ESG are three of the hottest letters on the corporate agenda. But what is ESG – and why is it so important?
ESG stands for Environmental, Social, and Governance. While each of the three disciplines has its own set of standards and practices, together they indicate an organization’s dedication to achieving the greater good. Investors, customers, employees, and other stakeholders are turning up the pressuring on companies to reduce the environmental impact of their business and be more transparent about ESG reporting.
Many elements of ESG have long been part of various corporate initiatives. But managing a broad spectrum of environmental, social, and governance issues under one ESG umbrella is relatively new – and is fast becoming an integral part of doing business.
Today’s ESG programs look at business practices across the enterprise to ensure that what the business says it’s doing is aligned with what the business actually does. Climate-change initiatives are often the most visible ESG-related program, but there are other important components to consider within each discipline.
- Environmental
Environmental criteria focus on the company’s impact on the planet. In addition to climate-change initiatives, this category includes energy usage, pollution outputs, water management, and other environmental impacts. - Social
The social element of ESG focuses on the way the company treats people. It includes the relationships that organizations have with their workforces, the societies in which they operate, and the current political atmosphere, including diversity, equity and inclusion, health and safety, labor management, data privacy, and community relations - Governance
The governance portion refers to a set of organizational practices, controls, and procedures used to make effective decisions, remain compliant, and meet stakeholder demands, including fraud, anti-bribery and corruption, security, financial performance, business ethics, and internal audit, as well as executive leadership and pay.
Why Address ESG Today?
While there are obvious benefits to prioritizing corporate integrity and employee well-being, ESG activities also pose serious risks to a company’s brand, market position, customer relations, recruiting ability, and culture. Whether your company is private or public, the potential cost of inaction is simply too great to ignore.
In a recent Riskonnect/OCEG webinar poll, participants described the current state of their ESG programs as:
| 39% | We’re working on it. |
| 23% | We just started on it. |
| 18% | I’m not sure. |
| 14% | We haven’t started yet. |
| 5% | What is ESG? |
What ESG Metrics Matter Most?
Demand for ESG-related information is high, however, the ability to meet those demands can be a challenge. Nonexistent ESG reporting standards often leave companies struggling to decide just how far they should go.
The good news is that many of the metrics that fall under the ESG umbrella might already exist within your organization – although they might not be labeled as “ESG.” One department might collect data on, for instance, carbon audits or water usage for separate purposes. Another department might track employee wellness initiatives or the number of minority directors. Knowing what data exists, where it is located, and who owns it can be one of the most difficult parts of ESG reporting.
The trick now is to pull that information together from wherever it currently resides into a cohesive ESG narrative. Companies that use integrated risk management technology to collect all risk-related information in one place definitely have an advantage. Existing data is easy to find and ready to be pulled into a report.
If data is collected in a variety of disparate systems – like spreadsheets – however, locating, consolidating, and building ESG reports will be much more challenging. And the more extensive your ESG reporting needs, the more challenging it will be to keep up.
Either way, though, you first must decide what information to report on. The metrics you choose to disclose should clearly align with the values and purpose of your organization.
While it may be tempting, don’t simply pick the metrics most favorable to you. Report on the metrics that are most meaningful to your priority stakeholders and those that are in line with what your peers are reporting. It’s also important to use the same metrics and methodology year after year for consistency and credibility. What you ultimately choose to report on not only reflects your commitment to ESG principles, it demonstrates your dedication to improvement.
With climate change and other ESG issues increasingly material to strategic risk and opportunity, businesses will face continued pressure to address their social and environmental impact on the world. While specific regulations on disclosures are still taking shape, some mandatory reporting of ESG is all but inevitable. Now is the time to benchmark where you are on ESG matters and prioritize your response.
For more on ESG, download our e-book, Taking a Stand on ESG, and learn more about Riskonnect’s Integrated Risk Management solutions.
