As investors increasingly focus on ESG performance, many businesses are still struggling to accurately report their ESG risks. Michael Dae, Head of Sustainability and Compliance at IsoMetrix, explains how an integrated risk management approach can ease the ESG reporting burden.
How companies manage their environmental, social and governance (ESG) risks is a question we’re increasingly hearing — especially from investors. Measuring ESG risks is becoming increasingly complicated as companies grapple with multiple reporting frameworks and inconsistencies across each regulation.
In 2020, we’ve seen the landscape shift in unexpected new ways, adding to the already stiff challenge for businesses. As companies continue to struggle with the basics of transparently and accurately reporting their ESG performance, taking an integrated risk management approach can help companies overcome the reporting burden.
Currently, there are over 1,000 ESG indexes, which are transparent tools investors use to benchmark a company’s ESG performance. Depending on a business’ stakeholders and investors, they can be held to any number of these indexes, prompting many to comply with multiple ESG regulations.
Not being able to establish equivalencies across multiple frameworks compounds the burden of reporting and often drives companies to create their own processes. However, many lack the proper risk management infrastructure, and a business’s manual reporting processes make it difficult to align its array of risks with each regulation. This inefficiency adds a significant time and financial burden and often leads to inaccurate reports, damaging a business’s investment funding opportunities.
ESG reporting isn’t a task for complex spreadsheets. The key to accurately and transparently tracking ESG risks lies in an integrated approach to risk management. Through a centralized, integrated software solution that can track a variety of regulations, companies can minimize the reporting burden.
Even the most committed organizations find it extremely challenging to keep up with the rapidly evolving ESG landscape. To create an effective ESG management system, companies should first look closer at specific ways the landscape shifted in 2020.
The Pandemic’s Impact on the ESG Landscape
Historically, ESG regulations focused on the environment. With little tie to a company’s financial performance, many investors didn’t see how ESG regulations pointed to a viable business model – until now. While conversations around ESG regulations were a focus before the pandemic, COVID-19 emphasized how financial opportunities align with more than just profit.
The scale of COVID-19’s impact on social and governance factors has shifted ESG risks into a prominent role alongside traditional financial metrics.
At the beginning of the COVID-19 crisis, businesses were forced to address the immediate repercussions of the virus, specifically revenue loss and the health and safety of its employees. As we move into the next phase of COVID-19 response, companies are presented with an opportunity to develop a wider risk management approach to ensure they’re tracking all the ESG risks that could impact their bottom line.
Prior to COVID-19, when a business determined an ESG-related risk, it only took firm action to mitigate risks that had short-term business impact. Now, companies have seen how quickly those risks can become a reality. For example, social factors, such as employee health and safety, now drive businesses’ financial and workplace decisions. Despite having economic investments in rental spaces, companies have transitioned to remote work to minimize the chances of spreading the virus.
While social factors may seem to be top of mind, the pandemic has also heightened investors’ focus on governance practices. How a leadership team identifies and manages potentially significant risks to business operations now holds more weight to investors. As the front line deals with unpredicted risks, the leadership team is responsible for guiding the business through unexpected situations.
This goes far beyond how they deal with a health crisis and examines businesses’ community and environmental impacts. The array of factors investors track creates an increasingly complex set of pressures on the leadership team and the board of directors to align their governance plans with the requirements of various stakeholder groups. This pressure further complicates their decisions around which governance practices should be the foundation of its long-term business strategy.
These shifts in thinking have unveiled the importance of companies’ ESG performance, creating an understanding between organizations and their stakeholders that ESG risks need to be the center of the company’s risk management approach. As a result, stakeholders are now looking to invest only in companies that have a strong ESG performance. In fact, in the first four months of 2020, investments in ESG funds more than doubled compared to the same period last year.
A company’s ESG performance could now mean the difference between staying open during these unprecedented times and closing forever. Meanwhile, accurate disclosure of so many disparate elements — all in flux — is extremely complicated.
Overcoming the ESG reporting burden starts with the entire risk management ecosystem.
The Siloed Nature of ESG Management
Companies today manage an array of specific ESG risks depending on their industry — unfortunately, still with a siloed approach. Due to the lack of specific ESG data that exists, companies are stuck tracking a myriad of unlikely risk factors across different business units.
With different departments tracking the full gamut of risks, a holistic view is almost impossible without an integrated platform. Fragmented risk management causes managers to miss interconnected risks, or “golden threads,” the links between companies’ processes, risks, controls and events. Not having an understanding of these “golden threads,” companies are more likely to miss the key factors that impact its performance.
After identifying the “golden threads,” it’s important to integrate them into the company’s key performance indicators. Without a holistic view, inaccurate and disjointed reporting can weaken stakeholder relationships and mask investment opportunities.
Creating a Centralized Platform to Manage ESG Risks
COVID-19 has brought societal and governance issues to the forefront, putting a spotlight on new risks. For businesses to manage these risks, it’s important that they leverage the power of integrated risk management to reduce the inefficiencies of their current ESG reporting processes.
The problem is that many of the emerging solutions don’t help manage the broader risk ecosystem. With sustainability managers spending the majority of their time conducting audits, assurance and compiling multiple reports, a simple reporting error due to an overlooked risk could add hours or days of extra work.
Integrating a centralized management system gives sustainability managers a true understanding of their ESG performance through a holistic view of risk data. Through personalized dashboards that point to a company’s overall ESG impact, managers can eliminate the time-consuming task of collecting and aligning data with each regulation.
Linking datasets provides a deeper understanding of a company’s own “golden threads.” A complete and transparent view helps them better understand how to align each risk with each ESG regulation and, as a result, better communicate its performance with investors, stakeholders and regulatory bodies.
Transforming the ESG Reporting Process Once and for All
With the rapid adoption of new ESG regulations, 2020 has further pushed companies toward a more holistic risk management approach. An understanding of your ESG performance is no longer a nice-to-have; it’s the difference between protecting your license to operate, maintaining positive stakeholder relationships and realizing investment successes or shutting down forever.
Companies should not wait for regulatory bodies to create a global standard before mastering their own ESG reporting process.
The answer is already here: integrated risk management that is fair, efficient and transparent. Software makes all the difference. Luckily, getting started isn’t hard; companies can hand key metrics to an integrated risk management platform that does all the heavy lifting. Tracking indicators against each regulation immediately raises standards and builds trust.
The pressure to transparently disclose ESG practices isn’t going away. By rethinking how they look at ESG regulations and finding holistic connections with key performance indicators, companies can eliminate the risk of ESG reporting altogether.