Hello everyone and welcome to the Climate Money Work podcast. I'm Keesa Schreane. We are at a very interesting point in our podcast in that we are ending our first season. And with the first season coming to an end, I really wanted to do some reflecting on where we are as a broader society as it relates to some of the conversations we're having around ESG and around sustainability. Now as we're recording this, we are about midway through July and representative Andy Barr, in Kentucky has labeled July ESG month. And whereas a lot of us were thrilled to hear that this is ESG month talking about some of the work that the house is doing, I really wanted to dig deeper into what's going on from a broader perspective and why this ESG month in terms of what's going on in the house and those conversations should really be important for most of us, all of us who are in this space.

Now, when we say that ESG is being debated right now heavily, we know that this month house Republicans are opening up opportunities, sessions, hearings for folks to come in and talk about ESG in investing. What is ESG investing? Probably is on the docket, really making the argument around ESG investing and why it's so important. And given this whole ESG month, as the house representative called it, I wanted to bring attention to ESG as a key risk factor that should be viewed by an investor as well as by a corporate leader. For those of us who are in this space, we've heard repeatedly that there are different types of ESG investing. ESG investing is not just one thing. And I'm hopeful that during this ESG month, that they're calling it right now in those house discussions, that ESG can really be debated and analyzed and can be seen as something that's a continuum.

And for those of us who've tuned into the podcast, we've seen that earlier in the season we had on someone from ESG advisors. And one of the things that Blythe mentioned and that we have a wonderful visual for in the show notes is that there are different types of ESG investing. There is impact investing when you or a portfolio manager is investing for impact, whether it be climate, whether it be some sort of social issue or social activism but there's also ESG integration where you're simply looking at risks through an ESG lens, that could look like physical climate risk. So if you're investing in a business that has lots of real estate, what is the likelihood that the building, the office, the real estate, may be impacted by floods or hurricanes or droughts in the years ahead? That's an important risk to consider, very important risk to consider. There are different types of risk when we look outside of just the climate and the environmental piece, there's risks that are associated with how we treat people inside of our organizations.

There are opportunities that exist when we treat people well, but when we treat people poorly, when we have practices that allow for folks to be treated poorly, that allow for microaggressions in the sort, there are risks of lawsuits, there are risks of reputational damage. So if we look at the type of risks that a business tends to have, and now if you think about it closely, a lot of these risks, reputational damage being one, may ultimately become a risk in terms of revenue. When a firm's reputation is damaged, consumers stop purchasing there, businesses stop partnering with that organization. So reputational risk can certainly lead to revenue issues as well as many of these risks can. Lawsuits can be something that comes off the back of reputational risks. So again, if we look at these ESG conversations, not as just one type of investing, ESG investing, but if we look at these ESG conversations for what they are, we can really see that there's number one, there are different types of ESG investing for impact, thematic investing, for example, based on themes, ESG integration where you're looking through that risk lens.

And so we should be able to have a conversation, open, honest, looking at disparate views and really seek to gain the knowledge about the different types of ESG investing. And then at least from there, go on to have a discussion about people's thoughts on what should be included as part of an investor's fiduciary duty versus what shouldn't be included. But it's so important that we get that baseline correct first, that we get the definitions correct first, that we really have knowledge of what ESG investing is and what it is not and then have a conversation about the investor's fiduciary duty and have a conversation about investors doing everything they can to ensure that they are meeting the objectives that they say they're going to meet around investors. So thus, ESG as it relates to the conversations that we're seeing now in July as a representative called July ESG month.

Risks and corporations

I also want to talk about risk as it relates to corporations. And we mentioned some of them. And the reason that's important is because investment managers, portfolio managers, asset managers, they have a portfolio of companies. So all the risks that they are thinking through, that they're considering, they're made up of risks that are going on in the company. And from a portfolio perspective, you want to make sure that the various companies that you have in that basket that they're working and they're harmonizing together. But if you are a company, you still need to be mindful of those various risks. And so we talked about a few of them, risks as it relates to the treatment of your employees, the treatment of those who are in your communities and the opportunities around them. And just always understanding that with risks, there's always an opportunity side of the spectrum too. So really important for corporations to get that.

Double materiality

Those of us in this space talk a lot about double materiality. And in its simplest terms, the whole materiality simply means what you are doing inside of your business, part of your operations that's impacting the environment, that's impacting society, that's impacting these external factors. And it's doubled because there's another side to this. The other side of that is what's going on in the environment, in the climate, in society that's impacting your business. And so for corporations to really get a sense of what's material to their business, what could be financially material to their business, it's really important to look at risks, sustainability risks, environmental, social governance risks, and opportunities. And from there to measure how they've done in the past and how they can improve in the future.

And we know that there are loads of frameworks and standards that help companies do this. [inaudible 00:08:30] as well as GRI, Global Reporting Initiative, and now the International Sustainability Standards for the ISSB that is now taking over some of the work that the TCFD task force on climate related financial disclosures taking over some of the work that they're doing in terms of reviewing a company's progress on climate related disclosures. And the reason that the climate related disclosures are so important, that global reporting is so important, that sustainability accounting standards is so important is because this is how companies can measure what they are doing in their strategies and what they can do better, is simply a measuring tool is simply a way to really create structure around measuring the opportunities and the risks around sustainability and around ESG. So wanted to have that conversation about risk as it relates to ESG, as it relates to sustainability.

Supplier risk

In terms of one of the biggest risks that quite honestly, I don't know if many corporate leaders give a lot of attention to right now today, is risks associated with suppliers and vendors. And many firms, not just large firms, but many firms are interested in partnering with vendors who supply widgets and pieces they need for their products or certain aspects they need for their services. And now we see companies are increasingly being held accountable for their vendors and what their vendors do. And earlier on in my study around sustainability and ESG, I ran across the use case of chocolate companies and we saw that many chocolate companies were being sued, were being held liable for having child labor. Now, the chocolate companies and some of these of course, they said, "Hey, we didn't hire these children, our farmers did." So we are not responsible because our farmers, the cocoa farmers, they're the ones who hired child labor.

And many of the courts found that to be the case. But that's when I really began to see the importance of understanding what your suppliers, what your vendors, what your partners are doing. Because in the court of public opinion, many times if your supplier is accused of something or if your vendor is being accused of something, it can reflect on the company. So in consulting, one of the things that I talk about is alignment to ensure that you as a company, that your values are aligned with your supplier's values, with your partner's values, with your vendors' values. And just a few tips on how to do that because this is something I'm hearing quite frequently, which lets me know that maybe today companies haven't really considered it, but it's definitely something that companies are considering more and more. How can I make sure that I bring on the right supplier, the right vendor, the right partner? How can I make sure that their values reflect mine? And so a few tips for that.

Select the right supplier for your firm

First of all, really select the right supplier based on criteria that you feel is important. Environmental impact, labor practices, how do they treat their people and their company? Like with the chocolate example, the cocoa farmers, et cetera, ethical sourcing and compliance with regional regulations. Those are the sorts of things that you want to do a check on when you're thinking about bringing on the supplier or partner. And those are the risks that you might want to be mindful of measuring the suppliers against that criteria. So really think about how you evaluate these candidates, the vendors that may be potential partners, and as you make your selection, think about engaging with your stakeholders, so engaging with employees inside of the business and even engaging with community members, so your employees inside the business as well as those who live where you're doing business, particularly if it's a vendor that's local, that has done a lot of work in that area, in that city, in that community, is really important to get feedback and not just have a myopic view, but get other stakeholders feedback on the vendor, on the supplier.

And also take a look at that vendor's sustainability performance over the last year or three years or two years to get a sense of what they're doing well and where they can improve. And then finally, course correcting. Once you bring on a supplier, there are going to be challenges. There is going to be an area that you thought was maybe in tip-top shape, and then you find out there's lots of room for improvement. Course correcting is par for the course. Audit your supplier's performance and measure when they improve and consider where they need to put more effort. And it's okay to shift strategy if you realize that what you thought was the case when you brought them on board, you're seeing something different. But ongoing measuring, ongoing monitoring, these are the things that I consider very important and that my colleagues in this space consider very important. Define the criteria, number one. Evaluating candidates, measuring suppliers against that criteria, engaging with stakeholders, engaging with communities to understand what their thoughts are on the supplier and getting data from them as well as course correcting, those three things.

Four tips for engaging with suppliers

So again, looking at suppliers from the context of aligning their missions and ensuring that their mission, their values is aligned with your company's mission and values. What are some of the other things that can really support an ongoing supplier relationship, a positive supplier relationship where your supplier has fewer risks and there are more opportunities with them? Well, here are some things to look at:

1. Ongoing education, and this is something that you're going to hear throughout the podcast from me and from others. Ensuring that you and your suppliers understand the latest regulations and ensuring that you are constantly communicating with them and constantly engaging them, educating them if they're educating you, this can have several different forms. This can be in the form of a town hall. This can be in a form of a one-on-one with you and your supplier. The only thing that is really needed is consistency, the consistent effort to educate the supplier and ensure that there is a full loop where the supplier can educate you on what's going on as well.

2. Secondly, establishing clear goals. This goes back to the measurement and the metrics piece that we talked about earlier. Whether you're talking about designing a product, whether we're talking about rolling out a solution or a product to our customer base, really establishing a clear goal with any team, whether it's the product team or the sales team, with any team is important, is just as important to establish a clear goal with your suppliers. Key performance indicators to measure how they are meeting those goals, having a clear view of what the milestones look like. So when you want to get to a goal, what mini goals, small goals do you need to meet? That they need to meet on their way to meeting that bigger goal? It's really critical that you're transparent with suppliers about what the goals are, about what the policies are that'll support them in getting to those goals and about what your expectations are.

3. And then one of my clear favorites is to show that you value your vendors, your suppliers, your partners. We talk about ongoing education and ensuring that there's that continuous loop. They're educating you, you're educating them. We talk about meeting the goals, having KPIs, and so why not celebrate when the vendors get it right? Why not celebrate when your suppliers are doing the right thing, when they have strong positive labor practices, when they are really honing in and doubling down on good strong environmental practices, biodiversity practices, celebrate that. Let your vendor know you appreciate that. This is something that we talk about a lot in the podcast, whether we're discussing celebrating our employees who do a fantastic job or celebrating our vendors and our suppliers who do a fantastic job, get an understanding of what that celebration looks like for them. What does a pat on the back look like for them? For some, it's going to have a monetary value. For others, it might be extra vacation time. Getting an understanding of what your vendors want when they've exceeded the goals, when they've met and surpassed your expectations. Understand how they want to be rewarded for going above and beyond.

4. And also as always, stakeholder support is valuable. Make sure that you have a group, a team that can help you in finding the right suppliers and finding the right vendors. That can be a team that sources diverse suppliers, that can be a team that agrees to help you monitor the progress of your suppliers and vendors. It takes a community. As a leader, you can't do it alone. You need a team. So that ongoing stakeholder support to ensure that your suppliers are achieving what you know they can achieve.

Those are the top things that I really engage on and that I recommend that leaders do when they want to bring on suppliers and vendors and really develop a positive relationship:

1. Ongoing education

2. Establish clear goals

3. Show that you value the vendors

4. Getting stakeholder support.

Those are the four things.