Ceilidh Hemmati, Simon Foxcroft and Nolan Okrusko have written a white paper for Edmonton Global entitled ESG as a Catalyst for Economic Development.

The use of environmental, social and governance (ESG) metrics to evaluate the direct and indirect financial impact of the risks and opportunities of an investment is not new, but it has become more prevalent in recent years.

This timely paper provides insights on:

  • the "G" in ESG and corporate governance factors;
  • corporate behaviour, policies and business ethics;
  • voluntary and mandatory ESG reporting;
  • why governments and economic development agencies should be attune to ESG; and
  • the ESG efforts carried out by certain economic development agencies in Alberta, British Columbia, Toronto and California to date.

Executive Summary

The use of Environmental, Social and Governance (ESG) metrics to evaluate the direct and indirect financial impact of the environmental, social and governance risks and opportunities of an investment is not new. However, ESG factors, data and reporting have increasingly been a topic of discussion among companies, governments and investors within recent years, with ESG increasingly being referenced following the global turmoil set off in 2020 by the COVID-19 pandemic and compounded by ongoing climate disasters, social unrest and the war in Ukraine.

Notwithstanding its prevalence, uncertainty remains as to how ESG is defined and what ESG means in practice for organizations. The various ESG reporting frameworks that have been created can seem overly complex or beyond the realities of smaller companies who may just be at the beginning of their ESG journey. In addition, an emphasis on the pressing environmental and social issues (the "E" and the "S") faced by organizations and global society has also sometimes resulted in governance factors (the "G") being underrepresented in ESG discussions and reporting, notwithstanding the foundational role good governance plays in achieving environmental and social goals and avoiding risks.

In order to receive the benefits of ESG incorporation while also reducing the risks created by collecting and reporting on ESG data, organizations must truly understand the meaning of ESG, including governance. Given their connectivity to individuals and companies in their jurisdiction, governments and agencies, including economic development agencies like Edmonton Global, play a key role in fostering this understanding and promoting the potential impact ESG can have on the economic, social and environmental vibrancy of their regions. This paper aims to facilitate these educational efforts by (1) providing a high level introduction to ESG, and governance in particular, (2) discussing why economic development agencies should be concerned about and attuned to ESG, and (3) canvassing some of the ESG efforts carried out by governments and economic development agencies to date, in the hope that what may have worked in other jurisdictions can be applied in the Edmonton region as well.

Introduction

The use of Environmental, Social and Governance (ESG) metrics to evaluate the direct and indirect financial impact of the environmental, social and governance risks and opportunities of an investment is not new. However, ESG factors, data and reporting have increasingly been a topic of discussion among companies, governments and investors following the global turmoil set off in 2020 by the COVID-19 pandemic and compounded by ongoing climate disasters, social unrest and the war in Ukraine. Between 2018 and 2020, sustainable investment assets in Canada grew by 48 percent, the largest increase in absolute terms as compared to Europe, the United States, Australia, New Zealand and Japan, all of which have also seen a substantial increase in sustainable investing.

Notwithstanding its prevalence, and indeed perhaps in part due to the sheer volume of material and information available on the topic, uncertainty remains as to how ESG is defined and what ESG means in practice for organizations. For many Canadian and Albertan companies in particular, questions arise regarding whether ESG is necessary or even meaningful in the face of the various reporting frameworks and standards that often seem directed primarily at large multinationals and distanced from the realities of business on the ground. For example, Canada West Foundation and The Canadian Energy and Climate Nexus found that while Canada's largest oil and gas and electric utility companies reported publicly on ESG, the number of companies with public ESG reports or metrics decreased substantially when smaller oil and gas, energy and utilities companies were considered, many of which are located in Alberta. Whether a company was public or private also had significant influence on the prevalence of ESG reporting and metrics among the companies surveyed.

In addition to the multiple and various frameworks and standards organizations may have to wade through in arriving at an ESG policy, there is an awareness that public statements and reports made with respect to ESG, particularly if not mandated, may create risk, rather than mitigate it. If statements are determined to have been misrepresentations or inaccurate or publicly disclosed goals and targets are not met, companies may expose themselves to regulatory or legislative consequences or shareholder lawsuits.

While the above are reasons organizations must be mindful when deciding to create an ESG policy or report on ESG factors, they are not an indictment of the established utility and value of incorporating ESG into an organization's planning and operations. Companies with strong ESG performance have been demonstrated to reap a number of operational rewards, including enhancing their reputation, attracting, retaining and motivating talent, improving overall performance by reducing waste and streamlining operations, and improving opportunities to attract capital.

However, in order to receive the benefits of ESG incorporation while also reducing the risks created by collecting and reporting on ESG data, organizations must truly understand the meaning of ESG, the nuances of ESG reporting, factors and frameworks in their industry and area, and then engage in the work necessary to embed ESG more broadly in their operations. Governments and agencies, including economic development organizations, will play a key role in promoting a greater understanding of ESG and its importance to companies in their jurisdictions and ultimately improving the attractiveness of the jurisdiction as a whole, not only from an economic standpoint, but, in certain cases, from a social and environmental perspective as well.

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Originally published by Edmonton Global.

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