Any organization with an ESG program would admit that compiling, analyzing and sharing those metrics is no small feat. Depending on the business size and industry, the calculations on greenhouse gas emissions alone can be dizzying to comprehend. That complexity, combined with the level of transparency demanded by investors, the public – and likely in the near future, regulators –can be intimidating to disclose, especially when the business may not have the appropriate program in place.
The need for transparent and accurate ESG data is clear, and without it, organizations could suffer the consequences of a tarnished brand reputation, financial loss or regulatory action. “Transparent” and “accurate” are critical words here; without a commitment to data transparency and accuracy, companies may end up greenwashing their ESG endeavors.
Greenwashing is disinformation disseminated by an organization so as to present an environmentally responsible public image. And it happens often. Avoiding greenwashing requires a commitment from the organization to truthfully disclose ESG metrics, even when the truth may be uncomfortable. Admitting that environmental initiatives have a long way to go, or that diversity is lacking throughout the organization can cause some initial backlash – but as long as there is a commitment to and progress in improving those metrics, companies can weather that storm.
Building an ESG program that drives progress and improves results requires trust in the data produced by the company. The practice of instilling trust in your ESG data can be broken down into five disciplines.
Here is how to TRACK your ESG program’s viability and progress.
When it comes to the various sources of ESG data, that information must be traceable to the source. For example, reliable environmental information about a business’ energy and water usage must be aggregated from the utility provider and reported accurately, ensuring traceability of this information. When calculating third-party ESG impacts, it’s important that the information come directly from the suppliers and that expectations of transparency are set and regularly communicated.
Collecting, analyzing and sharing this information accurately requires dedicated resources and benefits greatly from an automated software solution. Though these calculations can be tracked and completed manually, this leaves room for human error and is not scalable as a business grows (or feasible for large enterprise organizations). Manual tracking also takes valuable resources and bandwidth away from more strategic pursuits – automation not only saves time and streamlines resources, it provides more accurate reporting and can quickly provide a return on investment from a software purchase.
ESG programs are ongoing and iterative, and therefore repeatability is key. Any successful ESG initiative must be able to scale and expand as needed; as a business grows or regulatory action comes into play, having a framework that can adjust to increasing complexity is a must have.
Repeatability specifically refers to implementing a scalable solution that can gather relevant data and aggregate the findings into a digestible format. Doing so on a regular basis streamlines the ability to make improvements by utilizing similar metrics, and alignment with standards makes ESG reporting a repeatable process for internal stakeholders and third parties. For example, if your organization manufactures products that require multiple suppliers, ensuring the supply chain also operates ethically and responsibly is a vital piece of the ESG story.
There are several key issues companies must tackle when addressing ESG, and many of them include instilling these values into the corporate culture and dedicating resources to make meaningful progress. Repeatability allows the appointed leaders to grow and scale ESG programs as targets are met or redefined, and regulatory requirements change over time.
For those paying close attention to the ESG space (and maybe even those who have not), accountability is getting a lot of airtime. Many leading organizations have announced varying levels of compensation will be tied to ESG metrics. Recently, Mastercard announced they are linking all employee compensation to ESG goals, and some other organizations such as Apple, McDonald’s and Chipotle announced that executive variable compensation will also be tied to ESG metrics.
As mentioned in a previous blog post on this topic, this could make a positive impact on the overall corporate culture, people and the environment. But it is important to keep the mission of creating a more sustainable and ethical business in mind. As noted in recent PwC research, “There’s a risk of hitting the target but missing the point. An example might be a bank that focuses on reducing its own carbon footprint when the biggest effect it could have on reducing emissions is through changing its approach to financing companies that emit carbon. There’s a risk of distorting incentives. Research shows that incentivizing pro-social goals can undermine intrinsic motivation…”
How does your organization stack up against others in the industry? Comparability is important as a method of benchmarking against your peers to help determine where efforts should be focused.
At present, this is difficult to do because of varying standards and an unregulated landscape for disclosure. Hopefully the near future will bring much-needed regulatory requirements for disclosure from the SEC, which will provide useful information for comparability. ESG programs are at varying stages of maturity across the world and a true comparison may be difficult, but it all starts with collecting and disseminating information, followed by setting goals and making progress accordingly.
Those responsible for ESG oversight should keep up to date on related news and actively seek out information from similar businesses. Many organizations are producing voluntary disclosures and while there is not a consistent framework to measure against currently, there is a wealth of useful information available to ESG leaders.
Failure to manage ESG presents a major risk to the organization. It is also imperative to think holistically about ESG, as social and governance problems (lack of diversity, gender pay parity, improper data governance, etc.) have long-lasting and detrimental impacts on the business. In short, managing an ESG program is not just about the environmental aspect; although greenhouse gas reporting is imperative, other social and governance aspects are just as critical to understand in terms of how it impacts your own organization and preparation for ESG disclosures.
When first starting out, a maturity assessment provides valuable knowledge about the current state and helps identify areas of focus going forward. Assembling a cross-functional team and assigning dedicated leadership to govern the ESG program will shed light onto what to focus on, where success and progress is present, and will firmly establish these priorities into the organizational culture.
Is Your ESG Program on TRACK?
It is in the best interest of all companies to establish a trustworthy, credible ESG program. Once considered “nice to have”, the tide has shifted and ESG is moving to a “need to have” for organizations of all sizes. There is an unfortunate and uncomfortable truth that many organizations fail to truly make progress, and either inadvertently or intentionally greenwash their business practices. To avoid greenwashing and instill trust in ESG data and disclosures, companies must prioritize and dedicate resources to ESG programs and codify policy and procedure into company culture.
Whether just getting started or seeking to keep your program on “TRACK”, NAVEX has resources to help you prioritize ESG.
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