Environment, Social, and Governance (ESG) is increasingly being viewed as the key tool to evaluate the overall health of a business’s operating model and the company’s long-term resiliency. Stakeholders are investigating, and, in some cases, demanding thoughtful, forward-looking policies and programs that incorporate environmental and social impacts and look at how they are governed.
According to the Harvard Business Review, between 2010-2018, assets under ESG investment strategies quadrupled to nearly $12 trillion dollars in the US – or 1 out of every 4 dollars invested. This trend is continuing to grow as investors and customers increase their demand for more transparency.
In turn, we are also seeing and recognizing the need for companies to stop considering "ESG risks" separately from enterprise risk management (ERM) and incorporate ESG risks into their ERM.
This increased demand for ESG is happening across all industries – so what does this mean for the biofuels industry?
Why ESG is Key for BioFuels
When talking about energy transition, you hear the terms “Low carbon transition,” “clean energy transition,” and “low carbon economy.” These phrases have become more referenced and relevant in stakeholder inquiries and industry reports over the past few years. The International Energy Agency predicted in their 2021 Renewables report that improved policies and international climate goals are set to propel renewable electricity growth to new heights, and pressure will continue in ALL industries to contribute to the low carbon transition through innovation, scientific research and financial investment.
Not only is ESG important for biofuels directly when developing and bolstering your own company’s business plan, but the role of ESG on other businesses is putting pressure on your company to incorporate renewable energy into the overall business structure. This pressure is blowing open the doors for growth of biofuels. Keeping a pulse on the energy transition and highlighting how biofuels are playing a key role in this societal shift is creating huge opportunities for businesses.
As the world is moving towards low carbon, biofuels will play a fundamental role.
This means having a strong internal ESG program in place within your business makes you stronger in terms of investors, your workforce, and your company culture. In addition, it will also give you an upper hand in integrating into future business opportunities where your sustainable business already aligns with your customers.
The Changing Regulatory Landscape
While providing ESG information is voluntary today, regulations are on the horizon. In April of 2022, the International Sustainability Standards Board (ISSB) publicly released the first draft proposal of its Sustainability Disclosure Standards and Climate Disclosure Standards. The drafts outline requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that are necessary for investors to assess a company’s enterprise value. The proposals are currently in a consultation period and the final standards are anticipated to be issued by the end of 2022.
In addition to the ISSB standards, the U.S. Securities and Exchange Commission (SEC) released a proposed rule on the Standardization of Climate Related Disclosures for publicly held companies. The Proposed Rule will require a public company to make more robust disclosures in its periodic reports with the SEC regarding its exposure to climate-related risks and its impact on the environment. The SEC currently anticipates finalizing the proposed rule in December 2022.
These reporting and disclosure requirements are quickly approaching, meaning the time to prepare is now.
7 Step ESG Strategy
There are plenty of tools out there to help you get started or to further develop your ESG strategy, and then report on your progress to your stakeholders. At Antea Group, we like to use a 7-step process when walking our clients through developing an ESG strategy or program - there is no one size fits all solution for developing a program so this cycle can adapt to each organization’s needs.
ESG is truly meant to be a journey. Some companies may be just starting out, while others are working to refine their programs already in place. Wherever you are on your journey, the key to a successful strategy is a strong foundation.
Setting the Foundation
1. Impact Screening: To get started we recommend identifying and understanding the environmental and social impacts of your business operations as the base of your ESG strategy. This allows you to focus on ESG topics related to your operations that have the largest impacts on both people and the planet.
2. Materiality Assessment: Engaging stakeholders to gather insight on the relative importance of specific ESG issues which are called material topics. The main part of a materiality assessment is stakeholder engagement. Stakeholders can include your employees, customers, investors, and suppliers. It can also include groups such as peers, NGOs, the communities in which you operate, and even the general public.
A materiality assessment helps you understand which topics are important to your stakeholders and allows you to prioritize the most material topics to focus on as part of your ESG strategy. When conducting a materiality assessment, it can be difficult to determine which topics to include in the assessment. Start with a wide ‘brush stroke’ of topics and allow stakeholders to narrow down to the most material topics. Engaging your stakeholders in this process ensures that their voices are heard - the more stakeholders you can engage, the better understanding you can gather.
3. Current State Baseline: Once you know which ESG topics to prioritize, assess existing programs, policies, metrics, and initiatives in your company to determine where you currently stand. You can do this by working directly with cross-functional stakeholders within your organization that have expertise in each priority ESG topic. Gather information from reports, policies, and data systems first, supplemented by interviews with internal stakeholders to follow up on specifics and collect more detailed insights.
In addition to assessing your company’s current state on the ESG journey, you should also evaluate how your industry peers are approaching ESG. This can be done by benchmarking within your industry through assessing existing programs, policies, metrics, and initiatives of your peers through publicly available information. Understanding what your industry is currently doing regarding ESG can help you identify additional areas of focus, as well as how your company compares to the rest of your industry.
These three activities set the foundation for your ESG journey and allow your company to build a robust ESG program. After setting the foundation, the next step is to create a strategic plan that can be integrated into your business strategy.
Crafting a Strategy
4. Vision and Goals: Define a vision for your ESG performance and goals based on the material ESG topics you identified. You can do this by deciding if you want to ‘Maintain, Improve, or Optimize’ each material topic.
- Maintain: What are you already doing well that only needs to be maintained or communicated? This may be considered something important for the business to maintain, but not necessarily something you would prioritize resources for in the short term to provide the greatest ESG value.
- Improve: What areas can you make incremental improvements to better align with peers, meet stakeholder expectations, and/or demonstrate commitment to ESG?
- Optimize: Where can you really sharpen your existing efforts to move toward industry leadership in ESG? This is where you will dedicate the majority of your resources to make great strides in your current ESG initiatives. Some of the topics you wish to optimize might be ones that you identified during your current state as already lagging and will need significant enhancement. Others are topics that you are already doing well, but that you see the potential to lead the industry by making a few adjustments.
To understand the level of effort required by your organization for each of these, we suggest conducting a gap analysis between your current state, your vision, and your goals to identify what may be missing. Then, you can strategize and plan accordingly for the future.
5. Strategic Roadmap: A roadmap will help your business understand the steps to fill in the gaps and reach your goals. A roadmap can outline a reasonable approach to understanding your resources, timing, and ensuring accountability that creates a compelling ESG framework with a clear picture of your strengths and goals. As part of your strategic roadmap, we recommend identifying clear and measurable actions and key performance indicators (KPIs) that define what success looks like, and that can be implemented through your business.
Once you have set your foundation and created a strategic roadmap with clear KPIs, the next step is to implement your plans and communicate your efforts.
Track Progress and Communicate Results
6. Implementation: This is the time to implement your strategic roadmap that integrates your ESG goals and KPIs into centralized management systems or data software. This will help identify trends and measure your actions and progress to your KPIs. Utilizing your existing systems will help ensure that your ESG initiatives are included in your standard business reporting.
7. Report Progress: Decide when and how to tell your ESG story. Many companies choose to communicate their ESG efforts through an annual report, typically called an ESG, Sustainability or Impact Report. To develop your report, you first need to decide what you want your report to accomplish. It should ideally be a combination of:
- Communicating ESG strategy while demonstrating alignment to business objectives.
- Highlighting ESG policies and programs already in place.
- Sharing company specific ESG goals and metrics.
- Evaluating your progress and engagements in key ESG areas.
Then repeat! These steps are a cycle of continuous improvement to refine as your business grows and the business landscape develops around ESG. It’s good to set a regular cadence of communication and updates for key stakeholders to continuously evaluate goals, update data, and compare best practices. By monitoring your plans, you can stay apprised of adjustments that might be needed as new regulations come out, so you can stay on track toward your goals.
The push towards a low-carbon economy is creating opportunities for growth in the biofuels industry. With the looming disclosure requirements and increased demands for transparency, the key now is to be prepared.
