Wintrust Financial : Environmental and Social Governance (ESG) — Good for Growth and the Planet

At the heart of environmental, social, and governance (ESG) strategies is the simple premise that companies are more likely to succeed by creating value for all stakeholders, society, and the environment as a whole.

Consequently, ESG tactics have quickly risen in popularity. Having become fundamental to those looking to invest ethically, ESG is now considered an integral part of credit research for many.

Reporting your ESG performance allows you to effectively demonstrate that you're setting and meeting your corporate sustainability goals. By both quantifying and quantitating the benefits of your sustainability efforts, you create value for investors who want to attract both financing and consumers, while avoiding empty promises and greenwashing.

ESG reporting, why it matters

"I will discontinue my relationship with companies that treat the environment, employees, or the community in which they operate poorly."

-Seventy-six percent of consumers agreed with this statement in a 2021 PwC survey

Demand for ESG investments is soaring as consumers, employees, and investors look to align themselves with socially responsible companies. PwC reports that, in 2021, 86% of employees cited a preference for supporting or working for companies that care about the same issues they do. (The PwC survey reached 5,005 consumers, 2,510 employees, and 1,257 business leaders in the United States, Brazil, the United Kingdom, Germany, and India.)

But the need for ESG reporting is driven by much more than conscious consumerism. More practically, by following ESG criteria, investors hope to mitigate their sustainability risks by identifying and avoiding suppliers whose poor labor or environmental practices may bring harm to their brand. Volkswagen's emissions scandal, which resulted in billions of dollars in losses, stands as an example of the possible implications and high risks of poor and unethical practices.

To incentivize borrowers to achieve their sustainability objectives, over the last few years, banks have begun to link sustainability performance to loans. This move restructures loans to provide lower interest rates to borrowers who improve their sustainability targets and other metrics.

ESG and your supply chains

Where Scope 1 emissions cover direct greenhouse (GHG) emissions only (those occurring from sources owned or controlled by the organization), Scope 2 widens the lens to indirect GHG (those associated with the purchase of electricity, steam, heat, or cooling). Scope 3, however, extends into a company's supply chain.

In March 2022, the SEC proposed new rules to enhance and standardize climate-related disclosures for investors. If adopted, the new rules would require registrants to "disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions."

What you need to know

Where the term "corporate sustainability" is limited to a company's relationship with the environment, ESG extends to social responsibility and corruption in regard to how a company is governed. Similar to a bond rating or credit score, ESG scores grade companies on their ESG progress and reflect the organization's ability to meet its targets and commitments, as well as its risk exposure.

Below are some of the determining factors companies would be graded on under each of the three areas:

• Environmental: Environmental impact, including climate change, deforestation, biodiversity, energy efficiency, greenhouse gas emissions, air and water pollution, water scarcity, and waste management
• Social: Treatment of people, including Diversity, Equity, and Inclusion (DEI), working conditions, health and safety, product quality and safety, access to health care, human rights, and labor standards
• Governance: Standards and practices for how a company is run, including board composition and diversity, audit committee structures, pay gaps between executives and workers, tax practices, lobbying, political contributions, whistleblower programs, bribery, and corruption

Using its own set of (often proprietary) criteria and metrics, scores are assigned by third-party providers, such as Bloomberg ESG Data Services, Dow Jones Sustainability Index Family, RepRisk, and Sustainalytics.

Regulations, frameworks, and standards

According to a 2016 McKinsey report, "the typical consumer company's supply chain creates far greater social and environmental costs than its own operations, accounting for more than 80 percent of greenhouse-gas emissions and more than 90 percent of the impact on air, land, water, biodiversity, and geological resources."

The regulatory environment continues to evolve rapidly as, around the globe, governments look to enact new sustainability and corporate social responsibility laws. With a significant portion of a company's environmental impact held in its supply chain, it stands to reason that governments will look to hold companies responsible for the environmental and social impacts of their supply chains.

In the meantime, the United Nations' Secretary-General António Guterres warns the world is on a "fast track" to disaster. As a 2022 UN Climate Report stresses, it's "now or never" to limit global warming to 1.5 degrees. Given the state of our planet and its people, there's no reason for organizations to wait.

Need Help?

Navigating the evolving regulatory landscape can be almost as complex as figuring out how and what to report on when it comes to ESG. If you're looking for help, the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB) provide recognized reporting frameworks to facilitate the incorporation of ESG factors into an organization's existing reporting process. It's also worth noting that Small and Medium-Sized Enterprises (SMEs) may be exempt from certain requirements.

Whether voluntary or mandatory or driven by a need for growth or lower-cost capital, it's time for you and your supply chain to care about ESG.

At Wintrust, we believe that businesses and individuals have a responsibility to limit their impact on the environment, and we strive to understand the broader environmental impacts, risks, and opportunities related to our financing and other business activities. See our ESG report highlights here.