In late August, the Albany Business Review hosted a panel of experts to discuss the state of the energy industry. The panelists represent a wide range of industries and provide a well-rounded update on what business owners and professionals need to know. Partner Michael Poveda was invited to speak during the roundtable as one of the leading partners for UHY’s ESG team:
The term ESG surfaces a lot when it comes to this industry. Can you tell us what ESG stands for and also explain the difference between ESG reporting and sustainability reporting?
There is a lot of confusion around the term. ESG is an acronym for environmental, social and governance. But what exactly does that mean? You mentioned the term “sustainability.” Sustainability has a view towards the long term, but it’s not compromising the short term. The definition of sustainability is meeting the needs of the present without compromising the ability of future generations to meet their own needs.
ESG is a framework that businesses, organizations and companies can use to disclose to stakeholders their performance value creation around short-, medium- and long-term performance. The term ESG can be used interchangeably, or synonymously, with sustainability. ESG reporting and sustainability reporting go hand in hand. Ultimately, it’s a way to categorize information that is the most important to businesses and stakeholders.
The conversation that we’re having here today focuses on energy, which is a category of the “E” in ESG. When you look across the “E” categories, there are many aspects that stakeholders are interested in.
Sticking with energy, emissions and greenhouse gases are a couple examples. What are companies doing to reduce their carbon footprint and manage the risks associated with climate change – business risks that investors, for example, are really interested in because they impact the valuation of the business in the long term. In addition to metrics on greenhouse gas (GHG) emissions, users are requesting more information on the ways in which companies manage their energy management within the confines of their own organization as well as their supply chain. And, given the external factors and complexities in business today, the demand for this type of information is increasing.
What is driving the demand for ESG reporting?
The better question might be, “Who is driving or using information, and who is requesting the information around business performance and value creation?” That’s because, ultimately, at the end of the day, what’s driving demand for ESG reporting are the stakeholders who really want to understand what businesses are doing to not only address the risks associated with climate and energy management, but also the opportunities that companies are realizing in this space. When asked from that perspective, it comes down to the stakeholders.
We start with the investor community. They have been a real driving force here. Now we’re even starting to see some of the financial institutions and lenders think about sustainable performance in how they manage their portfolios. Investors and creditors are demanding ESG reporting from a business valuation or credit risk perspective. Customers are another stakeholder group increasingly requesting ESG related information.
Where does climate risk fit in into ESG and sustainability reporting?
Climate risk would fit within the “E” of environmental when looking at the acronym. As we’re focused on the energy management issue here, companies are disclosing information to their stakeholders around the financial risks and opportunities associated with climate change and energy transition. Some of the areas investors are concerned with are fuel efficiency, energy usage, fuel mix and reliance on the grid. These are all measures of risk that not only could help form a discounted cashflow model by building risks into the cost of capital but may also impact long-term cost projections or even revenue projections.
How should a business owner integrate ESG into their business strategy?
Like business strategy, ESG reporting involves identifying key performance metrics that are important to the business and its stakeholders. Business owners will need to be prepared for ESG reporting because it will only continue to increasingly impact their businesses. One misperception is that ESG reporting only impacts large companies. However, it also impacts the supply chain. If we just take a look at some of the recent standards that highlight this – and everyone is anticipating the SEC’s climate risk disclosure rule – we see convergence happening through the International Financial Reporting Standards (IFRS) Foundation. They’ve now formed the International Sustainability Standards Board to issue new sustainability reporting standards.
There’s a large reporting requirement coming out of the EU in the form of European Sustainability Reporting Standards (ESRS) that become effective for many in 2024. These new standards will now impact anyone that has significant operations in the EU, so if a US company is doing business with a company that has operations in the EU, they will need to be prepared for requests for information on scope one emissions or current management of ESG risks. And when the SEC comes out with their final climate risk disclosure rule, more public companies will start reaching out to their supply chain. Everyone is going to be impacted, so it is paramount that business owners get started now, have a plan and measure what they treasure.
What’s one thing you’d like our audience to know or be on the lookout for with regard to the future of your industry?
Sustainability reporting is essential. It’s here to stay. It’s a framework for businesses to tell their story, and it’s important that businesses have a plan. Define within your organization who owns ESG reporting and sustainability. Define materiality. Who are your key stakeholders? What information are they looking for? And follow what’s going on, not only domestically, but internationally around standard setting because that will guide reporting around a lot of the topics we’ve been talking about. The standards are converging, and they will impact everyone.
Read the full interview published by Albany Business Review.
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