Understanding ESG:
Environmental Factors


ESG Scope & Impact

Create Value by Managing Environmental Risks and Opportunities

Summary


The environmental factor in the ESG equation focuses on how a company performs as a steward of nature. It considers how a company uses natural resources and how their operations impact the environment. It includes not only a company’s direct operations, but also all activities across their supply chains. Responsible and effective management of environmental factors is an increasingly important driver of corporate value.

 

"Environmental factors - dominated by climate change issues - will continue to drive decisions in the investor community and in the marketplace. Businesses must understand the risks and strengthen their positions."
Phil Grossweiler
Principal Consultant, M&H

Environmental Themes & Issues

Environmental concerns can be understood in terms of an organization’s outputs and inputs. Outputs consist of what and how much the organization produces. Inputs factor in the sustainability of the resources required to feed the organization’s processes.

There is no all-inclusive list of environmental factors, and some may overlap with social and governance factors. While some environmental factors are universal, such as waste reduction, a company will also be evaluated based on industry-specific issues, such as the elimination of biohazards in the medical industry or the reduction of flaring in oil and gas.

Although exact terminology varies, ESG rating agencies generally classify environmental factors according to four major themes: Climate Change, Natural Resources, Pollution & Waste, and Environmental Opportunities. Within each theme, multiple key issues are analyzed to arrive at key performance indicators.

These environmental themes and issues are summarized below.

Climate Change

  • Reducing greenhouse gases (GHG)
  • Decreasing carbon emissions and fossil fuel use
  • Researching, developing and implementing renewable energy solutions
  • Improving efficiency in carbon-intensive practices (carbon footprint)
  • Financing environmental impact
  • Climate change vulnerability

Natural Resources

  • Conserving water and other natural resources
  • Sourcing raw materials
  • Protecting biodiversity and ecosystems
  • Eliminating deforestation
  • Practicing responsible land use

Pollution & Waste

  • Reducing solid waste
  • Reducing toxic emissions and water pollution
  • Reducing packaging material and waste
  • Reducing electronic waste

Environmental Opportunities

  • Adopting clean technology
  • Implementing green building practices
  • Improving energy efficiency

Impacts on Business

Environmental factors are often the most visible component of ESG performance to investors, customers, and other stakeholders. At one time, environmental concerns were considered more for their non-financial, public relations value. Today, high-profile environmental factors such as climate change, water scarcity, and carbon footprint are evaluated for their direct financial impact and effect on a company’s competitive positioning.

Investment
Like all ESG criteria, environmental factors may be used as a risk-management guide for excluding certain companies, products, or services from investment portfolios. Potential investors want full disclosure of any risks a company might face up front, as well as any plans the company has for mitigating those risks.

Opportunity Analysis
Environmental factors are also used to assess potential risks of a new venture, a merger, or an expansion. Stakeholders will take into consideration issues such as emissions compliance violations, ownership of contaminated land, and hazardous waste generation before making a commitment.

Risk Avoidance
Companies that ignore the impacts of their policies and practices on the environment leave themselves exposed to financial and legal risks. Failure to protect against extreme environmental incidents, such as hazardous material spills or explosions, leave companies open to regulatory penalties, criminal prosecution, damage to their reputation, and harm to shareholder value.

Companies should not only assess and improve their ability to operate successfully in the present, but also develop strategies for potential long-term environmental disruptions and opportunities.

Full-Service Sustainability Consulting

M&H is uniquely qualified to help you manage ESG risks and opportunities, with more than 40 years of consulting experience in a diverse range of disciplines and applications.

If you're ready to discuss your needs, call 281-664-7222 or send a message to sales@mhes.com.