ESG is an increasingly important issue for investors, employees and customers
By Karen Alonardo, vice president of ESG Solutions at NAVEX Global
The Environmental, Social, and Governance (ESG) movement has gained considerable momentum in the wake of 2020, as the world has grown increasingly concerned with combating widespread issues like climate change and social injustice. Ten years ago, corporate social responsibility (CSR) issues, such as measuring carbon footprints, socially responsive company policies, or ethical supply chains, were largely championed by activist employees or customers. At the time, these were not business objectives for most organisations.
What a difference a decade has made, as social change, advances in technology, and the ability to prove ROI, has elevated ESG issues to the forefront of the business agenda.
ESG is not CSR
It is important to understand that there is a difference between CSR and ESG. CSR has been on the business radar for years and refers to ‘softer’, qualitative issues. However, as time has gone by, social issues have come into focus, and technology has advanced. In turn, it has become possible (and even desirable) to quantify a company’s use of natural resources, their ethical sourcing practices, their social composition and impact, as well as their commitment to good governance. This is where ESG comes into play. It
is a means of quantifiably measuring a company’s sustainability and societal impact, using metrics that matter to key stakeholders.
Yet, there is still some confusion in the industry around these terms. As a rule of thumb, CSR is about brand reputation, philanthropy, and providing accountability within your organisation, while ESG aims to collect and measure metrics relevant to your business risk exposure.
Examples of CSR include:
- community involvement or volunteering
- helping employees advance careers
- participating in fair trade agreements
- donating products or services
Examples of ESG include:
- greenhouse gas emissions and climate risk
- pay equity, diversity, and inclusion
- percentage of women or people of colour (POC) on the board
- ethical behaviour and anti-corruption
The Starting Point
As the board and investors are paying attention, more and more businesses are taking ESG and ESG reporting very seriously. In fact, recent research
has revealed that more than three-quarters of UK businesses upped their investment in ESG activities last year (67%). Issues relating to the environment firmly topped their priority list of ESG objectives (55%), with 60% planning a spending uplift in this area this year. However, it’s evident that more needs to be done. The research also revealed that whilst 82% of companies have ESG goals, fewer than half are performing well against individual ESG metrics.
However, for many businesses, the multitude of frameworks, varying guidelines, and uncertainty on how the E, the S and the G come together, can make it seem like a daunting task to get right but understanding what each of these means is an essential starting point.
The ESG acronym refers to a trio of business measures, typically used by environmentally and socially conscious investors, to identify and vet investments. And each measure adds value as can be seen below.
- Environmental benchmarks address the way an organisation responds to environmental issues, such as climate change and greenhouse gas (GHG) emissions, energy efficiency, renewable energy, green products and infrastructure, carbon footprint.
ESG Ratings Agencies
- MCSI ESG Ratings, published by Morgan Stanley Capital International, “is designed to measure a company’s resilience to long-term, industry material ESG risks”.
- S&P Global Ratings describes their ESG rating as a proprietary assessment of “a company’s ESG strategy and ability to prepare for potential future risks and opportunities. The ESG Evaluation is the ideal tool for investors in that it provides a forward looking, long term opinion of readiness for disruptive ESG risks and opportunities”.
- European Commission’s Taxonomy Regulation introduced an EU-wide taxonomy for ESG-related investments, creating “a work stream to support the European Green Deal channeling private investment to the transition to a climate-neutral economy”.
- Fitch Ratings shows relevant environmental, social, or governance risks that can impact credit quality.
Unlike ten years ago there are several popular ESG frameworks, which companies can measure themselves against. They include:
- SASB: The SASB framework is focused on ESG issues determined to be financially material. This includes sector-specific guidance on a broad range of ESG topics, covering issues such as greenhouse gas emissions, energy and water management, data security, and employee health and safety. It also provides sector-specific guidelines emphasising topics SASB believes are material for issuers in those.
- Certified B-Corp: Certified B-Corp companies are required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. B-Corp companies must adhere to transparency and accountability requirements.
- Global Reporting Initiative: The GRI covers topics like labour and human rights issues, biodiversity, energy use and reduction. It also assesses materiality based on impacts made by issuers on the economy, environment, and society.
- UN ‘17 Goals’ of Sustainable Development: Each of the U.N.’s 17 goals include targets and indicators. The goals are: No Poverty; Zero Hunger; Good Health and Well-being; Quality Education; Gender Equality; Clean Water and Sanitation; Affordable and Clean Energy; Decent Work
and Economic Growth; Industry, Innovation and Infrastructure; Reduced Inequality; Sustainable Cities and Communities; Responsible Consumption and Production; Climate Action; Life Below Water; Life on Land; Peace, Justice and Strong Institutions and Partnerships for the Goals.
- TCFD (Taskforce on Climate-Related Financial Disclosure): The Taskforce on Climate-related Financial Disclosures (TCFD) was recently developed by the Financial Stability Board to improve and increase reporting of climate-related financial information. The UK has announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023.
- Climate Disclosure Project: The CDP’s ESG framework is 20 years old. It provides a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. The CDP says they are “the gold standard of environmental reporting with the richest and most comprehensive dataset on corporate and city action”.
The above ESG frameworks, among others, have different areas of focus. That means challenges can arise when stakeholders follow different ESG frameworks. This is exactly where ESG software can help, by enabling organisations to manage internal ESG initiatives alongside external activities and reporting.
To simplify ESG adoption, technology is now making the launch of ESG programs and the tracking progress much easier than it was in the past.
With technology, ESG insights can be viewed through the lens of analytics, data automation and aligning with industry standards and frameworks to measure performance and risk of a business and its supply chain partners. ESG software can, for example, help to:
- Collect sustainability data from across the enterprise and manage multiple ESG frameworks – collecting sustainability data from across the organisation and its suppliers, allows businesses to instantly map ESG performance indicators to GRI, SASB, UN SDGs, CDP, Certified B Corporation, or other frameworks, to show progress and discover new sustainability opportunities.
- Convert resource usage to determine your carbon footprint – importing environmental resource usage from around the world helps to understand specific emissions, generation, resource mix, and other attributes related to managing the carbon footprint and emission estimates.
- Respond quickly to internal and third-party requests – creating and managing assignments related to third-party requests for greenhouse gas and ESG information allows the company to provide an auditable, single source of truth for sustainability initiatives.
- Manage workflow automation for ESG reporting frameworks – software can help with managing users, stakeholders, and their assignments to ensure timely data collection, follow-ups, questionnaires, and other sustainability initiatives.
Whether the business’s goal is values-based business development, or making the world a better place, the visibility provided by ESG reporting tools can help boards better position their organisation.
Utilising software to aggregate investor-ready data and address metrics that stakeholders and decision-makers care about, allows them to build a best-practice programme and put the organisation on a path for sustainable future growth.