ESG considerations increasingly critical for public companies, but they must be attainable

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There’s rising demand for companies to disclose environmental, social and governance (ESG) practices as institutional investors increasingly take that criteria into consideration when deciding whether or not to invest in a public company. But Josianne Beaudry, partner and leader of the Business Law Group at Lavery Lawyers, warns not all organizations — and not all ESG practices — are created equal.

“The risk is adopting standard practices that are too heavy for smaller companies,” Beaudry says. “The advice we give is to take it step-by-step to make sure the measures are attainable.”

Companies are often concerned that there are no prescribed regulations clearly stating what’s being looked for when it comes to ESG practices, but many organizations are setting standards that can be looked to for general guidance, Beaudry notes. However, solid ESG practices vary because they must address the “E,” the “S” and the “G” given the size of the company and the industry in which it operates.

For example, smaller companies could create an employee committee to focus on environmental practices like reducing energy consumption, but an organization evolving in a more environmentally challenging industry like mining or nuclear energy will be expected to show investors what’s being done to protect the environment on a larger scale. In the latter case, that kind of company will need more experience internally.

Beaudry often sees companies make the mistake of adopting general disclosure on ESG, but that’s not what’s being looked at. Companies need to start off by listening to all stakeholders — not only investors but also employees and the communities in which they operate — and determine what the various stakeholders are looking for, she says, and that can change depending on external factors.

For example, while the “E” used to be very important and the “G” is for the most part addressed for public companies through Canadian securities regulation and the Canadian Business Corporations Act, over the past few months the global COVID-19 pandemic has exacerbated existing inequalities between various industries and people have been taking an increasing look at the “S,” social impact. Specifically, it’s become important for organizations to focus on the wellness of employees.

While it’s challenging to address employees’ mental health with remote work — “You don’t have the same feeling about the wellness of your employees as when everyone was physically present in the office and you could meet around the coffee machine,” Beaudry notes — the most important thing is the company is sure that whatever target to address wellbeing is set, they are sure they can meet it.

“What we hear a lot is that companies do adopt nice policies, but the concern is what you’re doing on the floor,” Beaudry says. “It’s not enough to have the policy, you’ve got to walk the talk of it.”

Other stakeholders include the incoming generation of employees, who are more concerned about the corporate behaviour of their employers. Many industries are undergoing a human capital crisis with the Baby Boomer generation retiring, and it’s a very competitive market to hire skilled employees.

“It’s important for companies to present good ESG practices in order to convince employees to join them — that’s become a criteria,” Beaudry says. “It’s not only for investors in the financial sector any longer, it’s also for the hiring and retention of employees.”

If an organization’s workforce is engaged, supportive and proud to work for a corporation that behaves like a responsible corporate citizen, they’ll perform better — which in turns drives the company forward, which then attracts investors who bring the capital for growth. At the end of the day, ESG is a simple equation for better performance and reflects the social acceptability of the company, and there are simple ESG criteria companies can address right away. Small positive actions such as going paperless or phasing out plastic water bottles; delving deeper into diversity and inclusion considerations; and conducting employee surveys on wellness and listening to the feedback are steps that can easily be personalized to the industry and to the size of the company.

“I believe standardization of ESG requirements would be welcomed by all industries, not just the financial industry, but as we did for disclosure on corporate governance it should be comply or explain — not enforceable rules that are too heavy,” Beaudry says. “If a company says it’s adopting a series of practices and it cannot meet them, that’s worse than not having any ESG practices at all.”