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Environmental, Social and Governance (ESG) Score: What is it and why does it matter to me?

By Ed Maltby, NODPA Executive Director

As part of a Northeast Dairy Business Innovation Center (DBIC) grant project, NODPA is working on a project to better understand what criteria, in addition to organic certification, organic dairy product buyers will be requiring of producers, to further distinguish them in the marketplace. This is being referred to as the Environmental, Social and Governance (ESG) Score.

What is ESG?

At a basic level, ESG is a set of standards that determine whether a company falls under the umbrella of “sustainable investing.”

  • Environmental criteria could include energy use, waste management and treatment of animals.
  • Social criteria deal with an operation’s relationships with its employees, suppliers, customers and the communities where it operates. For example, does it work with suppliers that have the same values as the operation claims to have? Are working conditions safe and healthy for employees?
  • Governance deals with a company’s leadership and internal controls, among other factors. For example, does the operation have conflicts of interest or work with suppliers that have conflicts of interests.

Increasingly, consumers, retailers and processors are asking questions about ESG up and down their supply chains. If your buyer hasn’t yet asked these questions they will in the future, whether it is in the form of a questionnaire or an inspection. Most of these preferences are well documented and are no surprise. The findings of NODPA’s research are a result of direct interviews with buyers and the following are in no particular order:

  1. Certified humane animal treatment is highly desirable.
  2. Retailers expressed interest in having better relationship with suppliers and more consistent pricing and availability.
  3. Local provenance is considered a positive product attribute with track and trace from origin to include tracking food miles.
  4. Concern about the shrinking regional supply and wanting to support producer prices as a means to keep sufficient fluid and fat levels in the region.
  5. Extended Shelf Life (ESL) products are strongly preferred and increasingly required because of the shortage and expense of delivery trucks.
  6. Supply chain should/must contribute to positive ESG scores.

ESG adds complexity in identifying and tracking meaningful and measurable metrics that fit the individual ESG plans of the buyer. For organic dairy businesses these will be heavily influenced by environmental metrics related to the food producer including CO2 measures, water use, waste management, production practices and food miles. There may be other requirements such as those in the table below that force producers to operate an ESG scoring system just to qualify for sale.

On the flip side, there are both near- and long-term ESG risks. Near-term risks could include whether you have the right safety practices in place or if you’re exposed to a near-term risk of water scarcity. If you’re in a drought-prone area, it’s important to understand how you are managing that risk. Longer-term risks could include material impacts that climate change has on what you grow. How are you addressing that concern in your current operations?

We know and understand the environmental benefits of organic dairy production, but, similar to having organic and animal welfare certification, we need to share this information with consumers and provide facts with case studies. A recent study (Montgomery, David R., et al. “Soil Health and Nutrient Density: Preliminary Comparison of Regenerative and Conventional Farming.” PeerJ, vol. 10, 2022, https://peerj.com/articles/12848/ ) found that organic and regenerative farms that combined no-till, cover crops and plant diversity had healthier soils and positively affected the nutritional content of food. We need to leverage our advantages as a pasture-based and organic system to manage lands responsibly and regeneratively increasing soil health and biodiversity. Grazing animals can help these systems thrive and capture more carbon. This shows the consumer how responsible organic dairy and livestock production can be, providing yet another reason to support organic dairy through their purchasing power.

Some Examples of ESG Criteria:

Environmental

Social

Governance

  • Recycling
  • Life-cycle thinking
  • Carbon footprint size
  • Using green energy
  • Clean water
  • Health & safety
  • Community relations
  • Wages & benefits
  • Employee training
  • Recreation access
  • Committee diversity
  • Tax policies
  • Corruption & bribery
  • Transparency
  • Investment policies