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ESG – environment, society and governance – was a hot topic in 2021 and will only pick up steam in 2022. If you’re not paying attention yet, it’s time to get started. Companies that want to make ESG a priority will have to do more than just talk. With ESG, the proof is in the report. By sharing their ESG goals and the tangible data-driven progress they are making towards achieving them, organizations demonstrate their ability to manage those risks and remain profitable.
Take BlackRock Chairman Larry Fink’s letter to CEOs He points out not only that sustainable investments have reached $4 trillion, but that BlackRock is asking companies that are part of the investment giant to set short, medium and long-term goals for greenhouse gas reductions. BlackRock-funded companies are also expected to issue reports aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Why need this data? Fink couldn’t be clearer: “We focus on sustainability, not because we are environmentalists, but because we are capitalists and confidants for our customers.”
ESG as a measure of a company’s adaptability
Fink sees those ESG reporting details as essential tools for understanding a company’s ability to adapt to the future. Amid these changes, he mentions a growing shareholder interest in the corporate governance of public companies. He clearly says that companies will either demonstrate their progress towards ESG goals or will lag behind.
Investment firms are not alone in requiring organizations to go along with ESG. As regards 83% of consumers believe companies should actively shape ESG guidelines, 91% of business leaders believe their company has a responsibility to act on ESG issues, and 86% of employees prefer to work for companies that do the same things important as they do. Consumers and employees are paying more attention to company values — and how those values are expressed — when making purchasing and employment decisions.
Before ESG, companies were interested in corporate social responsibility (CSR) or sustainability. But where CSR became more of a branding exercise for many companies, ESG requires accountability and results. Reporting is the essential part of that accountability, which requires tangible support. Without meaningful reporting, it’s hard to show your stakeholders that you take ESG initiatives seriously. Monitoring the ESG criteria most relevant to your business and reporting findings is the best way to show the progress you’ve made toward ESG goals. A holistic approach to governance, risk and compliance (GRC) can provide that support. GRC software makes it easier to identify and monitor needs, collect data, measure progress and mitigate risk, all providing interconnectivity between risk functions to streamline risk management across your organization.
What is ESG?
Environment. This property includes climate issues, such as pollution, water efficiency and carbon emissions. It has received a lot of attention in recent years as countries around the world pledged to achieve it net zero emissions by 2050 (others promised to reach that goal by 2060). Industries differ in how they deal with environmental issues, but these concerns affect every organization.
Social. This feature covers issues related to diversity, equality and inclusion (DEI), discriminatory employment practices, harassment, safety and development at work, and data security and privacy. Investors and consumers do not easily forget issues in these areas, making it difficult for companies to restore reputation.
Management. This trait is about the way business is done and includes corruption, financial reporting, security breaches and fraud. These problems are very similar in all sectors, and like the social trait, a misstep in this category stays with a company for a long time.
All of these align with a broader principle of ESG, the concept of: double materiality† Outward risk refers to how an organization’s actions (e.g., water use or labor practices) affect the world, while inward risk refers to the way that global events (e.g., floods or wildfires) affect an organization. That dual materiality drives the need and value of ESG reporting.
How does ESG reporting work?
There is still no set standard for ESG in the US, which presents a challenge for risk managers. But one thing is clear: you can’t do it ESG without GRC†
Various frameworks for ESG reporting (GRI† SASB† SDG† TCFD† UNGC) provide guidance on what to populate your reports, but they don’t detail how to manage ESG on an ongoing, day-to-day basis. That’s where GRC comes in. Where the focus of ESG is on reporting and communication, GRC software facilitates the process of collecting data, providing assessments, identifying ESG-related risks and entering that ESG reporting.
Reporting is the critical step that makes your ESG strategy real. It is one thing to announce initiatives and goals, but those goals must be achieved through action. Ongoing reporting enables a company’s leadership to show the results and progress of the board and investors, ultimately resulting in the bottom line. Companies that want to show where they stand on ESG need a starting point. Holistic GRC software that your business already uses for risk management can connect your systems, pull in data, and track what you need so you can present ESG progress in meaningful ways. To use that software, you must first decide what you are going to measure.
Using ESG frameworks to identify metrics
Listed companies should visit the CSRHub, which provides ESG information through both an observed ESG rating and a breakdown of criteria affecting that score. From there, learn about the ESG frameworks that best suit your business.
What do ESG frameworks offer? A shared language for all stakeholders that ensures reporting can be verified, understood and compared. Efforts are underway to establish global reporting standards through the International Sustainability Standards Board (ISSB), announced at the end of 2021, but that board is not yet operational. As organizations make progress in their ESG reporting journey, they are likely to use more than one framework to tailor reporting to stakeholder needs and expectations.
ESG frameworks differ in purpose, audience and likely users. The Sustainability Accounting Standards Board (SASB), for example, provides industry-specific standards for five “sustainability dimensions”: the environment, human capital, social capital, business model and innovation, and leadership and governance. Those standards provide an overview of sustainability-related risks and opportunities that could affect a company’s financial condition, business performance or market valuation. Thus, companies use SASB to determine which ESG factors to monitor and report to investors. Business leaders can search SASB Standards by industry or name (for publicly traded companies) to get an overview of disclosure topics to start the reporting process.
After you identify which SASB standards are most important to your organization, the Global Reporting Initiative (GRI) framework can provide insight into measuring and reporting on those standards, including specific quantitative data that must be made public as part of reporting. GRI is the most widely used ESG framework and the organization partnered with SASB to develop a guide to use the frames together.
Set goals and dive into your data
Treat ESG like an internal audit or regulatory compliance: be ready to provide evidence. While GRI provides guidelines for measuring and reporting information in categories defined by the SASB framework, you need access to your data — and an effort from your whole team — to turn those recommendations into reporting that reflects the state of your organization.
Look within the GRC software you already use at ESG business strategy and strategic goals for the year. Identify ongoing initiatives that align with the standards outlined in your preferred ESG frameworks. What kind of policy do you already have? How do you enforce that policy? How do you monitor the initiatives you have? What are you already measuring? These are the questions to ask when collecting your data.
Remember, ESG is about your extended business. It reaches all the way to your suppliers and associates who keep your business running. The actions of your suppliers in the supply chain can affect the ESG status of your organization. So you have to know where they are. For example, if you buy materials from a company that causes high water pollution levels, you should consider how you can reduce that.
Finally, set your goals in each area using guidance from ESG frameworks, publicly available CSR data, and competitor ESG reports. That data can serve as a benchmark when assessing ESG goals and practices. Companies providing compliance software are working to provide solutions to the challenges of reporting – including incorporating such benchmarks – as the reporting process remains a pain point for many companies.
Start your ESG reporting journey now
ESG reporting acts as a mirror that reflects the reality of your organization. It will expose any discrepancy between what your organization says you care about and what you actually do. But it’s not just that. The financial impact is real, as companies make investment decisions based on companies’ ESG impact. Supervisors also focus on ESG guidelines. Future workers and consumers are also on that list. They look to see if a company is acting on the values it professes before committing to working for or spending money for an organization.
With much to gain and too much to lose, now is the time to get serious about ESG reporting.
Matt Kunkel is CEO of LogicGate.
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