By Karen Alonardo, vice president of ESG Solutions at NAVEX Global
Since the turn of the century, the world has seen a vast increase in the adoption and prioritization of environmental, social, and governance (ESG) initiatives, as well as ESG disclosures and reporting.
However, there is a building pressure to adopt ESG initiatives as the spotlight continues to be shone on issues like climate change and social injustice in the wake of 2020.
It’s also become clear that key stakeholders care deeply about ESG factors and expect businesses to do better and realise the benefits of concentrating efforts in these areas. The huge coverage of social movements like #BlackLivesMatter and the #MeToo movement, along with the subsequent calls for individuals and businesses to address how they plan to improve, this stepchange has put ESG policies firmly at the top of the business agenda. Embracing ESG metrics as part of a truly comprehensive risk and compliance programme – and transparently reporting on the results – deserves to be taken seriously.
Here we look at what that means, how businesses are responding, and how they can ensure they are doing more than paying lip service to ESG.
What is ESG?
According to Gartner, Environmental, social and governance (ESG) refers to a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts. Examples of ESG data include the quantification of a company’s carbon emissions, water consumption or customer privacy breaches. Institutional investors, stock exchanges and boards increasingly use sustainability and social responsibility disclosure information to explore the relationship between a company’s management of ESG risk factors and its business performance.
Regulators have been edging toward putting frameworks in place for ESG-related issues for some time. For example, the Securities and Exchange Commission published guidance 10 years ago, pushing companies to discuss climate change risk (although the guidance has never been the source of enforcement action). Meanwhile, regulation linked to supply chain responsibility and due diligence have taken on greater prominence. At the start of the year the Conflict Minerals Regulation (EU Regulation 2017/821) came into full force across the European Union, aimed at ensuring importers of certain materials originating from conflict-affected and high-risk areas across the globe source these materials responsibly. These rules go even further than existing US legislation around the same topic (US Dodd-Frank Act 2010 Section 1502), which only covers 10 specific West African countries.
New regulations such as these mean that companies are under pressure from banks and investment funds on one side and “hashtag activism” on the other. As a result, ESG risk management is getting pushed up the priority list for boards and the C-suite.
In fact, almost half of FTSE 100 companies now link executive pay to ESG targets, as investors have stepped up demands for them to adopt these non-financial goals in the upcoming annual general meeting season.
Recent research by NAVEX Global also revealed more than half of UK companies (51%) believe their brand reputation is affected by ESG issues – both from a consumer and investor (43%) perspective. In fact, in the UK, more than three-quarters of businesses upped their investment in ESG activities last year (67%). Issues relating to the environment firmly topped their priority list of ESG objectives (55%), with 60% planning a spending uplift in this area, this year.
However, paying lip service is not enough. The research also revealed that whilst 82% of companies have ESG goals, less than half are performing well against individual ESG metrics.
How to create meaningful ESG goals
Until recently, ESG metrics were often considered too esoteric to be reliably quantified and too difficult to track manually. Reporting on ESG performance, if done at all, took a backseat to more traditional financial measures. But that is changing.
Now there is a growing understanding that positive ESG measures are associated with better overall business performance. Forward-thinking organisations know ESG impacts their overall risk profile. The challenge is how to collect and analyse ESG data with the same rigor as other risk and compliance data. Here are some top tips on how to create and implement a successful ESG programme:
Align ESG goals with wider business objectives – It is imperative to go beyond traditional CSR and Sustainability reporting. Stakeholders have much more awareness of concerns like diversity and inclusion, gender pay structure, donation programmes, board composition, factory conditions, and how to mitigate climate risks. Increased integration across ESG, Sustainability, and other cross-functional teams is becoming more critical to the accuracy of the information and it takes more than one group to manage ESG efforts. Companies who align their ESG goals with business goals will have more long-term success as better information is collected by the appropriate professionals.
Look around you for inspiration – It can be daunting to know where to begin, but aligning your ESG goals with popular frameworks can be a good starting point. ESG frameworks are used by organisations to create a standardised ESG programme; used by investors to assess the impact of the sustainability and ethical practices of a company. Popular frameworks include:
- SASB (Sustainability Accounting Standards Board): The SASB framework is focused on ESG issues determined to be financially material. This includes sector-specific guidance on a broad range of ESG topics, covering issues such as greenhouse gas emissions, energy and water management, data security, and employee health and safety, while providing sector-specific guidelines emphasising topics SASB believes are material for issuers in those.
- TCFD (Taskforce on Climate-Related Financial Disclosure): The Taskforce on Climate-related Financial Disclosures (TCFD) was recently developed by the Financial Stability Board to improve and increase reporting of climate-related financial information. The UK has announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023.
- UN “17 Goals” of Sustainable Development: Each of the U.N.’s 17 goals include targets and indicators. The goals are: No Poverty; Zero Hunger; Good Health and Well-being; Quality Education; Gender Equality; Clean Water and Sanitation; Affordable and Clean Energy; Decent Work and Economic Growth; Industry, Innovation and Infrastructure; Reduced Inequality; Sustainable Cities and Communities; Responsible Consumption and Production; Climate Action; Life Below Water; Life on Land; Peace, Justice and Strong Institutions and Partnerships for the Goals.
Use tech to unify your ESG efforts – As you can see, the various ESG frameworks have different areas of focus. Challenges arise when stakeholders follow different ESG frameworks. Implementing ESG software like NAVEX ESG helps to manage internal ESG initiatives and external activities and reporting. ESG software helps companies aggregate investor-ready data and address metrics that decision-makers care about. Whether your goal is values-based business development or making the world a better place, ESG software can help you build a best-practice programme and put you on a path for sustainable future growth.
ESG metrics are only going to increase in importance. Ten years ago, ESG was a grassroots initiative. Today, it is top-down. To attain ESG status, organisations must focus on becoming more transparent. They, and their leadership, must build ESG programmes, create awareness with an ESG rating, and hit and report on metrics that matter to forward-thinking investors if they wish to prosper.