What should companies focus on today?
The biggest challenges our customers face surrounding ESG is developing a strategic execution plan. They’re often overwhelmed deciding where to begin.
The examples set by Exxon, Pepsi and Nike teach us that your stakeholders are everything. When our clients express frustration with their consultants’ advice for ESG being “it depends,” we provide a more narrow, action-oriented first step: “It all starts with your stakeholders.” People who skip over this step often miss the mark on execution, or inaccurately assume that ESG is either all about the environment, all about social justice or all about corporate governance. At the end of the day, it’s all about what your stakeholders care most about.
Start by asking yourself the following 3 questions:
- Who are my stakeholders?
- What industry am I in?
- What is my relationship with my stakeholders within that industry?
Let’s say you’re a cancer research institute. You need to be looking at donors as your lifeline; what do they believe? It’s not all about cancer, per se – it’s about connecting to your donors’ interests, and then taking those interests and saying “What are the ESG aspects of cancer research that are going to be favorable to my constituency?” It’s also about asking “What can I do that has a dollar return?” (donors want to see measurable outcomes on the cancer treatment innovations they’re backing). From there, consider the environmental, social and governance impacts on your research initiatives.
But what if you’re a bank? You have investors and investments to worry about. Start again by analyzing your stakeholder interests. Then, take a look at what you’re already doing to satisfy those interests. Consider the location of your branches; are they in underserved communities? What’s in your lending portfolio? Are you tracking information about your usage of funds? Have you invested or made loans in sustainable projects like solar energy, or shown support for particular social justice initiatives? Many businesses’ material contributions and investor success stories are related to various ESG vectors, they just haven’t captured the information that proves it. Save critical time and resources by assessing what you’re already doing that’s in alignment with your stakeholder interests, and then fill in the gaps where needed.
ESG Regulations: Today & Beyond
While world peace has always been something that we as humans strive towards, human rights and social justice initiatives have never had a larger platform and a greater worldwide impact as they do today.
I spoke earlier about how the pandemic has acted like a flare; it’s highlighted new risks and opportunities all around us. This perspective shift, together with the new administration, are a recipe for an outpouring of new regulations surrounding ESG.
It’s already begun; ESG is now a financial mandate. In March of this year, the SEC provided an enforcement warning to organizations that they needed to back up their ESG related disclosures with stronger evidence. Like SOX, the regulatory bodies are simply stating that a company must attest to the material accuracy of their ESG statements.
Now, because of the investor interest and financial implications that ESG is tied to, making a disclosure about ESG that is inaccurate, whether it’s exaggerating your ESG strengths or underplaying your ESG weaknesses, is equivalent to making a financial misstatement about how much cash you have in the bank or the value of your assets.
And it also doesn’t matter if your misstatement comes down to fraud or negligence, or if it was made formally or informally. In any scenario, the SEC is enforcing penalties at the same level as SOX. Organizations both public and private must now disclose accurate information on their ESG capabilities.
Similarly to SOX, these enforcements have spread to trade and regulatory associations across the globe. People everywhere are speaking up and saying that if a company is saying they’re doing good, they want to know that they’re really doing it. And if they have a vulnerability, they want that company to be transparent about it and share how they’re addressing it. That’s why it’s more important than ever to have a standardized process for ESG that helps you defend against negligence and avoid reputational backlash from today’s highly critical consumer base.
Taking a Risk-Based Approach To ESG
Every company in every industry and geography has a unique set of circumstances that outline their ESG risks and opportunities. The oil and gas industry has very different ESG concerns than the consumer goods industry. A company with activities shareholders will present a very different risk profile for management than one that’s traditionally focused. So how can you ensure that you’re not incorrectly incorporating ESG best practices – and more importantly, not inaccurately stating your ESG status?
Through an Enterprise Risk Management approach, you’ll inherently incorporate ESG best practices and protect your organization from negligence and fraud. A mature ERM program not only promotes good governance, but it encourages a definitive process that produces reliable results in a predictable period of time.
Using a Risk-Based ESG Platform
Built on a fully integrated ERM platform, LogicManager’s ESG software solution package builds you a customizable, yet repeatable process for producing ESG disclosures in an industry-agnostic, methodical way. Through the risk-based process, you’ll assess gaps, perform ongoing monitoring and collect evidence for supporting your disclosures in an efficient manner. This provides peace of mind that your ESG disclosures are accurate, supportable and defensible. I encourage you to learn more about our software to discover everything that is included.
An effective ERM program is proven to not only back up disclosures with sufficient evidence to meet regulatory scrutiny, but it’s been proven to deliver a 25% greater market value premium to organizations that achieve high levels of ERM maturity. If you’re curious about your own organization’s risk maturity level, I’d recommend benchmarking your program against best practices through the Risk Maturity Model (RMM). The RMM measures your risks, opportunities and regulatory readiness: 3 vectors that can be directly linked to your ESG status. It also provides peer-reviewed evidence of your ESG status for your boards, regulators, committees, investors and consumers. Start your free, 30-minute RMM assessment now by clicking here.
After all is said and done, people want assurance. They want to trust the companies they’re giving their hard-earned money to and they want those companies to share their values. While consumer demand for companies to “do good” is no novel concept, the level to which investors, the government and other regulating bodies are holding companies accountable is unprecedented. It is all about the See-Through Economy, and this warrants a risk-based approach to ESG.
To learn how LogicManager can help your organization improve your ESG status, schedule a demo with one of our risk experts today.