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ESG: WHAT IT IS, HOW IT WORKS & WHY IT’S IMPORTANT

Provided by: - February 14, 2023

Provided by KPMG

What is ESG?

ESG stands for Environmental, Social and Governance, and relates to issues surrounding these three topics:

  • Environmental:
    Considers how a company acts in its role as a steward of nature, such as energy, land and water use, recycling practices, pollution, and natural resource conservation.
  • Social:
    Examines how well a company manages relationships with employees, suppliers, customers, and the community, including Indigenous inclusion and participation. Some examples include gender pay gaps, inclusion and diversity in the workplace, duty to consult and Truth and Reconciliation actions.
  • Governance:
    Is concerned with a company’s leadership, internal controls, executive pay, audits, and shareholder rights.

ESG is broader than just a company’s impact of on the environment and society – it is a framework that integrates the risks and opportunities in each of these areas into a company’s strategy to build long-term financial sustainability and value creation.

ESG criteria includes a wide range of financial and non-financial scoring categories, used by lenders, investors, customers and other stakeholders to assess the impact of a company’s products and business practices on sustainability and social issues.

ESG strategies can help companies achieve long-term sustainability, drive economic vibrancy and deliver long-term value through effective engagement with all stakeholders.  Your organization may already be focused on some or many of these ESG factors, maybe using terms such as sustainability, equity, ethical, socially responsible, etc., but not with a holistic approach or framework.

Why is ESG important?

We know that ESG factors are essential to the success and resilience of businesses across all sectors. Customers, employees, shareholders, creditors, suppliers and public authorities are increasingly expecting action and transparency on a company’s ESG commitments. Suppliers to larger companies and those seeking funding are, in many cases, required to meet a certain standard of ESG reporting and accountability to demonstrate their current and future ESG initiatives and actions.

Whether they’re privately or publicly owned, businesses of every type are considering the sustainability of their operating practices, and senior leadership teams in every industry and sector are turning their attention to ‘people, planet and profit’ goals.

The benefits of investing in environmentally and socially responsible business practices becomes even more significant over time, such as lower operational costs, higher customer satisfaction, better access to capital sources and on favourable conditions, access to top talent, and improved reputation.

Where to begin?

While the purpose and values of private businesses often draw them naturally toward actions related to social responsibility, many of these actions haven’t necessarily been connected under a cohesive strategic umbrella in the past. Now, a more inclusive approach is becoming increasingly necessary to connect the company’s environmental and societal actions, help ensure that tangible targets are set and that there is clear accountability for the impact and results the company is setting out to achieve.

With this wider view, more private businesses are adopting a new social responsibility mindset in an effort to get deeper insights into what is most important to their customers, employees and other critical stakeholders and to consider how their actions might also have an impact on their businesses. As part of this process, they’re asking, ‘how can we use our knowledge and capabilities to move the needle in the right direction on the environmental and social issues that affect all of our stakeholders’? And, as a result, ‘what are the material issues that we need to address to keep our business profitable and sustainable over the long term’?

To help answer these questions, KPMG has developed a four Ps strategic framework: Value for the planet, people, prosperity and principle:

Integrating ESG thinking into your organization can seem like a daunting task and there is no one-size fits all ESG solution.  Each business needs to determine where their priorities lie, what will make the most impact for your customers, your employees and stakeholders and then balancing all that in way that positively impacts the business you are in.

For example, a manufacturing company will have different ESG priorities than an agricultural equipment dealer. The manufacturers will want to source local, environmentally friendly, zero waste ingredients and packaging, whereas the supplier might consider how the practice of new and innovative farming practices will impact the products and equipment they carry. There may also be some areas of overlap, such as ensuring an inclusive work environment with equitable pay and incentives.

The time to engage with stakeholders on ESG topics, learn, and build your ESG strategy is now. We’re at the precipice of a monumental shift in our economy and society, and although it won’t be an easy road, it ought to be well traveled. KPMG professionals are standing ready to discuss which tools and methods would best fit your business and answer your ESG related questions.

For more information or to discuss please contact KPMG’s local ESG network coordinators:

James Barr, FCPA, FCA, CIA, CRMA                             Jolene Anton, CPA, CA

jbarr@kpmg.ca                                                             janton@kpmg.ca

306-791-1236                                                                 306-791-1233

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