As a part of the climate debate, ESG has been receiving a lot of attention by the media and lawmakers in Washington.
Financial institutions and institutional asset owners, such as mutual funds, pension plans, commercial banks and insurance companies, are integrating or considering integrating some sort of “sustainable investing,” often referred to as ESG, in their investment portfolios. ESG refers to three central factors in measuring the sustainability and societal impact of an investment in a company or business: environmental, social and governance. Investors are increasingly considering ESG issues to help manage investment risks and apply these nonfinancial factors as part of their analysis process to identify material risks and growth opportunities.
ESG provides a specific set of criteria that companies can measure against and report. ESG performance ratings and reports show investors a company’s efforts to mitigate risks and generate sustainable long-term financial returns. ESG criteria are standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria look at how a company performs as a steward of nature and what actions a company is taking to reduce its carbon footprint.
Pressure from shareholders, investors, lenders, insurers and internal stakeholders is leading many businesses in the fuel and transportation energy sector to incorporate ESG planning into their corporate operations, whether it be a large publicly held corporation or a small privately held business. Though ESG reporting is voluntary in the United States, over two dozen countries have some sort of regulatory mandates on ESG disclosure. In addition, the Biden Administration and Congress are looking at ESG-related regulations and legislation.
In Congress, several bills have been introduced regarding ESG and sustainable investing. From banning retirement investment plans of federal employees from investing in fossil fuels, to establishing disclosure requirements regarding a business’s impact on climate-related risk and mitigation plans, to requiring issuers of securities to annually disclose to shareholders certain ESG metrics and their long-term strategies, to establishing a Sustainable Finance Advisory Committee within the Securities Exchange Commission (SEC), there is strong interest in codifying ESG requirements among many policymakers.
The Biden Administration is also actively pursuing ESG policies. President Biden recently signed Executive Order “Climate-Related Financial Risk,” which advances several ESG-related policy initiatives, including amending federal acquisition regulations to require major federal suppliers to publicly disclose greenhouse gas emissions and give preference to contracts with less emission. The order also includes a directive to several agencies to incorporate climate-related standards and ESG metrics for federal lending programs. With over 600 frameworks on ESG metrics, the SEC has stated its intent to standardize ESG disclosure reports.
In recent public comments, SEC officials have stated that the SEC’s role is to help create an effective ESG disclosure system and stressed the importance of creating a single global ESG reporting framework. In other statements, officials have stated that publicly traded companies should be expected to provide comprehensive sustainability/ESG disclosures.
With the convenience and fuel retailing industry selling over 80% of the motor fuels in the United States, ESG requirements will have an impact on retailers. Whether it be publicly traded convenience retailers having to disclose ESG-related information or privately held retailers seeking investors, insurance coverage or loans, depending on what information is required and what information is used to make a financial decision, ESG policy will have an impact on the industry.