Environmental, Social & Governance (ESG) High-emission sectors and decarbonizing our economy

Global commitments to “net-zero emissions” and “net-zero financed emissions” seem to be swirling in the build up to and will continue in the wake of the United Nations Climate Change Conference (COP26) meetings in Glasgow. Developed countries are committing to build on the goals established in the 2015 Paris Agreement to work on reducing their emissions, work with developing countries on reducing their emissions, invest in financing and building green infrastructure, as well as transition the economy away from reliance on fossil fuels to other alternative, and cleaner, energy solutions.

Where does Canada fit in?

In response to the 2015 Paris Agreement, Canada created a strategy document in 2016 outlining an extensive description of executive, mitigation and adaptation strategies for a clean economy that leans heavily on carbon pricing. It was called “The Pan-Canadian Framework on Clean Growth and Climate Change”. Fast forward to this year and you will see that the federal government has included climate leadership for crown corporations as part of their annual budget. There is now mandatory reporting required for crown corporations over $1 Billion in asset size with those that are smaller to address the same requirement for disclosure by 2024 as the formal reporting year. This reporting will be based on the adoption of the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD was developed to drive consistent climate-related financial risk disclosures.

Changes made by crown corporations will only work in achieving some of the global commitments made by Canada, including more extensive commitments having been made at COP26. This means that more stringent requirements will be set to drive change across both the public and private sector — and these requirements will either directly or indirectly impact you. And being included in the 10 most emission-intensive sectors of the Canadian economy, the transportation sector needs to take particular note. In fact, your company’s future borrowing may be impacted by lenders establishing conditions related to how you promote sustainability in your operations, starting with climate-related risks and opportunities. Or your customers — those you haul for — have, or are likely to, start establishing targets that set minimum expectations for sustainability goals. These targets and goals will cascade down the supply chain to impact you. And in worst cases, may detrimentally impact your revenue sources and operations.

While ESG issues vary from industry to industry, or sector to sector, customers, vendors, and other stakeholders should be considering and strategizing how to address key ESG factors.

You’re working in a high emission sector: how can we work together to decarbonize the economy?

Environmental factors corporations must address include greenhouse gas emissions, waste management, and energy efficiency. Given renewed efforts to combat global warming, cutting emissions and decarbonizing is increasingly important, on a practical and reputational scale.

Some environmental topics to consider include:

1. Carbon emissions: Potential changes in regulatory and social scrutiny of carbon emissions is on the rise, driven by government commitments which translate into public policy. Taking stock of your emissions is going to be critical to determine the opportunities to reduce your carbon footprint.
2. Fleet / capital strategy: As emissions regulations step up over time, the costs of running older equipment will increase and fees for noncompliance will also increase, putting smaller operators who can’t afford to upgrade at a cost disadvantage. Having a plan for your fleet will be necessary when considering replacement as you invest capital for future operations.
3. Fuel efficiency: Fuel consumption is both a cost as well as an opportunity for controlling emissions. Looking at opportunities to reduce fuel consumption is a direct boost to your bottom line and tells a good news story on how you are working to reduce emissions. More efficient engines, management scrutiny of efficiency, as well as operating habits all have an impact on reducing costs and should be considered.
4. Recycling: Your organization should have a defined strategy and monitor the actions of employees to recycle batteries, liquids, and tires - at a minimum. This supports operations while reducing your carbon footprint.
5. Equipment refueling: Owned refueling tanks present risks, which vary depending on location and refueling protocols. These risks include spillage and contamination, which require a specific plan on both prevention and mitigation. Actions taken or not taken will count towards how you are perceived through the lens of ESG.
6. Offset strategies: If you are an ESG mature operator that understands and has measured your inventory of emissions, have you considered offsetting your remaining carbon footprint? Carbon offsets allow companies to invest in environmental projects to balance out their own carbon footprint. This can be investing in projects reducing future emissions, to rolling out clean technologies, or purchasing carbon credits generated through activities such as carbon sequestration through forestry practices.

Relationships with workforce, communities, and governments

The social in ESG includes human rights, labor standards in the supply chain, and issues such as adherence to workplace health and safety. The strength of your social strategy rises if your company is well integrated within the community and therefore you have social license to operate.

Some social topics to consider include:

1. Health and safety of operators: Essential for social license is the way you treat your employees. This includes appropriate and ongoing training, providing the right tools to complete the job, health and safety communications, and culture that drives a safety mindfulness from the top down. Included here would also be the focus on drivers operating within speed limits as well as forward-facing cameras to exonerate drivers from incidents as they occur. Your policies, procedures and processes will either support your ESG-mindfulness or cast a light on where you fall short.
2. Community relations: This may seem simple yet many times it is overlooked. Understanding the community(s) you work in is essential to aligning operating practices with their expectations. Which means consulting with them on how you operate will increase in importance. Moving the focus from an entitled mindset of ‘right to operate’ to earning social license will help engage and gain the support of your communities. Having a plan to engage is then a prerequisite. Inventory who your key stakeholders are in your local community and engage with them.
3. Employee turnover: Understanding trends such as employee turnover is critical. The treatment of employees is directly linked to the social pillar of ESG. Strong ESG strategies help companies attract and retain skilled employees by providing attractive workplaces. How would you be chosen as an employer of choice? Knowing your blind spots and having a strategy to proactively address these types of issues will greatly reduce downtime.

Recognized standards and policies

Governance refers to a set of rules or principles defining rights, responsibilities, and expectations between different stakeholders in the governance of companies. A well-defined corporate governance system can be used to balance or align interests between stakeholders and can work as a tool to support a company’s long-term strategy.

Some governance topics to consider include:

1. Ethical behavior: Ethical behavior should be entrenched in your company’s principles, and in the daily activities by owners, management and staff which ultimately drives your culture. How your ethical posture is perceived will directly impact the business relationships you have, and how socially conscious investors view your company. Is integrity a fundamental principle upon which your business is built and how business is conducted today?
2. Diversity and inclusion: This is a company’s mission, strategies, and practices to support a diverse workplace and leverage the effects of diversity to achieve a competitive business advantage. Diversity focuses on the makeup of your workforce, and inclusion is a measure of culture that enables diversity to thrive.
3. Coordinate with your customer: Knowing what customers’ commitments and targets are and how they are being measured by their stakeholders will ultimately cascade down the supply chain to you.

Your ESG plan of action

You really need to start the discussion at the senior leadership level. Sustainability initiatives are not only good for people and the planet, they are also good for profits. Benefits include more innovation, greater efficiency, lower operational and financing costs, stronger growth, greater resiliency, and enhanced reputation and customer relationships. To realize these benefits, it’s necessary to treat sustainability strategically and integrate it into your culture and core business practices. This also means listening to your employees and stakeholders who have feedback that will help you with continuous improvement.

When reviewing your ESG strategy, start by identifying the important topics which need to be addressed, and include some of those highlighted in this article. Look at your current performance, set targets for what you want to achieve, and then create strategic actions plans to be clear on how you can improve in those areas. As a business, you need to keep up with ESG changes, trends and directions or risk being left behind.

Forward-thinking companies are identifying, setting and publicly announcing their key targets and efforts. This is helping them focus senior management’s attention and deployment of corporate resources, spur internal efforts, and reassure lenders, customers, employees and your other important stakeholders that their company is making a true effort to make positive changes. You need to as well. Now is the time for action.

To learn more, contact Edward Olson, Leader, Environmental Social & Governance and Regional Leader, Enterprise Risk Services, at 250-763-8919 or [email protected] or Mary Larson, Leader, Consulting — Organizational Renewal, at 514-228-7905 or [email protected].