
Susan Borries Reed
Managing Director
Forest of green trees on a sunny day
Next up

ESG landscape in the financial services industry