ESG risks and challenges
From President Biden’s newly proposed infrastructure plan to the European Union’s legislative initiative on ESG-related disclosures, it’s becoming clear that society is headed towards a future built upon sustainability and moral stewardship. Prioritizing ESG management and compliance is gaining importance at both a national and global government level. This includes comprehensive monitoring of their environmental and social impact, reporting on and reducing emissions, becoming thought-leaders in the space, contributing to the creation of environmental regulations, and implementing holistic diversity, ethics, and inclusion training throughout all levels of the business.
Companies that don’t have a plan in place to address ESG concerns today will soon fall behind in both investor and consumer expectations tomorrow, resulting in a strong competitive disadvantage. The question that then follows is: “As a company, how do I ensure that I can create and lead an effective strategy to tackle the different ESG concerns from my stakeholders?” Let’s discuss a few of the challenges seen in the space, and what companies can do to address them with confidence.
Learn about ESG: ESG Imperatives 101 Infographic
ESG risk management
Part of standing up a holistic ESG solution is to understand the ESG Risks at play across your supply chain and internally in your organization. Environmental Risk Management covers a wide array of topics, ranging from climate change mitigation and adaption, to labor laws, diversity and inclusion issues, and health and safety conditions. Understanding ESG Risk Analysis and ESG Risk Examples are key in addressing this from the top-down, and bottom-up. ESG risk examples include:
- Climate Change
- Deforestation
- Water
- Waste
Challenge #1: Setting the tone at the top
It is becoming increasingly important to consumers that the companies they support align with their own ethical commitments. In order to make sure that your brand has the support that it needs, you need to support the same initiatives that your key audience members do, and that starts from the top of your enterprise.
As with most things in a business, the leadership team has an enormous influence on the direction of the company. Objectives tend to be set at the top and permeate throughout the company as everyone works to realize a grand vision. If ESG-related objectives don’t appear in one of the objectives, it can be difficult to gain buy-in throughout the company and truly make a difference.
Solution
Even if ESG isn’t top of mind for your leadership team, you can still make an impact by finding ways it can positively benefit the company. Whether it’s looking at how an ESG strategy can increase the bottom line or how the company can gain a competitive advantage, allowing the decision makers to see from these perspectives can be a compelling way to slowly gain that buy-in that eventually spreads throughout the company. It won’t happen overnight, but being consistent about it and directly showing the benefits will be a great first step.
Challenge #2: Following multiple ESG standards and frameworks
ESG standards and frameworks include:
- SASB: The Sustainability Accounting Standards Board (SASB) is a non-profit purposed in providing visibility into sustainability and accounting standards.
- WEF: The World Economic Forum (WEF) is an international NGO and an industry leader in all things sustainability, climate change, and ESG.
- GRI: The Global Reporting Initiative (GRI) publishes global best practices for impact reporting on ESG topics.
- TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) addresses financial risks attached to climate change.
These are just a small number of standards and frameworks that companies are recommended to follow with their ESG strategies. Not only are there multiple standards to look at, but there are quite a number of disclosures and metrics to report on from each. Altogether, these standards and frameworks can add up to almost 2,000 reporting provisions. That can be very overwhelming for someone responsible for creating and managing their company’s ESG strategies.
Solution
First, it’s important to know what truly matters within the company. Is the company concerned about reducing carbon emissions, or do they want to diversify the employee count? Whatever is prioritized, you can then begin to assess the different standards and frameworks with this in mind. As you identify overlaps across these standards and frameworks, you can create assessments to capture these disclosures that can then be reported upon.
Challenge #3: Identifying your ESG objectives and goals
Assuming you have the organizational buy-in and have been able to decide what disclosures matter to your company, you now have a foundation to build upon your ESG strategy. The next step in your journey would then be taking your findings and tying them to your goals and objectives. But how do you identify them? How can you manage them? What if other objectives need to be met that weren’t initially considered?
Solution
Once you’ve captured what matters internally, you can find common data points and group them into themes. These themes can act as the basis for the goals that determine the progress of your objectives. Think of your objectives as the north star of your ESG strategy and your goals as the mission that keeps you on the right path. As you identify more objectives, you can recalibrate your north star to make sure you work on what really matters.
Challenge #4: Managing your ESG metrics over time
So, you have your ESG foundation down and you’re keeping track of all your objectives and respective goals. That’s only half the battle. How do you measure ESG progress that you can show to your stakeholders? How can a stakeholder determine whether you’re working toward effectively meeting your objectives?
Solution
It is important to determine not only which metrics to track over time, but also how frequently you want to update them. Different companies operate in different industries and so certain metrics may matter more than others. Based on the industry you’re in, identify the metrics that need to be prioritized and then determine a frequency to update those metrics. Then repeat the process for less critical but still necessary metrics to have an up-to-date strategy as time passes. Doing this will clearly show your stakeholders the progress you’ve made.
Creating and managing a robust ESG strategy is certainly no easy feat. These challenges may seem daunting, but if addressed properly, will get you significantly closer to strengthening that fragile fabric of trust which your company can rely upon. Investors and consumers alike can gain the confidence today that you are taking their concerns seriously and plan to address them for a more prosperous tomorrow.
Learn about ESG: ESG Imperatives 101 Infographic
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