Environmental, Social, and governance reporting has been under way for over two decades. Often dismissed as green washing, many ESG statements seemed to cherry-pick good deeds while glossing over suspect practices. As of 2024, however, natural brands must be ready to disclose a comprehensive set of supply chain metrics along with strategies to improve them. Whether using a full investor-grade ESG score or a softer “non-financial statement”, a company’s character and valuation will depend on how they measure up in direct comparison with their peers.
The key to understanding ESG disclosures is simple: every industry sector must measure and report on the same set of issues, which makes side-by-side comparisons possible. Analysts at the big investment funds state that 90% of a company’s value is now based on non-financial measures. Profit is still required, but not at the expense of the planet’s health or the welfare of workers, communities, and animals. Simply put, it’s in the best interest of money to ensure the Earth and civil society survives into the future so the next generations can enjoy their wealth.
In February 2023, the nation members of the International Financial Standards Board unanimously adopted a set of required disclosures for each of 77 different industry sectors. Dozens of longstanding and competing frameworks have been rolled into the International Sustainability Standards Board. Each country is now rushing to implement and enforce the framework within its jurisdiction. The European Union is ahead of the curve, while the US Securities and Exchange Commission will be somewhat slow to act — but act it must.
Most of the international conglomerates that do business with the EU are already issuing regular ESG disclosures, since ESG reports are a de facto requirement for global commerce. Many still believe ESG is solely focused on carbon emissions and greenhouse gasses. Yes, that is where the SEC is starting. Not only will large US companies have to report their Scope 1 emissions under their direct control, but they will also need to report on the emissions of their suppliers under Scope 2 and the emissions of the Scope 3 activities that provide energy, raw materials and logistics to those suppliers. However, the full Environmental, Social, and Governance framework now in place under ISSB measures activities far beyond a carbon footprint.
CPG brands that use agricultural inputs may need to provide upwards of 1500 data points covering Leadership and Governance, Business Model and Innovation, Environment, Social Capital and Human Capital. The data covers such issue areas as food safety, animal welfare, labor practices, biodiversity, water use, and others, must be accurate and auditable. For most companies, the baseline ESG assessment will end up confirming the obvious. Many natural brands don’t know how their practices in the supply chain affect each of these outcomes. Their default answer will often be, “Well, actually, we are just starting to think about it”.
Most brands won’t get a high ESG score on the first go-round, but they will get points for knowing, at that point in time, what they don’t know. Like the accounting standards of the 1930’s, ESG was built as a tool for investors to gauge the riskiness of a venture alongside its potential to create added market value. Big money has studied how companies operate and determined that leadership that has visibility into their practices and supply chain are also best able to improve those practices and reduce externalized costs.
Financial analysts estimate that firms with robust ESG compliance are worth an average of 20 percent more than similar competitors. That’s a 20 percent bump just for paying attention and reporting what you find. After having presented to many audiences on how ESG has evolved from wishful promises into a valuable and required practice, one key narrative seems to put the global framework into perspective.
After the stock market crash triggered a global depression in 1929, banks, investors, regulators, shareholders and insurers gathered to fix the problem of corporations making unrealistic and unsustainable promises to attract capital. No more would they tolerate claims that could not be audited, or promises for which no one could be held responsible. By 1932, the new Securities and Exchange Commission was charged with enforcing compliance with Generally Accepted Accounting Principles, the Form S-1 prospectus, and the 10-Q and 10-K financial reports. Every company had to report the same information in the same way at the same time or it would be ejected from the capital markets. After 90 years of standardized balance sheets, P&Ls, and cash flows, we tend to take their usefulness for granted.
The systemic global breakdown caused by corporations failing to take responsibility for externalized costs lead to a similar but deeper reckoning that began some twenty years ago. In particular, the threat to climate stability, weather, labor welfare, brand reputation, and food production prompted a new set of required non-financial disclosures. Banks, investors, shareholders, insurers, and regulators realized that financial reporting alone was not providing a complete understanding of the risks inherent in many practices. Every person is now a stakeholder, and better practices were not being adequately rewarded. Thus, the today’s ESG disclosure framework was born.
The question is will your brand face a difficult reckoning or reap big rewards?
As an example, one sector that will face a reckoning is precision fermentation. This technology is being touted as a sustainable solution to all the world’s ills. It’s used to create synthetic proteins for food and a number of other ingredients used in food, dietary supplements and pharmaceuticals. The marketing gurus for these brands make extraordinary claims about their clean supply chains, but they seem to believe their supply chains begin when the corn syrup and soy isolate are received on their factory dock. When these firms compile their ESG disclosures, they will begin with fracked natural gas used to make synthetic nitrogen that is applied to fertilize GMO corn and soy that is sprayed with toxic pesticides derived from fossil fuels while propagated on vast monocultures void of biodiversity on top of depleted aquifers under windblown land that leach excess nitrogen and pesticides into waterways leading to dead, polluted oceans.
With such a low ESG baseline, at least it will be easy to claim incremental improvements over time.
Brands ahead of the curve have in place the tools to measure ESG issues, and strategies in place to do better. They also use third-party certifications with teeth, which ESG disclosures can refer to for verification. Understanding where you are starting from is key. The market will reward your verifiable continual improvement. The cost of noncompliance is high. Already, Wal-Mart requires all its vendors to provide a summary ESG report drafted by a qualified ESG consultant. The sum of these reports roll up into Wal-Mart’s own required ESG supply chain disclosures, including its Scope 3 carbon emissions.
Brands without an ESG strategy and practice face significant new barriers to the market. The cost of dishonest disclosures is even higher. The number of regulatory investigations and class action lawsuits against global brands continues to grow. If you can’t prove it, don’t say it. When Burt’s Bees, Whole Foods, H&M, and similar brands are under legal threat for misleading claims, it’s time to consider ESG compliance review programs for all communications – which requires a fully compliant investor grade ESG assessment.
Reckoning or reward? It depends on your brand’s commitment to measure, disclose, and plan.