New Approach to Business
Environmental, Social and Governance (ESG)
For most organizations, there is a growing business imperative to address sustainability. The material risks that companies face are broadening and becoming more complex. These mounting risks have led to the emergence of a global sustainability movement, driven by capital markets, governments, communities, and various stakeholders. This demand for accountability in environmental, social and governance (ESG) matters calls for better understanding of the impact of business and industry on the environment and society.
ESG factors refer to specific areas for evaluating corporates and governments’ sustainable impacts according to their policies and strategies, which can provide multiple metrics that help in assessing risks and impacts, further to supporting investments and growth.
According to the US SIF Foundation's 2020 trends report, U.S. assets under the managements that included ESG in their strategies grew to $17.1 trillion early 2020. Thus, marking a 42% increase (from $12 trillion early 2018). Climate change, modern slavery, indigenous rights, employee health and wellbeing, diversity and inclusion are examples of ESG factors that are being better incorporated by governments, corporates, and investors lately.
Building ESG framework
ESG frameworks can be built by identifying businesses’ structures and connecting their different components to the ESG strategy through a preexisting corporate (or government) strategy. This framework can be built through defining Key Performance Indicators (KPIs) and checklists across the three pillars of an ESG strategy (Environment, Society, and Governance).
Some ESG strategies utilize attribution of financial values to ESG factors, including valuing costs incurred, cost-benefits, and environmental impact costs of different greenhouse gas emissions. Some examples include calculating the insurance premiums from operations located in areas vulnerable to certain risks such as climate change, as well as the social impact of a high rate of turnover in staffing across specific industries or occupations.
As a result, organizations become able to declare different ESG conditions which influence their business in conjunction with the ESG impact of their activities including information that describe the emissions incurred from operations and the amount of reduction/offset achieved.
Due Diligence: ESG as part of financial services
ESG Due Diligence is a well-known practice that allows businesses to better support their status in the market. This practice provides a non-financial indicator for identifying material risks and growth opportunities. Developing consensus for the Due Diligence process involves different activities, including disk reviews, interviews, background checks, accounting analysis, and site visits leading up to the ESG risk assessment which provides a key advantage when financing investments and operations.
ESG Scoring
Reporting on ESG is highly dependent on the quality of data. Therefore, data collection varies depending on the methodology used for creating the ESG strategy that usually involves looking into company’s disclosures and researching government, academic, and NGOs’ databases.
ESG score calculation is conducted by different companies using various methodologies. Most providers outline specific ESG indicators, such as climate change effect and political contributions; weighting each indicator often differs depending on the provider.
ESG scoring is provided by credit rating agencies like Moody's, S&P, Fitch among other specialized rating providers, including MSCI, Sustainalytics, Bloomberg, and Refinitiv.
BDO Jordan's role in the Global Movement
BDO aims to help firms in achieving their goals. BDO Jordan recognizes the need to continually adapt its strategies, services, and the approach to meet our stakeholders’ sustainability expectations.
As part of the Net Zero Financial Service Providers Alliance, BDO Global has committed to supporting the goal of global net-zero greenhouse gas emissions by 2050 or sooner, in line with the ambition to limit the global temperature increase to 1.5°C above pre-industrial levels.
Within BDO Jordan’s efforts towards sustainability, we provide advisory services on ESG within our Green and Sustainability Services. These services include Strategy development, Scoring, Materiality Analysis, and Due Diligence in the context of ESGs in addition to Environmental and Social Impact Assessment, Sustainability Reporting, Industrial Systems & Process Development, Climate Change Mitigation and Adaptation, Sustainable Development Goals Integration.
Azzam Hamaideh – BDO Jordan - Consulting Director.