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In recent years, organizations around the world have embraced Environmental, Social, and Governance (ESG) as a management and disclosure strategy. In this segment, we discuss ESG with Kris Macoskey, Vice President. Mr. Macoskey will help us understand what ESG is, how organizations are using it, and how to get started.
You’re listening to CEC Chats: a short look at some of the most interesting concepts we focus on each day. Today, we will be chatting with CEC Vice President, Kris Macoskey, who is leading CEC sustainability and ESG, or environmental social and governance initiatives. In recent years, organizations around the world have embraced environmental social and governance initiatives (ESG) as a management and disclosure strategy. In this segment, Kris will help us understand what ESG is, how organizations are using it, and how to get started. Welcome, Kris. So, tell me a little bit about yourself.
Kris: Hi, AJ. It’s great to be here today. Thanks for having me. Well, I’m an environmental scientist and career air quality consultant. I’ve had a long-term interest in sustainability. I have a Bachelor of Science and Environmental Science, and a Master’s in Environmental Science. I’ve been a student of sustainability since before the formal definition was even coined back in 1987 by the United Nations Brundtland Commission. That’s when the definition of “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” was coined, and that served as a framework for understanding sustainability.
It was my father, I think, who influenced me the most, though. He was a professor at Slippery Rock, and he created the first Master of Science and Sustainability Program in the United States there in 1990. That research center was named in his honor after he passed away, and it still operates as a living laboratory for sustainability research. So, I guess you could say that sustainability runs in the family.
AJ: Well, that seems like a really good place to start then. What is ESG and how is it related to sustainability?
Kris: Well, as you said in your intro, ESG stands for Environmental Social Governance and the easiest way to think about it is as an organizational management strategy. It’s really a collection of priorities, metrics, and disclosure procedures that are focused on these three overlapping spheres. And when those three spheres overlap, it’s that intersection of activities that we think of as being sustainable. So as an organizational strategy, ESG really aims to encourage leaders to manage organizations in a way that sustains themselves and the social and environmental systems that they depend on.
AJ: Hasn’t that sort of decision-making always been used by organizations?
Kris: No, not really. I mean, in the context of public corporations, there’s really been a strong emphasis on profit-only as the key measure of performance. That’s the economic bottom line we talked about. And that emphasis on maximizing shareholder profit was really articulated back in 1970 by someone who you may have heard of, Milton Friedman, a very popular economist and leader. And that thinking, that economic bottom line, really influenced much of corporate decision-making until fairly recently. So now, the concept is of a triple bottom line instead of a single bottom line. And that triple bottom line represents the people and the planet in addition to the profit factor. So those are the things that correspond to E, S, and G.
AJ: What are some examples of how organizations are using ESG now?
Kris: Well, you’ve heard the term “what gets measured gets managed,” right? So in the ESG world, the idea is to define a set of metrics that fall into each of these three spheres that are important to an organization. So that’s done by engaging those who have a stake in the organization and some dialogue about what’s important to them and the organization and for the collection of issues that are most important then the task is to start to evaluate or measure them and establish a baseline. So let me give you a couple examples.
On the environmental side, for instance, organizations are looking at their greenhouse gas emissions and determining what their current emissions are and then establishing goals to reduce them or the amount of waste they generate, or the water they consume and so on. On the social side, health and safety metrics are important to organizations, workforce diversity, professional development–those kinds of things and how they interact with their communities. And on the governance side, there are a lot of elements like political contributions and ethics and transparency and executive compensation and diversity on the board, all those kinds of things. So, yeah, once they’ve identified what issues are important, they establish a Baseline and then you can start to set goals and track that progress. And that’s really what the ESG system facilitates and structures.
AJ: Are there many US corporations reporting ESG performance now?
Kris: Yeah, as a matter of fact, over 90% of Fortune 500 companies are preparing annual corporate sustainability reports today.
AJ: Is there a standard format for those reports?
Kris: Actually, no, and that’s been a challenge for these organizations because they want to and their shareholders are expecting them to report but there really hasn’t been a standardized process to do that because this is all been a voluntary initiative. So organizations have had to look through the available guidelines and figure out how best to tell their sustainability story. Heck, there are at least five different major reporting schemes right now used globally and those represent some six hundred different metrics that organizations can pick and choose from between all the ESG criteria.
AJ: That’s a lot to choose from. Do you expect that to change anytime soon?
Kris: Yes, yes. There’s a significant effort underway right now to establish a common framework for that global reporting on an organizational basis. I think that the global community does recognize that there are urgent actions needed on many fronts and that corporations, for instance, have a significant role to play. And not just environmentally, but socially as well. So the investment community, shareholders, and governments are all motivated to standardize these sustainability reporting metrics and to help inform decision-making. As a matter of fact, right now in front of the US Congress, several house rules are being reviewed and promoted. A couple of them focus on the US Securities and Exchange Commission, related to rules for disclosure of ESG information and climate change risk posed to public corporations.
AJ: With that in mind, what would you suggest that organizations do now?
Kris: Well, yeah, relative to ESG, I would recommend that if organizations haven’t already developed an ESG program, that they not wait for it to become a requirement and that they be proactive about it. There’s so much information out there available to help guide that process, and if they’re looking for benchmarks, a good way to do it is to look for what’s going on in your trade association or your competitors. How are they reporting their sustainability story to their shareholders and the public?
AJ: Are their basic steps an organization should consider?
Kris: Yeah, there are a basic–let’s say, a six-step framework that organizations could take. It really starts with the vision of the organization, having a strategy that informs how the organization views sustainability and ESG. And then the second step would be to establish some governance or management system internally that provides structure for the accountability and implementation of the program. Then you get into that step I mentioned earlier of assessing an organization’s material issues. It is those things that are important to the shareholders and the organization that fall into those three spheres: E, S, and G. And once you’ve prioritized, then you can pick the ones that the organization wants to focus on initially that provide key indicators or collect data around and establish a baseline and establish goals to assess what the risks and opportunities are for moving forward. Then it’s all about evaluating the reporting and reassessing, kind of a continuous improvement process and providing assurance to the users of the information, the stakeholders, the investment community, that this information is complete and consistent and accurate and transparent.
AJ: A moment ago, you mentioned risks and opportunities. Can you expand on that in the ESG context?
Kris: Certainly. If we think about the collection of topics. So that’s the–those are the indicators that an organization has determined are important or material to their ESG process. It’s useful to consider their risks and opportunities. So, for example, a business is dependent, say, on using water for their ongoing operations. And it would be important to assess whether or not they’re located in a drought prone area, now, or if there are future projections that indicate that water stress is going to be a problem in that area. So that would be a big risk to their operations that they would want to understand as far as their long-term sustainability of their production at the same time by focusing attention on that risk factor and the existing uses of water, say, for an organization, that may identify opportunities for that company/organization to more sustainably utilize that resource and thereby lessen their exposure to risk.
AJ: Sounds important.
KRIS: Yeah. And, I mean, that can be done on any of these spheres: environmental, social and governance. And that’s an important aspect of trying to balance those three criteria and provide for long-term as opposed to short-term, you know, quarterly returns which is really been the focus of the economic single profit basis for so long.
AJ: So then what are some of the ways that we–by we, I mean CEC–are helping clients in the ESG area?
Kris: Well, CEC is an engineering/environmental consulting firm, so we’re really focusing on the E in ESG, the environmental piece. And we have a three-phase process that focuses on first, assessing and planning, and then engineering to adapt, and finally, reporting and envisioning. Let me walk you through that real briefly.
In the assessing and planning stage, that’s where we would look at an organization’s exposure to these risks, whether it’s physical impacts, like extreme storms and wildfires, or drought or flooding, as well as societal changes. Whether that’s the social cost of carbon or changes in consumer demand for fossil energy or other regulatory requirements. And how those potential risks can affect an organization, so that they have an opportunity to be proactive and voluntarily take some actions now, rather than waiting to remedy a crisis after the fact, which is always more more costly than taking preventative measures up front.
So with that kind of assessment stage, corporations can interact with their local communities, even, and have sort of a double benefit of the social and environmental fees by collaborating and contributing to the community’s efforts to assess and understand climate impacts and and prepare for them. So that’s the assessing and planning phase. There’s a lot more to it that I could go into, but that’s it in a nutshell.
In the next phase is where CEC, as an engineering consultancy, has the opportunity to help companies/organizations design and implement actions to address these risks and opportunities. Whether that means supporting a renewable power installation, or designing infrastructure that’s resilient to flooding, or aiding in the development of carbon offset strategies.
And then finally we get to that reporting and envisioning stage where organizations are collecting up this information, reporting it to their shareholders or other interested parties, and developing strategies for ongoing improvements that align with their vision and goals. So I really think that the ESG process serves as a great roadmap to help organizations prioritize risks and find opportunities to make meaningful actions toward long-term sustainability of their organizations, the communities, and the environment
AJ: Waiting to remedy crises is always more costly than taking preventative measures. Chris, thank you for being on this episode of CEC chats.
Kris: It’s my pleasure!
For more information on this fascinating subject, visit www.cecinc.com/blog and check out Kris’ October 2020 article, “What is Sustainability, Really, and How Does It Look in Practice?”
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