Over the past five years, the rise of Environmental, Social and Governance (ESG) reporting has been meteoric. As the hype around potential benefits intensifies, so too has the skepticism in some circles as to what it can actually accomplish.
As is often the case, the reality is somewhere in the middle.
The Canada West Foundation and Canadian Energy and Climate Nexus released a new report, ESG and the Canadian Energy Sector. The report found that Canada’s energy sector is increasingly taking up Environmental, Social and Governance (ESG) reporting, but not across the board and not equally among companies – and widespread confusion remains about the most effective way to report on specific ESG metrics.
Rapid changes, including international efforts to consolidate the dizzying array of ESG frameworks, guidance from regulatory bodies and stock exchanges, and efforts by companies to find what works and what doesn’t, may help clear the air around ESG reporting.
The report examines the evidence surrounding four propositions, including whether ESG: drives financial investment; creates value within a company; disclosure practices are being driven by regulatory pressure; can meaningfully influence environmental and social outcomes.
It found that ESG reporting may: increase access to lower-cost capital, improve the company’s operational and managerial performance, lower material risks and impacts, map a path forward, and enhance brand and reputation. But legitimate criticisms remain. While more and more capital is being directed by sustainability performance—a whopping $40.5 trillion globally in 2020 alone—a sizeable amount of investment is still made using only financial criteria, absent ESG. Additionally, there is doubt about whether ESG can create a meaningful difference in climate, environmental or social outcomes, or whether ESG reporting focuses on relatively trivial issues and misses the larger picture. For ESG reporting to make a real difference, companies must do more than tick off boxes in a report and instead integrate sustainability principles companywide.
As ESG reporting continues to gain traction, it is important for investors, governments, NGOs and others to temper their expectations. But there is a strong business case for Canadian energy companies to embrace ESG reporting, flaws and all, and demonstrate how they intend to build successful businesses in a more sustainable world.