Environmental, Social, and Governance (“ESG”) refers to a range of standards and initiatives that companies are implementing in their internal operations to evaluate and address its own environmental performance, social impact and self-governance. This ESG criteria is rapidly becoming a priority for businesses of all sizes, including a number of our clients. Below are a few key factors that companies should be aware of:
- Corporate Policy Updates: Investors, lenders, shareholders and customers are increasingly requesting information from companies regarding their ESG policies and performance in both the public and private sector. Some of these requests extend further, to how the policies are being implemented, and the impact the policies have had on business operations (meaning these requests are more than a “check the box” exercise).
- Internal Due-Diligence: Companies can take measures to get ahead of the curve on ESG issues in a few ways. these include conducting internal reviews to determine the current landscape of environmental, social, and corporate governance policies and procedures for the company, hiring a third-party consultant to conduct an internal review and provide suggestions on areas of opportunity to strengthen ESG measures; and developing an action plan.
- Measuring and Reporting: Environmental, social, and corporate governance performance is not yet standardized across any industry. However, many investors utilize third party consultants to rate a company’s ESG policy, similar to an audit. Here’s an example of its potential impact. A company with a “good” ESG performance report seeking acquisition could stir up more interest in the market, thereby indirectly impacting that company’s valuation, leading to a more competitive sales process. In the opposite situation, a company with a “poor” ESG performance report could be a far less desirable acquisition target. These third-party assessments are becoming more ubiquitous in a company’s overall valuation.
- Cross-Border Takeaway: In the U.S., the focus on ESG has been heavy on the “Environmental” factors of carbon neutrality, climate change risks for the business, and use of supply chain vendors with strong ESG performance, the “Social” factors of diversity and inclusion and pay equity policies, and the “Governance” factors of implementation of decision-making procedures and cyber-security action plans. Given that the European market has been ahead of the U.S. market in adoption and reporting of ESG issues, companies doing business in U.S. markets should understand those corresponding obligations and seek to stay ahead of the curve in the U.S. market.