Advice & TipsAsk an ExpertJanuary/February 2023Previous Issues

Q: How do I evaluate a franchise’s ESG credentials?

Environmental, social, and governance principles (ESG), along with sustainability, have become hot topics in the past couple years. Throughout 2023, the competition for customers, employees, and franchisees to prove their credentials will be even more intense. Surveys show that each generation is becoming more conscious of sustainable development, which is defined as the intersection of environmental stewardship, social responsibility, and fiduciary responsibilities that meets the needs of the present, without compromising the ability of future generations to meet their own needs. And each generation is increasingly voting with their dollars to ensure that their values align with the brands they’re working for, investing in, and spending their money with.

Every brand is expected to have sustainability commitments and ESG metrics in place to woo the public and certainly, to win over your dollar as consumers and prospective franchisees. However, the risk of “greenwashing” or “green PR” is real.

If you check news headlines, more companies are getting caught mistreating their labour force, the environment, and even throwing out returns after touting a circular economy model. Franchisees should take note of their brand’s ESG practices as a matter of protecting their investment, and to mitigate risk in case your franchise becomes the target of a boycott, negative press, or other public action. To ensure that the franchisor’s ESG credentials are more than just skin deep, you must ask questions, and then ask follow-up questions.

The art of asking questions is something we advise members of Boards of Directors to do; to question their company and ask sufficient follow-up questions to adequately discharge their governance duties. It’s not enough to accept information presented at face value. Be sure to reiterate such questions as:

  • “How do you know?”
  • “How did you ascertain that?”
  • “What is the source of this information?”
  • “What assurance do you rely on that is correct and has been validated?”

The ability to keep drilling down may seem uncomfortable at first, but you must act like your own Board of Directors; ask the questions to get a sense of whether the franchisor is prepared, informed, and authentic. Ask questions about the systems, processes, and people in place to have good controls over ESG reporting.

Prepare yourself with foundational knowledge about ESG and sustainability issues. For example, understanding the difference between terms like “carbon neutral” and “net-zero” may be deciding factors in an organization’s climate change efforts. One buys enough “carbon credits” to offset greenhouse gas emissions, and one is to reduce greenhouse gas emissions.

If human rights or labour issues are important to you, get a sense of which regulatory standards the franchisors are adhering to, if any, by reading up on some of the globally recognized benchmarks, like the UN Sustainable Development Goals. Understand that a company’s Supplier Code of Conduct is often not sufficient in preventing or detecting forced labour or child labour in the supply chains.

The ability to ask questions is important but it’s also critically important that you’re prepared with parameters to assess whether the information passes the sniff test. Be wary if franchisors don’t have the answers readily available or seem surprised about the follow-up questions. Remember, ESG metrics shouldn’t be held to any lower standard than financial statement results and disclosures.

If the organization doesn’t have the verifiable, audited, and consistently reported data to back up any ESG claims, buyer beware. This would be true for all information but is especially true when it comes to ESG metrics because it’s become a catchy new branding lever. And unfortunately, the ESG metrics that are available may not have the maturity of controls and auditor assurance that traditional financial statement reports do. While that’s slowly changing, your franchise investment should be governed with the due care and due diligence of any large public organization. And you should discharge your governance duties with as much care as the chairperson of any board.

Finally, when in doubt, consult a professional. More and more companies are engaging help with acquisitions and mergers when it comes ESG metrics simply because the information is so inconsistently reported. And if this is true of large public companies, then it’s certainly true of the franchise with your hard-earned investment.

Head of Sustainability Risk Advisory and North America Sustainable Supply Chains
BDO Canada