Contextualizing ESG for the Great Lakes Region

What is ESG? How does it differ from CSR? 

Many organizations are familiar with Corporate Social Responsibility (CSR) dating back to the early 1980s when the notion of being a good corporate citizen first became mainstream. CSR is focused on a company’s values and how it builds relationships with a broad range of internal and external stakeholders, including but not limited to, employees, customers, and local communities. 

Over the past few years, a new acronym has taken the spotlight: environmental, social, and governance (ESG). The term was coined by institutional investors to denote the subset of CSR issues that are financially material to an organization’s financial and operational performance, and long-term value. Capital markets are seeking to ensure they maximize their risk-adjusted returns, and this now includes a structured consideration of ESG issues alongside traditional financial analysis.  Due to their focus on financial materiality, ESG issues are of interest to a broad range of capital markets participants, including equity and debt investors, credit rating agencies, regulators, and central banks. The focus on ESG is linked to the recognition that these issues can create real risks and new opportunities for companies in today’s interconnected world. 

It’s worth underscoring that CSR and ESG are not mutually exclusive – they overlap significantly as our economy can no longer operate in isolation of the environment and society upon which it depends. Global challenges such as the COVID-19 pandemic, geopolitical tensions and climate change, to name a few, are only accelerating this. A simple way to remember it: CSR is focused on the values of the company; ESG is focused on the value of the company. 

Why is ESG important for the Great Lakes Region?

The ESG movement is indicative of a fundamental shift in the global economy, which will impact companies operating in the Great Lakes region in several ways: 

  • Dependency on Environment and Natural Resources: There will continue to be pressure to address agricultural runoff, plastics pollution and remediating Areas of Concern, urban runoff and sanitary sewer overflows, climate change, and sprawling development.
  • Competition for Skilled Talent: Companies will have challenges in keeping pace with the advanced talent and skills required to succeed in a rapidly changing economy. In the global war for talent, companies need to articulate their ESG vision to attract and retain employees.
  • Critical Aging Infrastructure: As public debt skyrockets, failure to adopt alternative approaches to planning, procuring, and financing Great Lakes infrastructure has created competitive headwinds.
  • Cross-Border Issues: If the binational Great Lakes region is to compete globally, new approaches for managing and securing the border need to occur at a faster pace and their scope expanded as ports of entry and border management systems are modernized.
  • Public Health & Safety and Emergency Management: In the face of extreme weather increasing in frequency and intensity due to climate change, companies in the Great Lakes region will need to coordinate among regional, state, provincial, and local counterparts to build resilience. 

What do businesses need to know?

Due to the capital markets focus on ESG, businesses increasingly need to articulate their ESG value proposition to providers of capital and regulators through their reporting and disclosure. To address systemic financial risks posed by climate change, investors are seeking information on how the organization has identified, assessed, and mitigated its ESG risks and captured new opportunities. Whether a publicly traded or privately held entity, if your organization seeks debt or equity financing, this will become an imperative to accessing capital in the long run. 

ESG reporting and disclosure will have implications for public and private companies operating in the Great Lakes region. Public companies will be increasingly exposed to new reporting standards and mandatory disclosure regulations focused on consistent and comparable disclosure for investors. This will eventually include Scope 3 GHG emissions, which extends into the supply chains of organizations. Private companies with large publicly traded customers will face growing pressure to report their GHG emissions to customers so they can fulfil these disclosure obligations. 

Increasingly, younger generations, such as Gen Z and Millennials, are seeking to work for organizations that align with their values. The 2022 Edelman Trust Barometer found that “when considering a job, 60% of employees want their CEO to speak out on controversial issues they care about and 80% of the general population want CEOs to be personally visible when discussing public policy with external stakeholders or work their company has done to benefit society.” 

How to get started

Companies getting started on ESG should recognize that it is a journey of progress, not perfection. Given the rapid evolution in capital markets interest in ESG and its connection to value and performance, companies should get started with the following 3 steps: 

  1. Conduct an ESG Materiality Assessment – Not all ESG issues are relevant for every company and ESG issues are sector specific, jurisdictional and entity specific. The starting point is conducting an ESG Materiality assessment to identify and prioritize the relevant ESG risks and opportunities to inform company strategy and reporting efforts. As part of this assessment, companies should engage a broad range of stakeholders and conduct an analysis of their peers’ ESG performance and their investors’ expectations on ESG disclosure. 
  2. Develop an ESG Strategy – Using the results of the ESG Materiality Assessment, companies should develop comprehensive ESG strategies that cover governance, risk management, strategic planning, and reporting activities. As part of this process, organizations need to identify the most appropriate metrics and targets to measure their performance on their most material ESG risks and opportunities. 
  3. Produce ESG Reporting & Disclosure – Capital markets are seeking disclosure from companies to understand how they are identifying, assessing, and managing ESG risks and opportunities. Global accounting standards for ESG reporting are being developed by the International Sustainability Standards Board (ISSB), with the first two standards to be published in June 2023 and come into effect in 2024. In addition, securities regulators in Canada and the US have published new mandatory climate change disclosure requirements, which are expected to be finalized in 2023. Companies should get started on ESG reporting and disclosure in advance of these new rules coming into effect.   

These efforts do not happen overnight and a significant amount of change management is required to effectively navigate this new territory. Companies that develop a thoughtful approach to ESG have an opportunity for competitive advantage and improved long-term performance, ultimately benefiting the Great Lakes region as a whole. 

About the Author: 

Sarah Keyes, FCPA, FCA,

CEO, ESG Global Advisors

Sarah is an ESG and climate change expert with over a decade of experience. Today, she regularly presents to Executive teams and Boards of Directors on the link between ESG and climate change with  performance and long-term value, and helps her clients establish ESG and climate change strategies. 

Previously, Sarah was a Principal at CPA Canada where she guided companies in integrating climate  change considerations into business strategy, risk management, governance, and reporting. She has also  held senior roles at PwC and MNP working with the energy and mining sectors. 

She is the Academic Director and Lead Instructor for the Institute for Corporate Directors (ICD)’s Board  Oversight of Climate Change program. She also facilitates a module on ESG and sustainable finance in  the ICD’s Director Education Program and sits on the Boards of Leading Change and Sustainable  Buildings Canada.

About ESG Global Advisors:

As a trusted partner of both companies and investors, we are driven by an informed belief that Environmental, Social and Governance issues matter and that businesses that incorporate them into their decision-making stand to thrive over the long-term. We are passionate pragmatists. We know that incremental change has an exponential impact over time. That’s why our team of senior-level professionals—all with deep experience in the Capital Markets—works with you every step of the way, to develop an approach to ESG that adds value now and in the future.

CGLR’s business and sustainability network programming is supported by the Fred A. and Barbara M. Erb Family Foundation.

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