By Pamela Grinter, partner at Fox Rothschild LLP
ESG stands for “environmental, social, and governance” and reference to ESG for a food manufacturing business means using environmental, social and governance factors to evaluate the company or its business. Companies are increasingly focusing their business development on the manner in which they conduct business along with considerations of profitability.
My last article addressed how a food manufacturing company could identify its relevant stakeholders – investors, employees, customers, and others. Company management should work with its relevant stakeholders to review its operations and determine the ESG issues that are material to its business. Food manufacturers should identify material issues under each of the three pillars of ESG.
What material ESG issues might have the most impact on a food manufacturing business?
The environmental pillar examines how a company acts as a steward of nature. It considers the company’s impact on the climate, sources of energy, and other resources. Areas that a food manufacturing company should consider under the environmental footprint include the following:
- What are the company’s sources of energy? Are they clean energy or carbon based?
- What materials are used in the manufacturing process? Can they be recycled?
- Does the manufacturing process generate waste and how is that waste disposed of?
- What other ways do the company’s activities affect the air, water, and soil?
- What other impact do the company’s activities have relative to climate change?
- In what ways do the company’s activities impact natural resources?
- Does the company generate pollution and waste?
- What opportunities does the company have to engage with clean tech, green building, and renewable energy?
The social pillar considers how a company manages relationships with its stakeholders – employees, suppliers, customers, and its community. Employees, your human capital, are a critical component.
- Health and safety: Do the company’s working conditions show a respect for employee health and safety? Do the company’s operations meet and exceed state and federal workplace safety standards? Does the company provide robust health insurance, paid time off, and other benefits to support employee wellness?
- Labor management: Does the company pay fair wages? Do employees receive regular feedback? Do employees support the company’s ESG goals? Does the company provide human resources support to develop an organizational climate of sustainability, such as subsidies for public transportation, facilities for biking to work, time off for non-profit volunteer activities?
- Employee relations and diversity: Does the company have a diverse workforce? Does it actively seek to maintain a diverse workplace? Does the company support LGBTQ rights? Does the company have policies, that are actively enforced, to protect against sexual misconduct?
- Human capital development: Does the company have regular training programs that allow employees to build their skills in the business? Does the company cross-train employees on other jobs within the same group? Are rewards provided for employees who assist the company in meeting its ESG goals? Is training provided for employees on how they can assist the company in achieving its ESG goals?
Suppliers are also stakeholders:
- Supply chain ESG standards: Does the company require that their suppliers act ethically and meet the company’s ESG standards?
Product liability is another critical material ESG issue under the social pillar. Possible ESG issues include:
- Product safety and quality
- Chemical safety
- Privacy and data security
Governance standards consider how a company is managed and run. Does the company’s governance reflect its ESG values? The Governance Pillar covers a wide range of topics concerned with the governance of the business:
- Board diversity: Is the board diverse as people and with regard to their experience. Do you have board members from a variety of backgrounds? Do the board members have a variety of professional experience and are those experiences that are beneficial to the business of the company?
- Business ethics: Is the company ethically managed and operated?
- Is executive compensation reasonable?
- Does the company avoid anti-competitive practices?
- Does the company actively avoid corruption?
- Is there transparency in the company’s tax planning strategy?
For many companies, ESG represents the convergence of doing the right thing and increased profitability. ESG factors are important to long term financial performance and company growth. ESG considerations are an important driver of long term investment returns from both an opportunity and a risk mitigation perspective.
Pamela Grinter is a partner at Fox Rothschild LLP and co-chair of the firm’s Food & Beverage and Environmental, Social & Governance Practice Groups. Her practice primarily focuses on business and tax law. Pamela can be reached at [email protected].