Environmental, Social, and Governance (ESG) Takes the Spotlight | Episode 47

  Carpool Chats Podcast |  April 26, 2022

Increasing demands from investors, consumers, and policymakers make ESG pursuits a timely and fiscally responsible consideration. Without adequate ESG planning, public and private companies risk the loss of access to capital as well as customer loyalties. Listen in as we discuss the ESG movement and why it matters to your business.

Guest: 

Jerry Soverinsky, Creative Writer and Author of Fuels Institute's ESG Report

Transcript:

Speaker 1 (00:03):
Welcome to Carpool Chats, a podcast brought to you by the Fuels Institute.

Jeff (00:11):
Welcome everybody for another episode of Carpool Chats. We've got a great discussion going on, and something that the Fuels Institute has been working on for about the past year now.

Jeff (00:25):
Really ever since BlackRock made their big announcement that they were going to begin having sustainable portfolios for their investors to invest their dollars into. We brought this discussion up to our board of directors to see if this was something that was... Was it fleeting?

Jeff (00:47):
Is it something that is going to go away when we have the next president? Or does this really have legs under it? And the response we got from our board of directors was a pretty resounding, yes, we really need more information on this.

Jeff (01:02):
This is here. This is going to happen. This is not a policy issue. This is a nonpartisan type program. It's not even regulated at this point. At this point we're looking at it as a voluntary program. But if you're in the supply chain, if you're anywhere in the supply chain, whether you are a fuel marketer or from a refiner down to a fuel marketer, if you own a fleet of vehicles, this is going to be very impactful on your business.

Jeff (01:42):
And I say that in a number of ways. ESG, environment, social and governance planning is not a new concept. It's been around for a while. Most companies are familiar with corporate sustainability reporting. And in other pieces that the company has designed and built and some people refer to them as fluff pieces, marketing pieces, right?

Jeff (02:13):
They're really light on data. And so what the ESG plan demands is a tremendous amount of transparency of the company. And it really revolves around data, and showing whether it's the investor or showing whether your business associates that are asking for a copy of your ESG plan, or maybe it's even your lender.

Jeff (02:44):
We are hearing discussions on how ESG requirements are becoming a discussion point when we're looking at mergers and acquisitions. What is the risk? How can we use the ESG plan as a risk mitigation tool? And at many different levels.

Jeff (03:06):
I think a lot of us are comfortable and used to talking about risk in the sense of, what's your immediate environmental impact? So if you have underground storage tanks, the risk there is a release to the environment, right?

Jeff (03:22):
A leaky underground storage tank. And so we're used to talking about those types of risks. It could be a corporate risk such as, what's your internal policy on hiring practices, on dealing with complaints of harassment, for example? Do you have internal programs or are you letting the court systems manage this for you? Which is not a good plan by the way.

Jeff (03:54):
And it's really an opportunity, in my opinion, to really help mitigate risks. Where it goes a little bit further is when we start talking about climate risk, and what is your organization doing to limit or reduce the impacts on the climate through your day to day business? And so, of course, what we're mostly talking about here are CO2 emissions.

Jeff (04:19):
So you've got a fleet of vehicles, what have you been doing to reduce your CO2 emissions, to reduce the potential impact on the climate? So we start getting into these more long term risks that get outside of election cycles, but yet are extremely important to today's investors or many of today's investors where they're demanding these.

Jeff (04:45):
And hence that's where BlackRock's big announcement came out over a year ago saying that, we are going to have portfolios, S&P 500 options that are ESG centric so that investors can go in and they can really dial in on where are my investment dollars going.

Jeff (05:06):
So this thing has a number of different layers. And one of the things that the Fuels Institute really wanted to do as some time has progressed here to see if we've got... Does this have staying power? We know the SEC talking about proposing some rules in this in quarter one of 2022.

Jeff (05:27):
We haven't seen those proposed rules yet, but basically saying that this has got a strong potential to become a reg... Move from being voluntary to a regulated scenario for certain companies. And the Fuel Institute and the board of directors really wanted to have an update. So we brought in Jerry Soverinsky. Jerry, thank you for joining us.

Jerry Soverinsky (05:48):
Sure.

Jeff (05:50):
Jerry's a freelance writer and we asked him to go out and do some literature review and up to date current information on ESG planning. And I've read the white paper. It's very impressive, lots of references in there. And so Jerry, would you like to introduce your paper and some of your thoughts on it?

Jerry Soverinsky (06:23):
Sure, yeah. It's the second report I've done for the Fuels Institute and the important thing to note about the Fuels Institute, the reports are, even though the subjects may or may not spark passion, they're meant to be objective papers. So there's no stands taken as far as, for instance, for ESG, the ESG plan, it doesn't really matter where you stand as far as in your personal views of sustainability, let's say.

Jerry Soverinsky (06:56):
It's a pretty dispassionate objective look at here's what happens if you don't, as you mentioned at the top of the show. It's a risk assessment that you need to make because the bottom line is, and the report I should say, goes into the benefits as well, but the bottom line is if you want access to capital first and foremost, this is going to impact that.

Jerry Soverinsky (07:23):
And then there's other effects down the line as well. I mean, do you want to inspire employee loyalty, for instance? I know that's something we'll talk about. So the ESG plan, it's fact based. And this is what is going on, and this is going on in the courtrooms as well as the report states and it's going on in boardrooms.

Jerry Soverinsky (07:49):
And it's really hitting companies in their pocketbooks, which is really the main, I think, impetus for the paper is to say, here's what you should be thinking about if you, in fact, have not been thinking about because a lot of other people are.

Jeff (08:08):
Yeah, and it's been really great and fun getting your perspective on it. Coming in, getting some fresh eyes on it and watching, dig in in your findings. And to I mean, a number of the points you just made, this is becoming a cost of capital issue.

Jeff (08:28):
The mergers and acquisitions, if you're looking at acquiring a company or selling your company, the buyer and seller are going to want to know what are they buying? What are the risks involved here on environment, social and governance? So you're looking at a much broader look at the risks that are involved.

Jeff (08:51):
And to your point, what I'm finding is that if you don't do it, there are others out there that will do it for you. They will come out and they will assess. If they have an ESG plan, a program in place, and they want to do business with you, they are going assess your company on the same through the same lens as they're assessing themselves.

Jeff (09:21):
Because, again, that supply chain, everybody is connected in the benefits that your supplier or improvements that your supplier is doing. You can then bring into your ESG program by reference. And so we're seeing a lot of interconnectedness there between fleets and fuels.

Jeff (09:48):
The application that the Fuels Institute built out for the ESG integrity program, we really looked at all of the different frameworks, right? So if anybody is out there right now and they're hearing about this and they want to look into it, there's a couple of key references that you really want to pay close attention to.

Jeff (10:11):
And I always begin with the GHG protocols, which is where all of this really kind of came out of. And then from there, we started seeing different frameworks. So we've got the SASB Framework, we've got the GRI Framework. There's just a tremendous amount of frameworks out there.

Jeff (10:31):
There's certain groups that are calling themselves scoring groups. We really don't know how they're scoring things, but they're scoring companies on their ES&G. So we built out this application so that somebody can go in and they can create their own ESG plan. It really doesn't matter how sophisticated of an organization you are.

Jeff (10:56):
If you've got one person that can dedicate time to this, even part of their time to it, you can get it done. But one of the things that I'm recognizing is that while it's voluntary or during this voluntary phase, we've got these questions of, am I doing it right?

Jeff (11:18):
Am I going to get accused of greenwashing because of the model I'm using to show my CO2 emissions? There's some really important questions there that you want to ask. And in a lot of the ESG reporting, really when it first came out about a year ago, the big focus was climate change. It was on environment.

Jeff (11:41):
It was on the E. And how do we calculate that? How do we calculate our footprint, for example? Direct emissions, indirect emissions. But then as time goes on, we start to see new focuses more in the social and governance. What are our hiring practices? How are we incorporating equity into our company, this concept of equity?

Jeff (12:04):
And what are we giving back to our communities to help support those communities? So you mentioned employee loyalty as one example to the many layers that are in the ESG plan. What were, in your white paper, what were some of your findings or even feelings on what that means? How can the ESG plan help to improve your employee relationships?

Jerry Soverinsky (12:35):
One of the thing that the literature points out is that younger employees in particular today are really looking for value conscious employers. So they're not just looking for a job. They're looking to align themselves with companies that share their values.

Jerry Soverinsky (12:51):
And for those that don't, the loyalty is wane. And especially today with, I think the job market just came out with how many millions of people left their jobs in November. It's precarious for companies to think if you're not able to generate that loyalty among your employees, the impact can really be devastating.

Jerry Soverinsky (13:16):
And to that point, too, it's, and you mentioned this just a few minutes ago. it's not nearly a PR like a greenwashing aspirational statement. I mean, people are looking for tangible efforts and metrics that show what a company is doing. So that's why the ESG plan is so helpful because it's not a vague construct, but it's really concrete steps what a company can be doing to kind of tick these boxes to say, okay, here's what we are doing. And yeah, I'm sorry.

Jeff (13:58):
Yeah. And I think it's really refreshing, right? Because nobody is asking a company to be perfect, right? They're asking for an honest assessment, basically setting a baseline with your first ESG plan, doing the assessment of your company and then committing to improvements, setting goals.

Jeff (14:24):
So yes, we believe we're really good here. We do this really, really well, and we want to talk about it, but over here, we've got some things that, you know what? We could probably use some improvement on. And so when that new employee comes in and sees that they're jumping into that environment, they're seeing a very transparent employer.

Jeff (14:44):
They're seeing an employer that's committed to constant improvement. And so the ESG plan is, of course it's designed to be done every year, and then you compare, and hopefully, you are hitting those goals. You're not always going to hit your goals, but you make your goals. You make sure that they're reasonable.

Jeff (15:07):
You show the public whether that's a potential employee coming in or investors, or just anybody else in your community or who you're doing business with. And in some of this, it sounds like is rolling into your relationships with your lenders. If you're going in for a loan, for example, are lenders going to start giving preferred rates for organizations that have ESG plans?

Jeff (15:37):
I always ask that question because I hear it being said, but I never see it being practiced, and maybe when you're talking to Fortune 500 companies that is certainly the case. But we're still learning. This whole program is developing. And hence when we start talking about the financial aspects of it, the cost of capital and access to capital.

Jeff (16:10):
If you're going to multiple lenders for your best rate and a couple of those lenders say, do you have an ESG plan? Well, no, you don't. Well then therefore take your business somewhere else, which seems pretty extreme. But you want as many opportunities as you can as a business for capital. And so why would you want to limit yourself there?

Jeff (16:30):
And hence you hear all this talk about cost of money and everything. That's where we get the SEC coming in, Securities Exchange Commission, looking at regulating ESG to a certain extent. Again, we haven't seen those rules yet, but pretty sure they're coming. One of the things that I see, one of the goals of SEC is to make sure that in the United States, we can continue to compete in a global economy and where the EU is several years ahead of us on ESG.

Jeff (17:09):
The SEC is concerned that businesses in the United States are not going to be able to compete because we are behind the curve in this sense. So that was kind of interesting. They put out a request for information several months ago, and a lot of those questions kind of were leading down that path.

Jeff (17:29):
How does the United States catch up on ESG planning? And what do we need to do to make sure we fit in with the rest of the planet [inaudible 00:17:37] frankly? So, making sure that we're keeping those lines of business open. So I thought that was pretty interesting, too.

Jeff (17:45):
Again, so many layers to this program. What would you say to organizations that have not completed an ESG plan, given what you're seeing? What's the timeline look on all this?

Jerry Soverinsky (18:06):
Well, I guess as far as the urgency goes, it would depend on the company itself the stakeholders and their, I guess, reach in the community. But from other standpoints as well, one of the things that we do go into in the paper is these ESG principles, in many respects, they're the right things to do.

Jerry Soverinsky (18:37):
And we talk about environmental, social and the governance factors. So as far a timeline, I think the time to at least get familiar with the concepts is now. And then how you go to implement it, I guess that depends on how nimble your company is. And there are some other factors too that we talk about in the report, because the tricky thing is, as you mentioned there, the standards are not fixed.

Jerry Soverinsky (19:13):
There's different measurements, different organizations kind of assess things differently. So that makes things confusing, which is where the plan comes in. How do you kind of proceed without feeling like you're just kind of bailing? So it does give you some concrete steps to take to kind of proceed and go through the different analyses and then how to implement things.

Jeff (19:42):
Yeah. And my review of the frameworks, they're good. They're a good starting point, but they're certainly not perfect for every company. So when you do start looking at it, I would not suggest looking at one framework and say, I've got to put this round peg into this square hole because that's the framework I'm choosing to use.

Jeff (20:09):
Again, we're in this phase where certain parts of a SASB Framework might fit your company and then other parts from GRI or other frameworks might be better. So what we did is we kind of combined them. So for the downstream fuel industry, we combined about three different frameworks to build out so that to tell those stories and to collect the right metrics, right?

Jeff (20:39):
First, we sat down with industry to determine, what's the material in this industry? What's important? What can we talk about? Good and the bad. And then what are the metrics that are associated with that that we can collect and we can gauge ourselves on? Where's our baseline at, and how can we improve on that?

Jeff (20:58):
So whether that's CO2 emissions or the cybersecurity and fraud prevention that's going in at the fueling dispenser, anywhere you're point of sale device where you're swiping your credit card. What are we doing to protect the consumer? What are we doing to protect our own company from cyber attacks?

Jeff (21:18):
So it's fairly broad and it's easy to jump in and start collecting all sorts of data. So one of the things we did was we interviewed industry, and we kind of narrowed it down. So six metrics in the E, six metrics in the S, six metrics in the G. And we really focused on just those areas. So it was more achievable to collect that data.

Jeff (21:50):
And that's going to change over time. I mean, we're going to see investors wanting more information on whatever the next topic is. But I think we can all agree that the discussion around climate change and equity is going to be a longstanding discussion. So we lean very heavily on that, at least in our application, but I think it's going to be a good time right now to start looking at your company, reviewing ESG programs.

Jeff (22:29):
By all means, give me a call if you've got any questions on that and we can at least show you what we did. And there's other groups out there that can help you work your way through this. But as far as our original conversation with our board of directors, their ask was, we need more white papers. Thank you very much, Jerry.

Jeff (22:55):
We need to stay on top of this. We need some tools. We need some applications. We need some things to help us decipher this. And our goal was to just make sure that we're focused on risk mitigation. We're collecting the right data, and we're doing it transparently. And by transparently, I mean, when we calculate our emissions, we use the open source GREET model.

Jeff (23:25):
When you create a report in our application, the reports like 30 pages long, but the appendix is like 70 pages long because our appendix has all of the methodology and all of the stuff that makes your eyes bleed when you're looking at all these tables on grid carbon intensity, or different biofuel blending practices and how you can make these improvements, or even electric vehicle charging stations.

Jeff (23:51):
If we can calculate the CO2 avoidance from a kilowatt hour to a gallon of gasoline, then we want to report that, right? These are things that we're working on right now and we want to make sure that we're staying ahead of it and collecting the data that we need for the future. So it's been pretty exciting. I really look forward to seeing the paper out.

Jeff (24:18):
I think we're going to... It'll be coming out for everybody to see shortly. It's a fantastic paper. Your references are spot on, is current, it's up to date. And it really leaves nobody questioning the direction ESG is going. And to your point, frankly, this is not a partisan issue. We live in a world where politics are driving the media, they're driving people's emotions.

Jeff (24:51):
This has nothing to do with that. This is strictly a doing business tool in my opinion. And that's very refreshing to be quite honest. I mean, we might not want to do it, but at least we don't have to say whether it's left leaning or right leaning. I mean, this is coming from investors. This is coming where people want to know where they're putting their money.

Jerry Soverinsky (25:15):
Right, and employees, like we've said. So it's a too huge factor.

Jeff (25:22):
Yeah. Well, Jerry, thank you very much.

Jerry Soverinsky (25:27):
Thank you.

Jeff (25:28):
We're going to get your white paper out really soon, and I'm sure we'll be doing more work together in the future.

Jerry Soverinsky (25:35):
Sounds great. Thank you very much, Jeff.

Jeff (25:38):
Okay, Jerry. Thank you.