The Essentials: Environmental, Social and Governance
There’s no better time than now to revisit your ESG program.
The more that regulators, investors, consumers and employees scrutinise your ESG activities and reporting, the more they will find if it isn’t up to scratch. And the impact on your business performance should not be underestimated.
Having a complete and transparent ESG program is no longer optional. It’s essential for organisations to consider ESG implications at every level, across all business units.
How do you ensure your program is as robust as it needs to be?
Keep reading this blog for a summary of ESG and its impacts, implementing a successful ESG program, reporting on risks and activities, and assessing its effectiveness.
What is ESG?
We see the term ‘ESG’ thrown around a lot in financial services, especially in relation to investing. So, what is ESG? It stands for Environmental, Social and Governance. With respect to investing, the term is often used interchangeably with sustainable investing or socially responsible investing. Engaging in ESG activities or investing means considering environmental, social and governance factors when making business or investment decisions. Looking closer at each factor that makes up ‘ESG’[i]:
Environmental – emissions that affect the climate, sustainable use of resources, and the size of the company’s collective environmental footprint, including its supply-chain impacts.
Social – diversity, social equity and fair labour issues, including those related to conflict minerals, child labour, and slavery throughout the extended enterprise.
Governance – diversity in board composition, transparency, and attention to controls designed to drive ethical conduct at all levels of the company.
The extent to which each of these factors are relevant to the operations of an organisation will depend on the nature of the business. However, no organisation is completely immune to external critical assessment in relation to ESG issues.
ESG issues have been on the rise in recent years as organisations, consumers, investors, regulators and other stakeholders are becoming increasingly environmentally and socially conscious. These stakeholders tend to have varying levels of demand when it comes to ESG, which makes it challenging for organisations when reporting on ESG. To be adequately prepared to withstand the critical eyes, and to simply play a role in doing good in this world, organisations need to implement a successful ESG program.
Implementing a successful ESG program
Implementing and running an effective ESG program was once a “nice to have” for organisations; a way to differentiate from the competition. That is no longer the case. Having an effective ESG program in place is now an expectation for organisations. You’ve probably even noticed the increasing number of questions dedicated to ESG issues in recent tenders that your organisation has participated in. Organisations can no longer sit back in relation to these issues, rather, proactiveness is non-negotiable.
So, how do you implement a successful ESG program? In their recently published e-book ‘Essential Connections for ESG Success’, OCEG defines the key steps as follows:
Establish ESG objectives that align to overall business objectives.
Define and manage ongoing ESG leadership and team.
Map stakeholder interests and define priorities.
Define buckets of data and metrics for different reporting needs.
Evaluate need for changes in ESG data to drive quality and reliability.
Evaluate need to modify ESG metrics for efficiency and consistency.
Determine how to collect and assess/evaluate data and metrics, including use of technology.
Define methodologies for creation and delivery of reports.
To build trust with stakeholders and build a successful ESG program, companies need to regularly monitor changes in the internal and external environment. To do this well, OCEG proposes the following process:
Step 1: Learn your ESG business context
Understand the external business context – regulations, macroeconomic events and other factors should inform ESG objectives, strategies and operational resiliency.
Evaluate the internal business context – defined business objectives, strategies, operational structures and culture should shape the foundation of ESG objectives and management.
Define points of impact and relationships – map relationships and potential effects across the organisation to enable timely and proactive responses.
Establish priorities and process – adjust priorities and controls in response to changes or new information regarding ESG or overall business objectives, strategies or operations.
Step 2: Align ESG for Principled Performance
Set the direction for Principled Performance in ESG – articulate ESG targets by identifying ESG practices at every level of the organisation and linking them to stated business objectives and decision-making guidance.
Assess requirements, capabilities, opportunities and threats – perform organisation-wide evaluations to ensure ESG management is integrated and aligned with business operations and relevant ESG frameworks/standards.
Develop an integrated business strategy – create a cohesive strategy to holistically integrate ESG measures across the organisation.
Ensure technology and information management support – use ESG technology across the organisation with integrated workflows that enhance data accessibility, reporting agility and resilience, to drive successful ESG strategy execution.
Step 3: Perform ESG Actions and Controls
Define and operate ESG policies and procedures – to encourage high standards in ESG practices and delivery transparent and trustworthy reports. Training and communication further support objectives and ensuring accurate disclosures.
Establish preventative and detective actions and controls – identify and remediate weaknesses in data-gathering processes, controls and broader operations.
Deliver dynamic real-time reports – ensure information provided to stakeholders is timely, accurate, complete and responsive to stakeholder interests.
Use analytics for insights – examine ESG trends, identify root causes of problems, predict behaviours and conditions and gain insight for risk-based decisions.
Step 4: Review ESG Capabilities
Monitor defined actions and controls – periodically evaluate the performance of ESG processes, technologies and organisational structures in light of stated objectives.
Provide assurance and data governance – assess ESG management to confirm it is effective, efficient, and responsive to change. For the highest level of assurance, engage independent assurance services.
Improve ESG risk and resiliency – review information from monitoring results and assurance reports to identify opportunities to improve ESG practices, including revising controls.
Drive future transformation – consolidate, analyse and prioritise information gathered from monitoring and assurance to guide follow-up planning top optimise the alignment of ESG functions with business objectives.
Reporting on ESG risks and activities
Complete, accurate and transparent reporting on ESG risks and activities is a must. If not done the right way (i.e. it is incomplete or inaccurate), ESG reporting can negatively impact an organisation’s reputation and hinder performance. When ESG disclosures are inaccurate, this is seen as being misleading (also known as ‘greenwashing’) and can result in serious consequences beyond reputational damage.
As mentioned in our blog ‘Managing greenwashing risk for your company’, transparency and accountability in relation to disclosing ESG activities is key. In relation to disclosure, Two standards that set the bar for disclosure in relation to climate change and sustainability are the International Sustainability Standards Board (ISSB) climate-related disclosure standards and the Sustainability Accounting Standards Board (SASB) standards. Further, ASIC has released regulatory guidance in Information Sheet 271, to help product issuers avoid greenwashing (misrepresenting the extent of environmental practices) when offering or promoting sustainability-related products.
Climate change and director’s duties
At the top of the list of ESG reporting items that stakeholders are focusing on today is climate change. The United Nations defined climate change as the long-term shifts in temperature and weather patterns. This is generally caused by greenhouse gas emissions building up in the atmosphere and making the earth warmer than it should be. Human industrial activity is a major contributor to increased volumes of greenhouse gas emissions, therefore companies are being held to account, including financial services organisations. And the responsibility for each organisation rests on company boards and directors.
To effectively communicate to stakeholders what an organisation is doing in relation to ESG risks and activities, ESG reporting is needed. However, proper disclosure often proves to be a challenging task.
In a survey of the London insurance market on the issues of real and immediate significant for directors and boards in Australia, two-thirds of directors and officers (D&O) underwriters who responded consider Australia as being behind other countries in addressing ESG issues[ii]. Many acknowledged how difficult it is to assess how effectively companies are responding to ESG issues throughout the organisation. However, the ability to offer transparency and demonstrate to underwriters that ESG activities are effectively embedded throughout all functions in your organisation will assist in accessing more favourable terms for D&O insurance.
Assessing the effectiveness of your ESG program
To ensure the success of your ESG program, periodic assessment is needed. As an initial stage, a self-assessment should be performed by the team responsible for the ESG program. This can then be followed by an independent assessment performed by auditors or consultants.
As part of the self-assessment, you can check the completeness of your program using the LexisNexis ESG Compliance checklist. The checklist can help you deliver on your ESG strategy and reporting requirements.
The checklist covers the following areas:
Questions asked throughout the checklist prompt an assessment of each area, highlighting areas that need more work to meet the relevant requirements.
For greater confidence in the effectiveness of your ESG program, engaging an external party to conduct an independent assessment is important. This assessment may be part of your internal audit program or may occur as a standalone consulting project. Either way, you gain an external perspective of your ESG program to help you ensure it is robust and will stand up well when evaluated by stakeholders.
How we can help
To help you strengthen your ESG program to protect your reputation and sustain your performance, we provide the following services:
Develop, uplift and implement ESG related policies and procedures for your organisation.
Director training on ESG obligations and the right questions to ask to effectively oversee ESG practices.
Complete comprehensive independent reviews against existing global and local standards and guidance.
For more information about the services we offer, contact us today for a confidential, no-obligation consultation.
[i] OCEG Essential Connections for ESG Success
[ii] D&O insurers are keeping a very close eye on class actions and ESG