Fathia Murphy, ESG Product Specialist, NAVEX Global, discusses the importance of understanding what E, S and G means so businesses can recognise their responsibility and be prepared to tackle issues, as well as how to put an effective ESG strategy in place
There is no doubt that the last year has been disruptive. However, concerns around our environment have united us in many ways. We have seen people come together to protest about climate and, COP26 put the environment and sustainability on centre stage. This, in turn, is prompting businesses to look in the mirror and act. Yet, more action does need to be taken as we are only at the beginning of major global and societal change.
A prominent way that organisations are seeking to make an impact is through increased environmental, social and governance (ESG) disclosure. We are seeing a growing number of listed companies fully incorporate their ESG strategy within their annual report to track and illustrate corporate progress on key issues, such as those raised in COP26. But we must acknowledge that it is no longer just about bottom-line results. Recent research has shown that only a quarter (25%) of consumers believe businesses are primarily motivated to undertake (ESG) initiatives to make a positive difference. Meaning it is more important than ever for businesses to act in a consistent way.
To make real change, there needs to be a deeper understanding of ESG. This goes beyond a box-ticking exercise and means businesses need to embrace ESG as a corporate initiative.
Understanding the E, S and G
Let’s start by understanding what these letters mean; we can then move on to why they are so important in today’s world. Although ESG is not new, there is still much confusion on what E, S and G mean.
- Environmental addresses the way an organisation responds to environmental issues, such as climate change and greenhouse gas (GHG) emissions, energy efficiency, renewable energy, green products and infrastructure, carbon footprint, and water and waste.
- Social outlines how companies should respond to complex and evolving issues like data privacy and security, pay equity, health and safety, human rights and child labour, diversity and inclusion, social justice positions, and employee treatment. Critical social topics like the Child Labour Due Diligence Law, being worked on now in the Netherlands, and the German Supply Chain Duty of Care which will come into place in 2023 should be carefully watched and receive full attention.
- Governance deals with issues such as executive compensation, diversity, and independence of the board of directors and management team, proxy access, whether the chairman and CEO roles are separate, and transparency in communication with shareholders.
A lack of common standards has made it difficult for businesses to prioritise their programmes. With many organisations at the beginning of their journey, education plays an essential role in driving awareness. To help answer these needs the International Financial Reporting Standards (IFRS) Foundation announced at COP26 a new International Sustainability Standards Board (ISSB) that will develop a comprehensive global baseline of high-quality sustainability standards to meet investors’ needs. Non-profit organisations such as the Climate Group, the ESG Foundation as well as Energy & Climate agencies such as the Climate Disclosure Standards Board, the Intergovernmental Panel on Climate Change, and the International Energy Agency, are also great sources of knowledge.
As ESG topics touch several areas within a given organisation, it is becoming crucial to make all the relevant stakeholders accountable for driving the ESG agenda. In fact, both European and U.S companies agree (90%, and 86%) that ESG reporting should be part of the organisation’s compliance programme. An active engagement with both internal and external stakeholders is at the heart of the most successful ESG programmes.
Once businesses have a complete understanding of ESG in place across all relevant parties, they can then begin to really understand how to build an effective ESG strategy.
Implementing an effective ESG strategy
The key to success in deploying an ESG programme is the identification of relevant regulations and frameworks implementation. There are several popular ESG frameworks that companies can measure themselves against, but it’s important to find a framework that fits.
Standards like the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI) are a great starting point in understanding what is material to your company. Meanwhile, other groups like CDP (Carbon Disclosure Project) and TCFD (Task Force on Climate-related Financial Disclosures) offer frameworks that specifically speak to organisations that want to share greater transparency in their emissions and describe how they go on mitigating physical and transition climate risks. These industry bodies have years of experience providing an excellent foundation for developing a tailored roadmap of actions.
To be successful in implementing ESG strategies, leadership teams need to be involved on day one. Once a plan is in place, this is where we can really see the value of ESG and even more so for those who align ESG goals with wider business goals.
Technology is a must
Technology is instrumental in ESG reporting and implementing successful strategies; it can be the difference between failing and succeeding. To roll out ESG initiatives and effectively take corrective actions, organisations first need to assess and measure their ESG risks.
The amount of data, the variety of formats and sources coupled with the fact that data needs to be coherent, visible, centralised and automated, dictates the need for technology beyond spreadsheets. Technology helps businesses mine data that can be used to align ESG initiatives across the business, developing effective strategies that align to wider business goals.
How to move forward with ESG
This year has been fundamental in progressing change when it comes to the environment. For businesses, this has meant a shift in views and a shift in actions. ESG should be seen as a tool for greater transparency that in turn will result in impactful action.
It needs to start with education. We need to understand what the E, S and G are to know where to begin, from there it’s about finding the right solutions to help make progress. Not only do we need to understand what E, S and G mean, but we also need to understand the relationships between them.
Technology is the solution: where data is so diverse and inconsistent, technology plays a key role in centralising and automating processes. Better data leads to better reporting and ultimately greater accountability. Clearly, a lot rides on the line for businesses. In a recent survey, we found that almost three in five (59%) consumers say they would stop doing business with a company if there were negative news stories about their ethical and sustainable practices, and 37% of consumers say they’ve stopped buying from a brand because they did not consider it sustainable or ethical. Firms can help ensure they stay on a good path when moving through their ESG journey by fully understanding the E, S and G and building a holistic, cross-departmental programme for each.
