The following guest blog was written by Kuni Chen, CFA. He is an ESG Consultant and former head of climate change impact investments at The Nature Conservancy. Mr. Chen is an FSA Credential holder and helps lead the NYC – SASB FSA Credential Group.
Sustainability reporting is ubiquitous among large companies, with about 90 percent of the S&P 500 providing corporate social responsibility (CSR) or environmental, social, and governance (ESG) reports. However, with fewer resources at their disposal, less than one-third of small- and mid-size companies provide ESG/CSR reports. The COVID-19 pandemic has exposed a variety of unsustainable business practices, including vulnerable supply chains, poor human capital management, and an excessive focus on short-term financial management. While the crisis will cause some companies to put ESG on the back burner, others view the pandemic as increasing the importance and urgency of corporate sustainability and the need for more effective public disclosures going forward.
My practice recently completed a comprehensive ESG project for a brick-and-mortar retail company with $1.2 billion sales, 1,000+ stores, and a $500 million market capitalization (as of December 31, 2019). This was the company’s first foray into sustainability reporting in its 75-year history. The company was motivated to start tracking ESG metrics following recent engagements with ESG rating firms. However, it viewed the process as daunting and was unsure which metrics are meaningful to investors. To address these issues, we crafted a 3-page ESG narrative that is based on SASB and TCFD-aligned reporting. The ESG narrative is included as a section in the company’s 2020 Proxy Statement.
We highlight key takeaways from this project that are applicable to small companies considering SASB reporting and sustainability disclosures.
- Make your management team accessible. We were provided full access to speak to members of the senior leadership team from finance, operations, marketing, procurement, logistics, legal, tax, and human resources. This process was not overly intrusive and consisted of calls to discuss the company’s sustainability initiatives and identify available sources of data. Importantly, these conversations helped to focus senior leaders on financially material sustainability issues in their respective business areas. Having an internal point person to coordinate responsiveness among the executive team was useful to keep the project on track.
- Develop an ESG governance plan. Sustainability-related responsibilities did not fall under the purview of the executive team, and while there were pockets of relevant activity taking place across the company, there was no cohesive strategy in place. So, the company placed a good deal of trust in the external consultant to guide the process. Ultimately, the Board was impressed with the new ESG disclosures and may add ESG oversight to one of the Board committees.
- Be flexible to overcome data challenges. The company had almost no internal reporting around sustainability, so developing appropriate data sets was a challenge. We initially focused on the SASB standard for Apparel, Accessories & Footwear. However, because our retailer primarily sells sneakers and sports apparel without an extensive supply chain, the SASB standard for Multiline & Specialty Retailers was a better fit. Key specialty retail metrics focus on energy management, data security, workforce diversity and inclusion, and sustainable products. We were also able to estimate the company’s Scope 1 and 2 carbon emissions and benchmark vs. industry peers. (See chart.) Looking ahead, the company has recognized the need to provide more robust sustainability data.
- Avoid getting bogged down with legal concerns. The company was concerned about potential legal liabilities or SEC inquiries in the event it publishes wrong or misleading ESG metrics. Given these concerns, the company declined to set specific performance targets. For example, the company was reluctant to set a target on carbon emissions without doing a comprehensive build-up of budgeted internal programs to reduce emissions.
Overall takeaways from the ESG reporting process were positive and demonstrate how small-cap companies can benefit. Since the SASB standards are streamlined, our client was not overwhelmed by the data collection process and was easily able to understand the relevance of the various metrics. Awareness of ESG and sustainability issues is now more prevalent among the company’s senior leaders and Board. The company was also pleasantly surprised to see it compares favorably to several of its larger industry peers. Lastly, the new ESG metrics provide a way to benchmark performance and drive operational improvements.