Automotive News Canada - November 2022 - 24

SPONSORED CONTENT
ENVIRONMENTAL, SOCIAL AND GOVERNANCE:
HOW ESG CAN DRIVE A COMPANY'S
LONG-TERM SUCCESS
The discussion around environmental, social and governance
(ESG) issues is gaining traction - and will have longterm
ramifications for the auto industry. ESG reporting
considers risk factors beyond just a company's financial
metrics, such as their sustainability practices (as well as
the practices of their suppliers), environmental risk-management
strategies, stances on social issues and the
make-up and effectiveness of their boards of directors.
Here Y Nguyen, head of sustainable risk advisory and
North American sustainable supply chains at BDO, a
global accounting and financial-advisory company, takes
a deep dive into this complex issue and offers some
valuable insights and perspectives.
Q: Is public awareness of environmental, social
and governance (ESG) investing where it needs to be? What does
this term mean and what are the most important components?
Y Nguyen: The concept of ESG reporting originated from the investment
community as a tool used by investors and capital markets to assess
whether a company had long term investment value beyond its current year
profits and losses. ESG reporting represented the non-financial metrics that
gave investment managers insight into whether a company had good, long
term hidden arbitrage value given its climate and environmental risk-management
strategies, its resources, talent, labour, as well as the make-up and
effectiveness of its board of directors (the G in ESG). Today, the concept
of ESG has evolved into the larger umbrella of sustainability, which includes
social responsibility, environmental stewardship, and fiduciary responsibility
- the so-called " triple P: " people, planet, and
profits. And ESG reporting reflects the metrics
of those values that provide the biggest
return for all shareholders and stakeholders,
including investors, regulators, employees,
consumers, and communities.
Q: Carbon-neutrality pledges, humanrights
protections, fair operating practices,
sustainable procurement, sourcing
rare-earth metals - these are not
exactly virtues we just discovered. Why
is ESG suddenly so important?
Nguyen: These virtues are not recently
discovered, but there is a movement and
an expectation to capture more transparent
accounting for them. The hardest part is
how to measure non-traditional, non-financial
metrics, such as carbon-emission footprints or long-term social-impact
investments, and then assign values and/or costs to the risk of not managing
these issues. The decades-long fallout of the financial crisis, coupled with
the impact of climate and environmental changes, have intersected with the
events in 2020 - the pandemic and the rise of social, consumer and investor
activism. All these factors have crystallized into this new responsibility
for all organizations - no longer just fund managers looking for arbitrage
investments - to accurately identify and account for long-term value and
"
long-term risks that traditionally have not appeared on
balance sheets or income statements.
Q: ESG sounds good and feels good. But what
are the actual benefits to a company? What is the
business case?
Y Nguyen
Nguyen: One of the biggest ESG myths or misconceptions
is that it is philanthropic in nature. But based on the
United Nations definition of sustainable development,
we consider sustainability as the intersection of people,
planet and profits that meets the needs of the present,
without compromising the ability of future generations
to meet their own needs. Thus, the fiduciary responsibility
of financial performance is still a very important value
and the business case for sustainability is thinking about
All these factors have
crystallized into this
new responsibility for all
organizations...to accurately
identify and account for longterm
value and long-term
"
risks that traditionally have not
appeared on balance sheets or
income statements.
people and planet as resources to your organization - as inputs that create
long-term value if properly managed. How can a company be successful in
5, 10 or 50 years, given that there are constraints on the environment, raw
materials, on labour, people, and communities?
Q: Surveys suggest that younger generations are embracing ESG
values. Is this what's driving ESG? Is this then a strategy to not
only appeal to customers, but also to talent?
Nguyen: The automotive industry is experiencing rapid changes coming
from so many directions, so it is important to recognize that process innovation
is just as important as product innovation. Companies need to strategically
adapt to what their stakeholders value or risk becoming obsolete.
Various surveys indisputably demonstrate
the fact that each generation is increasingly
embracing consumer, social and
investor activism. Roughly 25 percent of
Baby Boomers, 50 percent of Gen Xers
and 65 percent of millennials prefer to
spend money on products and companies
whose values align with theirs, and
this is expected to increase with Gen
Z and Alpha generations. More people,
whether they are employees, consumers,
investors, or
future investors, are more
conscious of social issues such as climate
change, social justice, modern slavery
or diversity and inclusion. And they are
voicing their opinions with their dollars. In
today's fiercely competitive environment,
organizations need to manage this risk to
not only attract, but also to retain market share.
Q: ESG is a new way to think, in that it combines financial and ethical
values. The bottom line is no longer the bottom line. How do you
change that mindset to accommodate ethics along with finances?
Nguyen: Yes, organizations must think about the top line, the bottom
line and the " green line " (environmental impacts). But they are not mutually
exclusive because sustainability management and ESG reporting are
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