Esg Finance: An Enterprise-Wide Checklist

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Esg Finance: An Enterprise-Wide Checklist
engineer hand working with a touch screen interface as success concept

In the past decade, Environmental, Social, and Governance (ESG) finance has grown tremendously and is no longer just a passing option for industries looking to redirect capital.

While they might not seem to offer obvious opportunities to the petroleum energy market, ESG programs and products are quickly becoming an expectation for boards and shareholders to show they are still relevant in today’s competitive market. With losses challenging the sector, a new administration feeding the ESG market, and lenders, consumers and investors seeking alternative investment choices, I hear more than ever about ESG finance in my energy and infrastructure practice at Pillsbury Law.

Inherent to the idea is keeping up with what ESG responsibilities are and aren’t. Every Board member or executive trying to improve a score, and every shareholder compiling an ESG portfolio, has many factors to consider. Keeping metrics on a company’s standards is essential, and the Securities and Exchange Commission, Commodity Futures Trading Commission and other regulatory bodies are adding additional pressure for companies to show higher levels of transparency.

Three places to start:

• Diversity is a must. Boards need diverse members with appropriate ESG skills to make sure their companies’ strategies are sustainable and relevant.

• Consider green bonds. Boards should consider issuing green bonds to fund sustainable projects and access ESG capital.

• Be able to measure your progress. Boards should know their ESG proxy and other rankings (e.g., ISS and State Street), so they can measure management’s progress on ESG initiatives and improve on remedial actions and disclosures.

To help, we’ve made a checklist for those looking to develop a clear strategy on how their company can best meet ESG goals — or for those who want more clarity on what to look for when considering companies for
ESG portfolios.

Board responsibilities:

Appropriate committees: Consider having an ESG-specific committee, or build ESG expertise into a Compensation Committee for Human Capital Management, or a Nominating and Governance Committee for ESG/Sustainability.

Charters: If necessary, amend corporation charters to add this responsibility and appoint appropriate members to such committees.

Diversity, a business imperative: Create programs to ensure that you have a workforce that is representative, at every level, of the diversity of your customers, investors, communities and business partners. Add new board members when varied expertise is needed or desired.

Tracking costs and success: Review metrics relating to your business against ESG activities and what they cost to evaluate the success of these activities across all business units.

Retain ESG measuring firm: Retain a third-party firm like Sustainalytics or MSCI, so you have an outside barometer to measure your progress and lend credibility.

Assign management: Assign responsibility for your ESG program to one person: general counsel, head of investor relations, CFO, or chief ESG officer.

Compensation plans: Add ESG progress — e.g., diversity and inclusion, employee and customer satisfaction, and community responsibility — as an individual performance factor, along with company performance, in the annual short-term incentive plan for executive officers.

Green bonds: Consider whether issuing a green bond is right for your company. Such issuances have tripled in the last year, as companies use these as one way to access ESG capital and finance important sustainability investments.

ESG investor outreach: Define an outreach program to access the $25 billion of capital investing in ESG-friendly companies, expected to grow to $40 billion within a few years.

Policies and reports every company should have:

Metrics: Create a chart to track and measure ESG initiatives over time, so your stakeholders can see your progress. The metrics tracked might follow social, environmental and climate impacts, employee well-being and engagement, training, diversity inclusion, anti-harassment, sustainability, organizational development, and employee wellness.

Public policies and reports: Responsible committees should make sure the company has adopted and posted on its website all appropriate reports, e.g., human rights, corporate social responsibility (CSR) or sustainability, environmental, supplier code of conduct, diversity and inclusion, etc. In the 10-K, include a Human Capital Management (HCM) report that’s accurate and comprehensive.

Sustainable Development Goals (SDGs): Ensure the ESG program addresses the United Nations’ 17 SDGs, which many money managers and institutional investors are using to determine whether you meet their ESG investment qualifications.

Proxy disclosure to look for:

Board members: Bios should show ESG expertise where appropriate and diversity statistics that satisfy applicable law, e.g., California and NASDAQ. A skills matrix should also be included. More and more companies are using graphics to drive the expertise and skills message home—“a picture is worth a thousand words.”

Board nomination graphics: Companies are also starting to include director nomination and succession graphics to show how they look for and appoint individuals with expertise and diversity.

CSR report: A Corporation Social Responsibility/Sustainability Report should be included as well as the HCM report (which can be extracted from the website and the 10-K). These disclosures will help improve ISS and other institutional shareholder ESG rankings.

ESG rankings: Boards should know their ISS and other ESG rankings (e.g., State Street’s R-Factor, or Blackrock’s) to determine if improvement is necessary and take remedial actions. This might include adding or supplementing training and safety programs, benefits and wellness programs, diversity hiring and promotion programs, community outreach, evaluating energy efficiency, water usage, waste minimization, greenhouse gas emissions and climate risk, and impact on natural resources.

Regulators and disclosures:

Regulators eye impacts: Rostin Behnam, Acting Chair of the Commodity Futures Trading Commission, last September commissioned a first-of-its-kind report, “Managing Climate Risk in the U.S. Financial System.” He followed in March by announcing a Climate Risk Unit with a focus on derivatives. He said it will support “industry-led and market-driven processes in the climate — and the larger ESG — space critical to ensuring that new products and markets fairly facilitate hedging, price discovery, market transparency, and capital allocation.”

Standards evolving: S.E.C. Acting Chair Allison Herren Lee noted that “no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that ESG (issues) pose to investors, our financial system and our economy.” In fact, the S.E.C. is working on revisions to the 2010 climate disclosure standards and global consistency on ESG disclosure requirements.

The biggest complex question for public companies is going to be how to balance the tension between profits, principles and ESG metrics. Lee suggested it will be an iterative process, taken in steps and requiring continuous improvement.


About the author: Mona Dajani is a partner and co-leader of global energy, infrastructure & mobility at Pillsbury Winthrop Shaw Pittman Law.

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