Leveraging ESG to Reduce Risks and Seize Opportunities

We’ve watched in horror as an unprecedented number of extreme weather events – hurricanes, floods, and wildfires – have wiped out neighborhoods and businesses over the past few years, costing billions of dollars.

How vulnerable is your business and what can you do to reduce the risks?

The National Oceanic and Atmospheric Administration, or NOAA, says these $1 billion+ events have been more frequent and more severe over the past five years, costing the United States more than $748 billion and -- even more devastatingly -- about 4600 lives. They have cost a staggering $2.3 trillion and over 15,000 lives since 1980. The March 2022 United Nation’s Intergovernmental Panel on Climate Change (IPCC) report discussed the, “increasing severity and frequency of climate-induced hazards and extreme events which (have) contributed to cascading effects of infrastructure damage, loss of services and economic activity, damage to heritage resources, safety concerns and disrupted livelihoods.”

And the worst is yet to come. The IPCC report cautions that if we don’t take collective action quickly to mitigate global warming, “key risks to North America are expected to intensify rapidly” over the next 20-30 years and measures should be taken “to ensure sustainable livelihoods, and protect…economic productivity in North America…especially if coupled with the lowest emission pathways.”

To reduce the risks to your business – and reap tangible, short-term and long-term benefits – you can embrace ESG and sustainability practices. What are they and how do you do that?

Here are key points on how to do so from EisnerAmper’s Travis Epp, which they discussed on the firm’s new “ESG In Focus” podcast.

EisnerAmper director of ESG and Sustainability Solutions, and has several years of hands-on experience in reducing the environmental impact of 100+ facilities in over 30 countries.  LM is the managing director of ESG and has spent many years addressing financial risks with ESG strategies at financial institutions. Travis Epp is an audit partner and partner-in-charge of the Manufacturing and Distribution Group (and rated one of New Jersey’s top 50 accountants). Collectively, they bring over 85 years of experience to the discussion.

• What is “ESG” and how is it different from “sustainability?” “The distinction between ESG and sustainability, in my opinion, is one of the most important things that we could start off with,” EisnerAmper explained. She has “led both sustainability and energy strategies, which usually for the most part included things like reducing carbon emissions, and developing CSR reports, which is your corporate social responsibility annual reports,” which reflect “how company operations affect the planet and communities.”

ESG, which stands for environmental, social and governance, “refers to a series of risk management tools. ESG is retroactive. It is a snapshot. So, you're looking at policies or data that already exists, whereas sustainability is very strategy focused…. Sustainability is very forward-looking, it’s proactive. That's important when we look at the division of solutions for our clients,” EisnerAmper added.

“It also looks at environmental and social issues, but more from the lens of an investor, so it is a tool that is mostly used to evaluate the risks and opportunities that environmental and social issues have on your business. And this is for the most part in order to help investors make more informed decisions about their investments,” she said.

• What are the benefits of ESG? ESG helps business leaders identify risks and opportunities ”to maximize profitability in a sustainable way,” including “for future generations,” LM explained. “You do that by applying very basic risk identification and assessment methodologies. So, if I put myself in the shoes of a CFO or a CEO of a company, the CEO and the CFO, they have multiple stakeholders that they have to appease,” including investors, regulators, suppliers, employees, the board, customers, and “the general public,” each of whom has their objectives and priorities.

“ESG gives the CFO a methodology to identify all the vulnerabilities that the company has towards an environmental risk; it could be climate change risk, it could be something that is related to land utilization, water scarcity,” he added.

Each of those risks can affect your cash flow and bottom line, which is why the SSEC is finalizing climate risk disclosure rules that companies will need to include in their audited financial statements. By identifying and addressing them, you can demonstrate that you’re protecting your cash flow and bottom line, which can improve your company’s valuation, and reduce your cost of capital.

“Suppose that you're a CFO and you want to get financing from a bank. The bank will look at your ability to generate cash flows and how you manage your risks and opportunities. The banks will also look at if you are reporting them, if you're disclosing the level of transparency; and they will give you a rate for your debt,” LM explained. “If you can show to the bankers, you can show to the market, that you are managing your risks properly… (including using) sustainability opportunities to mitigate those risks, you can reduce your cost of capital, increasing your valuation…. Managing your ESG risks can impact your ability to have better access to finance, and to have better access to capital and to investors.”

Travis emphasized an additional critical benefit, especially in today’s low-unemployment market. “The importance of ESG on employee retention and attracting employees (is paramount), because in today's workforce, having solid ESG program is very beneficial to the employees of companies,” he said. So ESG strategies can help you recruit and retain top talent.

• More companies, investors and lenders are focusing on ESG today: “I think a key change that's happened over the last year is maybe educating clients about the importance of ESG. And as well, some of the service providers and lenders,” Travis said. “I definitely think that ESG has gained traction over the last year,” based on his extensive conversations with clients. “I think a year ago, there's a definitely an awareness of ESG, but … (top executives thought) it was somebody else's responsibility within the organization.” Today, however, “some companies have created policies and procedures, but for the most part, I would say the biggest step forward is that more companies are now including ESG and corporate sustainability in their mission statements. And… investors and lenders are including ESG and corporate sustainability as part of their analysis when they review companies.”
  
  
• Find creative solutions to seize the financial, environmental, and social benefits: It can take some creativity and asking for better options, but win-win solutions can be found to seize these benefits. For example, EisnerAmper explained how she worked with a manufacturing company to reduce their carbon emissions and energy costs by converting a “brownfield” to a solar farm, as well as using rooftop solar including on their parking facilities. “It shows how much you can achieve with a little bit of creativity and strategic partnerships,” she pointed out.

It’s critically important to identify the physical and financial risks to your business from climate change and other ESG factors, especially as the SEC prepares its final climate risk disclosure rules.

Will your plant or other facility be able to operate in a flood or a drought or a wildfire? Will you lose inventory and will your employees be able to work in such a crisis?

“You have to start linking those risks to the bottom line,” LM emphasized.

Listen to the full episode of “ESG In Focus” for much more.