2020 deloitte renewable energy seminar renewables for a ...€¦ · source: deloitte resources 2020...

2020 Deloitte Renewable Energy SeminarRenewables for a sustainable future September 22, 2020

Michelle Bachir, Senior Manager, Deloitte & Touche LLPMark Mellen, Senior Manager, Deloitte & Touche LLP

ESG landscape and disclosure trends: what’s

next?

2020 Deloitte Renewable Energy SeminarCopyright © 2020 Deloitte Development LLC. All rights reserved. 3

Agenda

Environmental Social Governance (ESG) market updateWhat’s driving current attention to ESG?

ESG disclosure landscape What’s the latest?

ESG MaturityHow can your organization advance its ESG journey?


Environmental Social Governance (ESG) market updateWhat’s driving current attention to ESG?


• Capital market participants take action to manage ESG issues : divestment, engagement, vote

• Investors demand more transparency and accountability

• Credit raters assessing ESG-related credit risks

• The pandemic prompts purpose• ‘S’ in ESG becomes more prominent• Attention to climate risk amplified

among regulators• US consumers expect companies to

prioritize stakeholder needs and not just financial reward1

Market demand Dynamic impact

ESG continues to be amplified

• SEC adopts final regulation S-K Modernization Rules

• Managing climate risk in the US Financial System Report U.S. Commodity Futures Trading Commission (CFTC)

• EU Non Financial Reporting Directive• IOSCO Sustainable Finance Report

Regulatory movement

1. Porter Novelli COVID-19 Tracker Wave II: Purpose-Driven Data & Insights for a Changing Landscape, April 2020

https://www.sec.gov/news/press-release/2020-192#:%7E:text=Press%20Release-,SEC%20Adopts%20Rule%20Amendments%20to%20Modernize%20Disclosures%20of%20Business%2C%20Legal,Risk%20Factors%20Under%20Regulation%20S%2DK&text=%22Today%20we%20modernized%20our%20public,said%20SEC%20Chairman%20Jay%20Clayton.https://www.ft.com/content/dd47aae8-ce25-43ea-8352-814ca44174e3https://www.bnnbloomberg.ca/esg-is-increasingly-important-in-credit-ratings-moody-s-says-1.1421307https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf


Market outperformance70+% of responsible investment equity

funds outperformed peers in Q1 2020 5

56% outperformed peers in Q2 2020 6

Market demand$1T ESG AUM in 2020.

$71B flows into ESG funds and pandemic bonds in Q2 2020 7

Operational efficiency45% reduction in operating costs

reported by companies that encouraged their suppliers to reduce

resource use 8

Credit quality33% of credit downgrades

from Moody’s in 2019 attributed to ESG factors 2

Risk mitigation90% of bankruptcies

in the S&P500 between 2005 and 2015

were of companies with poor E&S scores 5 years prior to bankruptcy 3

Cost of capitalObtaining assurance over

sustainability reporting can reduce cost of capital by 0.7%4

ESG drives efficient market functioningESG factors can be material to a company’s operating performance, financial condition, credit risk profile, and/or stock performance.1

Source: 1 https://www.sasb.org/wp-content/uploads/2020/07/SASB.CommentstoDOLproposal.FINALFINAL.pdf2 https://www.moodys.com/research/Moodys-ESG-risks-material-in-33-of-Moodys-2019-private--PBC_12181143 https://www.greenbiz.com/article/esg-ratings-are-confounding-csos-thats-good-news4 https://www.journalofaccountancy.com/news/2018/apr/sustainability-report-assurance-services-201815361.html

: 5 https://www.morningstar.com/articles/976361/sustainable-funds-endure-the-first-quarter-better-than-conventional-funds6 https://www.bloomberg.com/news/articles/2020-08-12/long-term-investors-now-hold-more-sway-over-esg-green-insight7 https://www.bloomberg.com/news/articles/2020-08-12/long-term-investors-now-hold-more-sway-over-esg-green-insight8 https://www2.deloitte.com/us/en/insights/topics/social-impact/business-value-of-improving-your-csr-scorecard.html?id

https://www.sasb.org/wp-content/uploads/2020/07/SASB.CommentstoDOLproposal.FINALFINAL.pdfhttps://www.moodys.com/research/Moodys-ESG-risks-material-in-33-of-Moodys-2019-private--PBC_1218114https://www.greenbiz.com/article/esg-ratings-are-confounding-csos-thats-good-newshttps://www.journalofaccountancy.com/news/2018/apr/sustainability-report-assurance-services-201815361.htmlhttps://www.morningstar.com/articles/976361/sustainable-funds-endure-the-first-quarter-better-than-conventional-fundshttps://www.bloomberg.com/news/articles/2020-08-12/long-term-investors-now-hold-more-sway-over-esg-green-insighthttps://www.bloomberg.com/news/articles/2020-08-12/long-term-investors-now-hold-more-sway-over-esg-green-insighthttps://www2.deloitte.com/us/en/insights/topics/social-impact/business-value-of-improving-your-csr-scorecard.html?id


The impact of material ESG issues on financial performanceESG drives financial performance

Companies that focus their resources on the most important factors that they can influence outperform companies that diversify their time across topic areas

Sources:Mozaffar Khan, George Serafeim, and Aaron Yoon. Harvard Business School, Corporate Sustainability: First Evidence on Materiality, 2017Michael Porter, George Serafeim, and Mark Kramer, Where ESG Fails, 2019

Stock returns (in annualized alpha) by type of sustainability performance:

Companies that primarily target material social and environmental issues in their social impact efforts outperform the rest of the market to achieve an annual alpha of 3–6%.

6.01%

-2.90% 0.60%

1.96%

Low

High

Low High

Perf

orm

ance

on

MAT

ERIA

Lfa

ctor

s

Performance on IMMATERIAL factors

3 - 6 %

Focusing on your most material ESG issues…

Outperform annual alpha

… returns market value

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575912https://www.institutionalinvestor.com/article/b1hm5ghqtxj9s7/Where-ESG-Fails


ESG disclosure landscape What’s the latest?


More efforts are underway to standardize and consolidate comparable, high-quality and auditable standards of ESG disclosures

ESG disclosure frameworks and standards

World Economic Forum (WEF) / International Business Council (IBC) Collective Action Framework

Source: EU Commission (20 June 2019). Guidelines on non-financial reporting: Supplement on reporting climate-related information

Stan

dard

:

Sustainability Accounting Standards Board (SASB)

Industry-specific sustainability standards prioritizing material sustainability factors for disclosure to investors

Global Reporting Initiative (GRI)

Material ESG topics reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of a broad stakeholder base.

Task Force on Climate Related Financial Disclosure (TCFD)

Fram

ewor

k:

Recommendations for Climate-related financial disclosures to inform investors, lenders, insurers, and other stakeholders about resilience to climate related risks and opportunities. Focused on governance, strategy, risk management and targets and metrics.

Four Pillars: Principles of Governance, Planet, People and Prosperity

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52019XC0620(01)&from=EN


BlackRock positions climate and human capital management at the heart of its investment strategies Climate Risk• Voted against directors for lack of progress on integrating

climate risk into their business models or disclosures1

• Refreshing its expectations on human capital management as a result of the COVID-19 crisis and racial justice movement 2

Human Capital • Continues to emphasize importance of diversity in the board

room (gender, race, ethnicity, experience) • Elevates attention to board oversight and management

accountabilityAsks companies to disclose in line with TCFD recommendations and SASB standards

Investors increasing the integration of ESG in their investment strategies and demand more transparency

1. Our approach to sustainability BlackRock Investment Stewardship July 2020 https://www.blackrock.com/corporate/literature/publication/our-commitment-to-sustainability-full-report.pdf2. https://www.blackrock.com/corporate/about-us/social-impact/advancing-racial-equity3. https://www.ssga.com/library-content/pdfs/global/letterhead_racial_equity_guidance.pdf4. https://www.corporatesecretary.com/articles/shareholders/32213/how-ssga-integrates-esg-its-decision-making?utm_medium=email&_hsmi=94224341&_hsenc=p2ANqtz-

_GR5DdV0NdWRgRJ9aj7X1wkq3wHoayaPMpxFFiTQOmPqPwFa4KVcLlGznrvXIXs02sYvH1Y0wFF-3f9UlWDUBtlpIm4g&utm_content=94169749&utm_source=hs_email

Prominent examples

State Street R-Factor and disclosure requests on diversity and inclusion • Issues “Dear Board Chair” letter noting “Diversity

Strategy, Goals, and Disclosure” expectations 3• Beginning in 2021, will seek info on companies’ goals for

increasing diversity at all levels in an organization from the board to the workforce

• Seeking information on the role of diversity in the companies’ long-term strategy

• R-factor ESG scoring methodology to evaluate companies on financially material sector-specific ESG issues 4Generates unique ESG scores for over 6,000 listed companies globally leveraging SASBto evaluate companies on financially material and sector-specific ESG issues.

• Generates unique ESG scores for over 6,000 listed companies globally

• Leverages SASB

https://www.blackrock.com/corporate/literature/publication/our-commitment-to-sustainability-full-report.pdfhttps://www.blackrock.com/corporate/about-us/social-impact/advancing-racial-equityhttps://www.ssga.com/library-content/pdfs/global/letterhead_racial_equity_guidance.pdfhttps://www.corporatesecretary.com/articles/shareholders/32213/how-ssga-integrates-esg-its-decision-making?utm_medium=email&_hsmi=94224341&_hsenc=p2ANqtz-_GR5DdV0NdWRgRJ9aj7X1wkq3wHoayaPMpxFFiTQOmPqPwFa4KVcLlGznrvXIXs02sYvH1Y0wFF-3f9UlWDUBtlpIm4g&utm_content=94169749&utm_source=hs_email


Are stakeholders asking you or putting more pressure on your organization to disclose and/or develop plans to address climate-related risks?

Businesses report increasing stakeholder pressure to address climate risk

Technology, media, and telecommunications and health care sector respondents most frequently reported stakeholder pressure, at 72% and 69%, respectively.

Source: Deloitte Resources 2020 Study survey results.

Yes58%


In response to stakeholder pressure, many businesses reported reviewing or changing their climate risk disclosure plans and procedures

Source: Deloitte Resources 2020 Study survey results.

Three-quarters of respondents said that global agreements such as the Paris Climate Accord have caused them to focus more on energy management.


Source: GISR, www.ratesustainability.org

Provide rating of ESG performance based on company’s management of environmental, social, and governance risks and opportunities.

Consult investors about how to vote on the range of matters that require shareholder approval, including ESG issues.

ESG Raters & Rankers Proxy Advisors Credit Raters

Assigns credit ratings, which rate a debtor's ability to pay back debt taking into account, among other factors, ESG factors.

Examples

If you don’t tell your story, someone else willESG raters and rankers

Raters & Rankers Credit RatersProxy Advisors

CDP Bloomberg RobecoSAM

MSCI Sustainalyitcs GRESB Moody’s FitchS&PISS SESGlass Lewis

http://www.ratesustainability.org/


SASB’s universe of topicsNot all ESG topics are equal

• GHG emissions• Air quality • Energy management• Fuel management• Water & wastewater

management• Waste & hazardous

materials management

• Ecological impacts

Environment

• Human rights & community relations

• Customer privacy• Data security• Access & affordability• Product quality &

safety• Customer welfare• Selling practices &

product labeling

Social capital

• Product design & lifecycle management

• Business model resilience

• Supply chain management

• Materiality sourcing & efficiency

• Physical impacts of climate change

Business model and innovation

• Business ethics• Competitive behavior• Management of the

legal & regulatory environment

• Critical incident risk management

• Systemic risk management

Leadership andgovernance

• Labor practices• Employee health &

safety• Employee

engagement• Diversity & inclusion

Human Capital


ESG Maturity How can your organization advance its ESG journey?


ESG Maturity

High

Low

Integrated

Enhanced

Responsive

ESG

Mat

urity

Leve

l

Responsive

Enhanced

Integrated

• Compliance approach to responding to ESG requirements and changing expectations

• Companies have robust ESG programs with specific goals tied to specific business outcomes

• Associated ESG reporting and verified disclosures

• ESG is integrated into the business strategy, culture, and operations

• ESG risks are integrated with Enterprise Risk framework


Established board structure “provides oversight of the company’s strategy and carries out governance responsibilities to support management in achieving its strategy and business objectives.”1

Organization is important to enable ESG Governance

1. COSO (2017, June). “Enterprise Risk Management: Integrating with Strategy and Performance.” p. 282. COSO, WBCSD (2018, October). “Enterprise Risk Management Applying enterprise risk management to environmental, social and governance-related risks: Figure 1.2: Example governance structure.” p. 20

a. The Board is responsible for overseeing ESG-related risk ownership as well as ensuring there is a program in place to manage ESG-related risks effectively.

c. The Audit Committee assists the BOD in fulfilling its responsibilities.

e. Connections to strategic planning and operations personnel are also critical to support timely assessment of new and emerging ESG-related risks.

g. The sustainability director provides support in coordinating ESG-related activities.

i. Although management collectively ‘owns’ the entity risks, a ‘risk owner’ can be the point person with accountability.

b. The Risk Committee establishes the direct oversight of enterprise risk management.

d. Some companies have additional Board Committees, such as a sustainability committee, to identify, monitor and review ESG-related risks.

f. The ERM function leads the process for managing enterprise-wide risks in an integrated, systematic manner.

h. Advisory councils (either internal or external) can provide perspective on particular aspects of ESG issues or other risks.

Examples of ESG responsibilities2


Review Current Strategies

GET FOCUSED

GET REAL

Develop a clear expression of the current corporate and ESG strategies

Analyze and “stress test” the existing sustainability strategy through a variety of lenses

Develop Options

GET CREATIVE

GET DECISIVE

Develop strategic options and translate them into actions that drive performance and competitive advantage

Select strategic option(s) by focusing on the specific set of issues that act as barriers to choice

Deploy Integrated Strategy

GET COMMITTED

GET GOING

Determine actions required to execute the emergent strategy and how success will be enabled

Develop clear and effective action and communication plans for the new strategy, supported by a performance tracking system

Embedding sustainability into core strategy and business operations.https://www2.deloitte.com/au/en/pages/strategy-operations/articles/embedding-sustainability-strategy-business-operations.html

Integrating ESG into core strategy and business operationsThe strategic choices leaders take to address environmental and socio-economic imperatives remain as critical now as they were pre-pandemic, and will remain so over the next decade.

https://www2.deloitte/https://www2.deloitte.com/au/en/pages/strategy-operations/articles/embedding-sustainability-strategy-business-operations.html


What environmental and social topics should I prioritize?Identify the most important ESG areas from a business and stakeholder perspective

What is my current impact? Identify key metrics and collect and analyze data to measure impacts of priority topics

How do I communicate progress?Establish a disclosure strategy to evaluate what to report and how to gain credibility through alignment with leading standards

How can ESG create value?Develop an ESG strategy with goals, metrics and measurement techniques that demonstrate the business value of ESG and include in strategic and resource allocation decisions

What to focus on?Key decisions to integrate ESG into core business activities


Connect with us

Michelle BachirSenior ManagerDeloitte & Touche [email protected]

Mark MellenSenior ManagerDeloitte & Touche [email protected]

mailto:[email protected]:[email protected]

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities.

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

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2020 Deloitte Renewable Energy Seminar�Renewables for a sustainable future Michelle Bachir, Senior Manager, Deloitte & Touche LLP�Mark Mellen, Senior Manager, Deloitte & Touche LLPAgenda Polling Question #1Environmental Social Governance (ESG) market updateESG continues to be amplified ESG drives efficient market functioningESG drives financial performancePolling Question #2ESG disclosure landscape ESG disclosure frameworks and standardsInvestors increasing the integration of ESG in their investment strategies and demand more transparencyBusinesses report increasing stakeholder pressure to address climate riskIn response to stakeholder pressure, many businesses reported reviewing or changing their climate risk disclosure plans and proceduresESG raters and rankersNot all ESG topics are equalPolling Question #3ESG Maturity ESG MaturityOrganization is important to enable ESG Governance Integrating ESG into core strategy and business operationsWhat to focus on?Polling Question #4Connect with us Slide Number 25

2020 deloitte renewable energy seminar renewables for a ...€¦ · source: deloitte resources 2020...

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