Environmental, Social, and Governance (ESG) initiatives are not about doing good generally or making independent efforts to improve in those fields. ESG is a system with metrics and reporting standards for investment analysis that addresses non-financial factors that are material to stakeholders. An ESG analysis can reveal both opportunities and risks. Environment, social, and governance risks and plans can impact expected and actual company financial outcomes and investor interest.
Origins and Evolution of ESG
Before ESG initiatives, we had corporate social responsibility (CSR) and “doing [financially] well by doing good.” In the earlier era, the causal relationship wasn’t entirely clear for all companies. Some of the positive associations between doing well and doing good might have been due to companies with strong financial results being more willing and able to use their resources to act more responsibly and favorably towards their communities. However, those brands that emphasize the good they do have seen remarkable financial results. In 2020, research by the Harvard Law School Forum on Corporate Governance found that “high purpose” brands have over four times the earnings, nearly a 20 percentage point advantage in returns, and double their market value four times faster than “low purpose” brands. Doing good can produce a substantial financial advantage.
ESG shares some motivations with CSR. The term “Environment, Social, and Governance” was coined in a 2004 United Nations report called “Who Cares Wins: Connecting Financial Markets to a Changing World.” The initial emphasis was on ESG integration as a source of value creation for individual companies. The concepts have evolved since then.
In the U.S., ESG efforts started as voluntary and market-driven initiatives. In other parts of the world, particularly Europe, ESG regulations have existed for over a decade. The patchwork of regulations is not supported by a single governing body, analysis framework, or set of metrics, but there is some general alignment on intentions and areas addressed thanks to the G20 having established its Task Force on Climate-Related Financial Disclosures in 2015. Other bodies in the U.S., Europe, and elsewhere relied on work from that group.
Types of ESG Reporting Required of U.S. Companies
The U.S. SEC’s new climate risk reporting rules start with the year ending December 31, 2025. They require disclosure of climate-related goals that have material business impacts, greenhouse gas emissions if material, the effects of severe weather events like hurricanes and other natural conditions like wildfires, and spending on carbon offsets and renewable energy certificates, among other things. For each type of reporting, firms only need to disclose actual or anticipated material impacts.
Separate from the federal rules, California has reporting requirements for companies with revenues greater than $1 billion who do business in California (essentially all large U.S. businesses) to report on direct emissions, those from purchase and use of electricity, those from supply chains, business travel, employee commuting, procurement, waste, and water use. A second California law applies to businesses with revenues greater than $500 million, requiring disclosure of climate-related financial risks and mitigation efforts. A third California law requires disclosures from companies selling carbon offsets. The broader laws will go into effect next year, while the carbon offsets regulation will start later this year.
Large companies doing business in the EU must report on their energy use, resource use, impact on biodiversity, labor practices, integration of sustainability into decision-making, and identification of sustainability-related opportunities and risks.
The new U.S. presidential administration is expected to bring lower U.S. regulation, which could mean reduced ESG reporting requirements for some companies. However, those doing business in Europe or California will continue to be subject to robust reporting requirements.
ESG Reporting In Active Use By Investors and Business Partners
Large institutional investors in the U.S. and Europe say ESG criteria play a significant role in their investment decisions. Substantial ESG risk mitigation makes it far less likely that a catastrophe will shatter a company’s value, and companies with strong ESG metrics can help pension funds, asset managers, insurance companies, and others reduce portfolio volatility.
These investors are especially focused on climate-related policies and outcomes, including emissions, waste, pollution, energy use, and resource conservation in the environmental area. Among social factors, data security and privacy get the most attention. The governance portion includes efficiency, transparency, and accuracy issues like internal controls and audits, management and administration, shareholder rights, and executive pay.
In addition to investors, globally, 70-90% of consumers and business buyers consider ESG when making purchasing decisions. Still, the interest is less prominent in the U.S., where a 2023 Gallup survey found that 40% of respondents were unfamiliar with ESG.
Supply Chain Has Outsized Impact on ESG Metrics
Supply chain decisions have a major impact on ESG. Supply chain decisions can be instrumental in managing risk generally, in outcomes on particular ESG factors, and recordkeeping for those outcomes. S&P Global’s ESG risk assessment arm found that for all but one sector, over half and up to 98% of a sector’s environmental impact comes through its supply chain. That means companies paying attention to ESG are typically focused on the parties with whom they do business and their internal operations. ESG management in the supply chain can reduce risks to business continuity, lower costs, allow quicker responses to emerging regulatory requirements, and encourage stakeholder confidence, especially from investors.
Wood Pallets Support Strong ESG Supply Chain Metrics
Whether wood or plastic pallets are more sustainable has been the subject of considerable debate, with both industries claiming to be superior in that regard. Fortunately, an impartial group of academic researchers unaffiliated with the pallet industry have come to this clear conclusion: “Wooden pallets with conventional and RF heating incur an overall carbon footprint of 71.8% and 80.3% lower, respectively than plastic pallets during their life cycle.” [1] Using wood pallets helps to improve ESG metrics to encourage supply chain partnerships helpful to reaping the many benefits of strong ESG management.
PalletOne’s Pallet Concierge® program can help national clients better meet ESG goals while saving money and improving supply chain reliability. Armed with industry-leading testing and development capabilities, an unmatched national network, and decades of industry experience, PalletOne can help you take the next step. For full details on PalletOne’s governance, visit the UFP Industries governance report.
[1] Anil, S. K., Ma, J., Kremer, G. E., Ray, C. D., & Shahidi, S. M. (2020). Life cycle assessment comparison of wooden and plastic pallets in the grocery industry. Journal of Industrial Ecology, 24(4), 871–886. doi:10.1111/jiec.12974
