Environmental, social and governance issues are wide in their scope and important to address. So, how should firms begin to tackle them?
Sustainability is one of the biggest challenges of our time, and one of the greatest opportunities. Solving the world’s environmental and social challenges will take collective action on a scale never seen before; but working towards solutions could lead to a positive shift in the way we live, work, and do business.
Environmental, social and governance (ESG) issues are increasingly becoming front of mind in boardrooms. In recent years, they have become a key topic of conversation among executives and their colleagues; investors, customers, regulators and the media are also asking more questions and looking for businesses to play their part.
But sustainability issues are wide-ranging, and firms are only just beginning to tackle them. At a recent Protiviti webinar on ESG, 56 per cent of firms indicated they had “just got started” on the ESG agenda, with 14 per cent revealing it’s “not on our agenda yet.” Thirty per cent said they have made “important progress.”
Carbon emissions are commonly discussed, often the first thing that firms choose to address. Though crucial, they are one part of a much bigger picture. The environmental aspects of ESG do incorporate greenhouse gas emissions and their effect on climate change, but they also consider natural resources, pollution and waste, energy consumption, the circular economy, and biodiversity.
The social lens is equally comprehensive, looking at human rights, supply chains, data privacy, product responsibility and the workforce, alongside diversity, equity and inclusion. Governance refers to business ethics and leadership, risk and internal controls, board and management structures, transparency and reporting, and anti-corruption. Taken all together, it’s a long list of aspects to consider, not to forget the interconnections of issues.
In addition, companies need to think in two directions: the impact of the issues on the company and its financial performance, and the impact of the company itself on these issues.
Helping firms to understand these sustainability issues and take their first steps remains important; so, here are six elements to consider:
Firms should start by developing a sustainability strategy, one that sets goals and direction. Articulating a strategy will develop an understanding of what ESG means for the firm, how it relates to the wider business, and the laws and regulations to be considered. A roadmap will then bring the strategy to life and help to monitor its progress.
ESG is a journey presenting risks and opportunities, and there are no “out of the box” solutions; so, the process of developing a strategy will help define plans and goals. It will also help to embed sustainability at the core of the firm and at the same time anticipate its impact on the firm’s operations: a recipe to both increase competitive advantage and ensure future viability.
Key questions: Do firms understand how ESG relates to their business? Have they clarified what ESG means for them?
Already when defining the strategy, the perspectives of the stakeholders are taken into account. Once the strategy has been defined, it will open the door to communicate with the stakeholder groups. These groups, which include employees, clients, suppliers and regulators, among others, have an important role in shaping and influencing the firm. But each of them will need different types and amounts of information and require adequate ways of interaction.
The level of engagement will depend on the stakeholders’ interest and influence. This isn’t about delivering everything to everyone; it’s about understanding how each stakeholder uses the information and which ones have the most influence or impact. Stakeholders can be analysed on this basis and then placed into four communications strategies – inform, consult, involve, collaborate – which vary in their intensity and depth.
“Inform” can provide insights into ongoing ESG activities through a website, for example, while “consult” can gather feedback through surveys, acknowledging concerns; “involve” means actually working directly with stakeholders and adjusting aspirations; and “collaborate” will integrate the advice and recommendations of key stakeholders – such as employees – into decision making.
Key questions: Do firms know who their key stakeholders are? Do they know which of them are most relevant to the ESG journey and how to interact with them?
To manage and steer ESG activities strategically, data is crucial. The data needed to understand ESG issues won’t be sitting in a central database; it will be scattered in systems, inside and outside the firm. This means that ensuring the data’s quality and the quality of its source will be important to develop good reporting and an audit trail. Workflow tooling can help to gather manual data and gain control of data processing; other tools like robotic process automation, APIs and data marts can also help to source data from different places and make it available for analysis and reporting.
Key questions: Do firms know what ESG aspects they need to monitor and what KPIs they need to set up according to their sustainability scope? Have they identified the required internal and external data sources supported by appropriate technology?
The link between operations and sustainability traditionally centred on the environment first: energy and wastewater management, for example. But the link has become more complex. Customers are demanding higher standards for product quality, speed of delivery and environmental responsibility, and they are also focussing on social impact in supply chains. This has shined a spotlight on human rights.
In the UK, the Modern Slavery Act has been in place since 2015; more recently, France has moved to implement similar legislation with the Loi de vigilance, and Germany has confirmed the 2021 Supply Chain Act. The European Union has drafted a corporate sustainability due diligence directive (CSDD). Firms are expected to respect human rights and remedy human rights violations. To do that, four core elements are essential: identifying and assessing actual and potential impacts; integrating their findings into company processes; tracking the effectiveness of any measures; and communicating how these impacts are being addressed.
Key questions: Do firms understand the duty to respect human rights? Do they know how to conduct a human rights due diligence and where the risks are in the value chain, including the supply chain?
Performance and Reporting
Companies with a foundation of strong financial reporting can build on this for ESG. They understand the link between performance and reporting. The challenge is to transfer this understanding and the professional approach used for financial reporting to ESG, to use it to manage ESG issues better and meet the growing expectations of customers, investors and regulators. To date, most of the reporting on ESG has been voluntary, but it will become compulsory soon.
In the U.S., the Securities and Exchange Commission has proposed new rules to enhance climate risk disclosures for investors, and in Europe, the Corporate Sustainability Reporting Directive has been provisionally agreed to by the European Council and European Parliament. Firms are already reporting using frameworks, including the Global Reporting Initiative and the Task Force for Climate-Related Financial Disclosures, and using the UN Sustainable Development Goals to help structure their ESG reporting.
Key questions: Are firms aware of and prepared for current and future reporting requirements? Have they established robust sustainability reporting structures, including controls?
Governance, Risk and Compliance
Governance, risk and compliance is very important on the ESG journey and firms have approached this challenge in different ways: Some have appointed a chief sustainability officer, while others have given that responsibility to their chief risk officer or the chief financial officer. Some have set up ESG steering groups. The key is to make sure the right structure is in place to embed ESG into the strategic decision making, in processes and policies of corporate governance, the risk framework, and the firm’s response to the fast-moving regulatory environment.
Key questions: Do firms have clearly defined responsibilities for ESG governance? Have they established a specific ESG risk assessment?
Firms are still developing their approach to ESG, spurred by regulators, customers, employees and investors. In the months and years ahead, these issues will play an increasing role in their performance, risk management, and compliance activities. And while ESG covers a wide range of issues and can be overwhelming, it is important to take the first steps and learn on the journey. This will help firms to look at the impact of environmental and social issues on the firm itself while also helping them to unlock the opportunities these issues present and position sustainability as a way of building the firm’s future.
To learn more, watch our webinar, “How to Start Your Journey to Sustainability/ESG,” available on demand here. For more information on how Protiviti can help firms on their ESG journey, visit https://www.protiviti.com/us-en/esg-strategy-and-planning. For country-specific information visit the following pages: Germany, UK, Netherlands, Switzerland, Italy.