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ESG — environmental, social and governance — was a hot topic in 2021, and it’s only picking up steam in 2022. If you’re not paying attention yet, it’s time to start. Companies interested in making ESG a priority will have to do more than talk a good game. With ESG, the proof is in the reporting. By sharing their ESG goals and the tangible data-driven progress they’re making to reach them, organizations show their ability to manage those risks and remain profitable.
Take BlackRock chairperson Larry Fink’s letter to CEOs to start 2022. Not only does he point out sustainable investments have reached $4 trillion, but also that BlackRock is asking companies that are part of the investment giant to set short, medium and long-term targets for greenhouse gas reductions. BlackRock-funded companies, too, are expected to issue reports aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Why require these details? Fink couldn’t be more clear: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
ESG as a measure of a company’s adaptability
Fink sees those ESG reporting details as essential tools to understand a company’s ability to adapt to the future. Amid these changes, he cites a growing interest in the corporate governance of public companies among shareholders. Put plainly, he says companies will either demonstrate their progress toward ESG goals or be left behind.
Investment firms aren’t alone in demanding that organizations get on board with ESG. About 83% of consumers think companies should be actively shaping 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 businesses that care about the same things they do. Consumers and employees are paying more attention to company values — and how those values come out — as they make decisions about purchases and employment.
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 outcomes. Reporting is the essential component of that accountability, which requires tangible support. Without meaningful reporting, it’s difficult to show your stakeholders you’re serious about ESG initiatives. Monitoring the ESG criteria most relevant to your company 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, gather data, measure progress and mitigate risks, all while offering interconnectivity across risk functions to streamline risk management for your whole organization.
What is ESG?
Environmental. This trait includes climate issues, such as pollution, water efficiency and carbon emissions. It has received significant attention in recent years, as countries worldwide pledged to reach net-zero emissions by 2050 (others pledged to achieve that goal by 2060). Industries vary in how they interact with environmental issues, but these concerns affect every organization.
Social. This trait encompasses issues related to diversity, equity and inclusion (DEI), discriminatory labor practices, harassment, work safety and development, and data security and privacy. Investors and consumers don’t easily forget problems in these areas, making it hard for businesses’ reputations to recover.
Governance. This trait deals with how business is conducted and includes corruption, financial reporting, security breaches and fraud. These issues look very similar across industries, and like the social trait, a misstep in this category stays with a company for a long time.
All of these speak to a broader principle of ESG, the concept of double materiality. Outward risk is concerned with the ways an organization’s actions (water use or labor practices, for example) affect the world, while inward risk refers to the way world events (floods or wildfires, for instance) affect an organization. That double materiality drives the need and value of ESG reporting.
How does ESG reporting work?
There’s still no set standard for ESG in the U.S., presenting a challenge for risk managers. But one thing’s clear: You can’t do ESG without GRC.
Various frameworks for ESG reporting (GRI, SASB, SDG, TCFD, UNGC) offer guidance about what should 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 ESG’s focus is on reporting and communicating, GRC software facilitates the process of collecting data, providing assessments, identifying ESG-related risks, and feeding into that ESG reporting.
Reporting is the pivotal step that makes your ESG strategy real. It’s one thing to announce initiatives and goals, but those goals must be met with action. Ongoing reporting empowers a company’s leadership to show their board and investors results and progress, ultimately reflecting on the bottom line. Companies that want to show how they’re faring in ESG need a place to start. Holistic GRC software your company is already using 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 first must decide what to measure.
Use ESG frameworks to identify metrics
Publicly-traded companies should visit the CSRHub, which provides ESG information through both a perceived ESG rating and a breakdown of criteria influencing that score. From there, familiarize yourself with the ESG frameworks that best suit your business.
What do ESG frameworks provide? A shared language for all stakeholders that ensures reporting can be verified, understood and compared. Efforts are in the works to establish global reporting standards through the International Sustainability Standards Board (ISSB), announced in late 2021, but that board is not yet operational. As organizations make progress in their ESG reporting journey, they’ll likely use more than one framework to customize reporting according to stakeholders’ needs and expectations.
ESG frameworks differ in purpose, audience and likely users. The Sustainability Accounting Standards Board (SASB), for example, provides industry-specific standards across 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 can affect a company’s financial condition, operating performance or market valuation. Thus, companies use SASB to determine which ESG factors should be monitored and reported to investors. Business leaders can search SASB standards by industry or name (for publicly traded companies) to get a breakdown of disclosure topics to start the reporting process.
After you identify which SASB standards matter most to your organization, the Global Reporting Initiative (GRI) framework can provide insight into measuring and reporting on those standards, including specific quantitative data to disclose as part of reporting. GRI is the most widely used ESG framework, and the organization partnered with SASB to publish a guide to using the frameworks together.
Establish targets and dig into your data
Treat ESG like an internal audit or regulatory compliance: Be ready to produce evidence. While GRI provides guidelines for how to measure and report information in categories laid out by the SASB framework, you’ll need access to your data — and an effort from your whole team — to transform those recommendations into reporting that reflects the state of your organization.
Within the GRC software you’re already using, look at the corporate strategy around ESG and strategic goals for the year. Identify initiatives already underway that tie into the standards outlined in your preferred ESG frameworks. What kinds of policies do you already have in place? How are you enforcing those policies? How are you following up with initiatives you have in place? What are you already measuring? These are the questions you need to ask as you gather your data.
Remember that ESG is about your extended enterprise. It reaches all the way to your vendors and relationships that keep your business running. The actions of your supply chain vendors can impact your organization’s ESG standing. So you need to know where they stand. For example, if you source materials from a company that creates high water pollution levels, you’ll need to consider how to mitigate that.
Finally, establish your targets in each area using guidance from ESG frameworks, public CSR data and ESG reports from competitors. That data can serve as benchmarks as you assess ESG goals and practices. Companies that provide compliance software are working to offer 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 disconnect between what your organization says you care about and what you actually do. But it’s not just that. The financial impact is real, with companies making investment decisions based on companies’ ESG impact. Regulators, too, are focusing on ESG guidelines. Prospective employees and consumers are on that list, as well. They’re looking to see if a company acts on the values it professes before they commit to working for an organization or spending money there.
With plenty to gain and too much to lose, the time to get serious about ESG reporting is now.
Matt Kunkel is CEO of LogicGate.
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