Navex Global VP Karen Alonardo has worked in the ESG space for decades. She has a simple message for companies just beginning to report: Start small and focus on what matters.
Environmental, social and governance (ESG) is finally in the spotlight with the recent increase in investor interest. According to the 2020 biennial “Report on U.S. Sustainable and Impact Investing Trends,” from the US SIF: The Forum for Sustainable and Responsible Investment, ESG investments now account for one-third of total U.S. assets under management, and sustainable investing has increased 42 percent since 2018.
Now that momentum is increasing, regulatory bodies are likely to begin requiring businesses to report on their ESG efforts, and stakeholders of all kinds are already demanding companies prioritize ESG initiatives. To prepare, corporations must determine a way to track, manage and report on their investments in ESG and to prove that their efforts are both rooted in truth and being acted upon.
NAVEX Global’s recent ESG survey revealed that 88 percent of publicly traded companies in the U.S., the U.K., France and Germany have ESG initiatives already in place, further demonstrating that ESG is here to stay. To be successful, corporations need to understand how ESG fits into their broader enterprise risk management and compliance strategy, considering the following three key priorities.
ESG Efforts Cannot Be Siloed
ESG goals should align with overarching business goals to ensure long-term success. ESG is not an annual “check-the-box” task. It should be an ongoing part of daily business operations. Businesses must:
- Make sure the ESG efforts they are investing in support their mission. This will help align business initiatives and streamline efforts. For example, if the business is focused on broadening ESG initiatives, The U.N.’s Sustainability Development Goals or the World Economic Forum are a good place to start for direction.
- Ensure every single team member across every department integrates those initiatives into their day-to-day roles and confirm ESG efforts are regularly incorporated into activity throughout the entire organization.
- Clearly communicate to every team to ensure consistent, cohesive execution of ESG efforts. That way, each team member will have clarity and contribute toward the company’s ESG goals.
Transparency and Auditability Are Key
Business leaders should develop a strategy for tracking and transparently reporting on ESG factors and determine steps to continuously improve — just like they do with their ethics and compliance programs. While the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) provide a baseline for what we can expect when it comes to ESG regulations, there are no set compliance standards yet, so companies may have a difficult time deciding which metrics to report on. To begin, organizations should determine and communicate extremely transparent and clear goals to maintain trust both within the organization and externally.
Leaders will also need to make decisions about what their reporting programs will look like, who will ultimately be responsible for them and how they will be incorporated into existing sustainability reporting as part of a broader compliance program.
To set themselves up for success, leaders should first determine answers to key questions about their organization’s ESG program. For example:
- Where does ESG live within the organization?
- Who owns the ESG data? Will we set up an ESG committee or a single point of contact?
- Where does that data live?
- Which data can be disclosed? Can all of the data be disclosed?
Measure the Factors That Are Material to Your Business
Understanding their financial and nonfinancial risks may help businesses set goals that are more meaningful, actionable and easier to measure. Anchoring ESG programs to the goal of addressing these risks also reduces exposure to claims of “greenwashing.” As a business builds an ESG strategy around components that directly impact their performance, they may be less likely – and less able – to stretch the truth around initiatives that are ultimately misleading.
Instead, focus on immediately achievable and measurable goals that can be reported on regularly, such as greenhouse gas emissions, pay equality and board diversity. Finally, when determining performance metrics, stakeholders’ opinions must be considered. For example, if stakeholders are particularly interested in social metrics – such as progress against DEI initiatives or actions taken to address current geopolitical situations – businesses should set goals and establish a framework that incorporates those metrics.
Determining where ESG can be integrated into your company’s risk management program is a step in the right direction. Compliance professionals and sustainability professionals need to come together to collaborate and prepare businesses for the ESG compliance requirements undoubtedly forthcoming. With increased regulations and standards on the horizon and a new EU regulation already here, there is mounting pressure on organizations to implement and report on ESG efforts. Businesses that proactively prepare will set themselves up for success.