Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP 6 | The Climate Changes for ESG DETERMINING ESG SCOPE One of the most difficult threshold challenges for companies seeking to establish a comprehensive approach to ESG is setting the scope of engagement. This is usually an iterative process involving a wide cross-section of management and often with board involvement. A number of factors are relevant in determining which ESG issues a company should focus on and prioritize. Determining the scope is critically important so that the company can set expectations, establish appropriate goals, plan and implement actions to achieve these goals, measure success over time and, where appropriate, publicly report on progress. Typically, a discussion of the scope of a company's ESG efforts includes a discussion of materiality. While many ESG issues that are important to a company and its Look at Strategy and Risks One of the most important factors in determining the scope of the company's ESG focus is analyzing which issues are important to the success of the company's long-term business strategy and the management of the significant risks facing the company in pursuing that strategy. As noted above, this involves viewing the company's business strategy and risk assessment through a wider lens than traditional financial materiality. Boards and management should consider how environmental, social and sustainability issues impact the company's ability to achieve its long-term strategy. This is a complex analysis, but it is not much different than how boards tackle any new risk or problem or brainstorm on future challenges and opportunities. constituencies are not material when viewed through the traditional financial materiality lens, some of these can be critically important to a company over the long-term with implications for the company's business in a way that does not necessarily translate neatly into short-term financial metrics. For example, the focus on a particular ESG issue by an important constituency, such as large institutional shareholders or employees, can significantly escalate the importance of the issue to the company. Additionally, clients and customers and the public generally are increasingly raising concerns that may affect a company's ESG agenda, and ignoring these voices can result in direct financial and reputational harm. Look to Industry Each company will have unique ESG focuses based on numerous factors, such as its size, geographic location, investor base and employee composition, but industry- wide trends will be important guideposts as to where a company needs to be focused. Monitoring news about industry peers and evaluating their SEC reports As it does with any new risk, the board should better understand how an ESG issue can be an obstacle to long-term objectives. First, the company must understand and prioritize what its core ESG issues are — for example: • How could climate change impact the company's long- term prospects? • How could a better-trained workforce help grow the company's anticipated new business lines? • How could better childcare resources in the communities in which the company operates create new opportunities? and voluntary disclosures can be valuable tools in establishing the scope for a company's approach to ESG. Most companies will be "graded" against objective standards by which they will also be compared to others in their industry.