As a measure of corporate integrity, ESG is being taken extremely seriously by Board level management, who recognise that driving business strategy in conjunction with ESG is now key to success. Indeed, there are reports that link good ESG performance with above average financial performance.
While annual reporting is important, it is merely the summary of a lot of hard work and ESG management processes that happen in the background. Research shows us that those organisations that go beyond simply viewing ESG as a box-ticking exercise to stay on the right side of the regulators are gaining significantly. Adopting ESG practices and making it part of company culture typically results in a more effective business that is, consequently, more profitable.
ESG is a broad subject that impacts organisations and their stakeholders in every area of operations. Organisations need to build an in-depth understanding of how they impact the world around them and provide regular assurance to investors and all stakeholders that they are managing ESG topics effectively.
The recent RiskLogix webinar, which was run in conjunction with Chartis Research, discussed getting started with ESG, giving practical advice and guidance. With an agile approach to ESG businesses can start with manageable objectives and grow and evolve ESG goals over time.
Regulations and Reporting
This first in a series of three webinars on the topic discussed the myriad of different ESG regulations. Despite being several years away from a single set of standards for ESG reporting, there is much to consider and regulation in this area is likely to grow exponentially in the coming years. In the UK the Financial Conduct Authority has published its guiding principles on design, delivery and disclosure of ESG and sustainable investment funds; in the EU there is the Sustainable Finance Disclosure Regulation (SFDR); and in the US, while ESG reporting is still voluntary, the Securities and Exchange Commission has announced a new enforcement taskforce focused on climate and ESG issues to identify ESG-related misconduct.
This means that organisations need to decide which regulations are right for their stakeholders. Currently, the two major world bodies are the GSSB (Global Sustainability Standards Board) and SASB (Sustainability Accounting Standards Board). GSSB has issued GRI (Global Reporting Initiative) Standards.
Broadly speaking there are three levels of reporting that impact ESG.
- Sustainability Reporting – which is a broader set of reporting standards than those from the SASB. Here, impact materiality captures the significant impacts an organisation has on the economy, environment, and people that are not captured by enterprise value.
- SASB Standards Reporting – which covers financial materiality in the context of sustainability information representing the sustainability factors that are material to short, medium, and long-term enterprise value.
- Financial Reporting – which captures the information already reflected in the financial accounts, which includes assumptions and cashflow projections.
In short, ESG is much wider than just the firm. It covers the impact on the firm, by the firm, or by the firm’s supply chain. This means that third party and supplier management is now vital. In addition, ESG has an influence on the assessments and decisions of stakeholders. This means that stakeholders can include investors, shareholders, largest suppliers/buyers, employees as well as regulators, trade unions, NGOs, and the general public. Therefore, when deciding on the level of reporting appropriate, the organisation must consider who it sees itself accountable to.
Having discussed the levels of regulation and reporting in detail, the webinar moves on to some practical advice on what to do next, including the 10 key steps to managing ESG.
How to Manage ESG – 10 key steps
- Identify the firm’s ESG objective
- Identify ESG topics from the ESG objective
- Assess impact by and on the firm and influence on stakeholders of each ESG topic (i.e. identify material topics from Step 2 list)
- Assess threat and mitigation of each ESG material topic
- Identify key ESG metrics and set escalation levels
- Capture and analyse ESG incidents
- Set ESG Appetite (considering both firm and stakeholders)
- Stress material topics to identify possible ESG weaknesses
- Use Monte Carlo analysis to identify further ESG weaknesses
- Create ESG Reports
For more information, watch the on-demand webinar here: https://risklogix-solutions.com/webinars/on-demand-webinar-proving-corporate-integrity-with-esg
And download the white paper Proving Corporate Integrity with ESG – A Practical Guide here: https://risklogix-solutions.com/whitepapers/providing-corporate-integrity-esg