“ESG” is a term that’s been making headlines over the past year in the midst of today’s rapidly evolving federal and state requirements and our continuously disruptive environment.
So what exactly is ESG, what does your organization need to do to be compliant with ESG best practices, and how can you close gaps in your program to become more aligned with ESG? Find out by reading this comprehensive ‘what is ESG?’ guide.
What Is ESG? Definition & Meaning
When defining ESG, it’s important to first understand what ESG stands for. ESG stands for Environmental, Social and Governance: three areas that house distinct sets of criteria, but together make up a set of criteria that demonstrates an organization’s dedication to helping the greater good.
Let’s take a look at each of the 3 ESG considerations and dive into what exactly they entail:
- Environmental criteria evaluate how strongly a business acts as a steward of the environment. It focuses mainly on environmental risks, energy sourcing strategies, pollution contribution, water and waste management, deforestation involvement, gas emissions and overarching climate change initiatives.
- Social criteria examine diversity, equity and inclusion, labor management, data privacy and security and community relations.
- Governance criteria deals with a company’s leadership, executive pay, audits, internal controls, board governance, financial performance, business ethics, intellectual property protection and shareholder rights.
Bonus Material: ESG Checklist
Why is ESG compliance important?
Today more than ever before, organizations everywhere are facing pressure from the See-Through Economy to conduct their businesses in an ethical and responsible manner. The See-Through Economy is a term that LogicManager uses (coined by our CEO Steven Minsky) that explains the trend in fast-paced transparency today, where consumers and investors alike are empowered to directly impact a company’s reputation – and ultimately, their bottom line.
With technology providing more transparency than ever before, companies have nowhere to hide, meaning that it’s harder than ever before to get away with failing to meet consumer expectations. And with more and more consumers holding the companies they support responsible for being environmentally, socially and fiscally responsible, federal regulators and investors are following suit and prioritizing ESG factors and regulations.
There are a myriad of emerging federal regulations that are currently in play and on the horizon that will determine the manner in which your organization should justify its ESG status and sustain their disclosures from the SEC’s scrutiny on misstatements. However, many people are struggling to find a way to achieve ESG compliance in a meaningful way – that is, going beyond saying “we recycle” or making other vague statements.
SEC Chairman Gary Gensler, former Chairman of the Commodity Futures Trading Commission (CFTC) under the Obama administration, is expected to usher in an era of increased SEC enforcement and regulation. Companies should expect this regulation under Gensler to be swift and robust, focusing in particular on industry-shaping enforcement actions and rulemaking related to financial technologies and ESG disclosures.
Still not convinced that ESG is important?
According to a recent Harvard Law report, companies that have evidence supporting their ESG initiatives are now seen to be “ahead of the pack, and in prime position to utilize their reputations to garner greater mainstream buy-in towards sustainable business practice. As such, 2021 offers responsible investors an opportunity to truly live up to their potential, aiding in the delivery of a socially and environmentally sustainable global recovery.”
As a risk professional, if ESG factors sustainability are not something you’re already prioritizing at your organization, we hope to put it on your radar today.
Related Post: Building An ESG Bowtie
ESG Investing & Socially Responsible Investing
One of the main reasons ESG is getting more attention than ever across industries everywhere is that investors are now considering socially responsible investing a key deciding factor when determining whether or not to support a business. Not only do they want to fill their portfolio with reputable, responsible companies, but ESG compliance also has strong positive impacts on business performance, strengthening ESG investing ROI. In fact, according to the SEC, maximizing the bottom line and pursuing the interest of the public are complementary efforts, which would be why sustainable investing is one of the key investment strategies that ESG investors are considering nowadays.
Take for example Warby Parker: through their Buy-A-Pair, Give-A-Pair program, they make monthly donations to various nonprofits that bring prescription eyewear to people in developing countries. When the pandemic began, they pivoted and began contributing to PPE for healthcare workers and communities in need. According to their cofounder, Jeff Raider, being socially conscious is woven into the core of their business plan. They describe themselves as “a transformative lifestyle brand that offers designer eyewear at a revolutionary price while leading the way for socially conscious businesses” (Business Insider).
Today, Raider serves on the board of directors for Warby Parker. Raider believes the #1 question any business plan should answer for ESG investing is “What is your fundamental reason for being?” Knowing that being socially responsible is core to Warby Parker’s being, it’s no surprise that they have consistently been able to rake in ESG investor funds since their foundation; in 10 years, they raised $290 million from ESG investors. Most recently, just 3 months after launching their COVID-19 aid program, they nearly doubled that amount by closing a $245 million funding round. This shows that sustainable investing across a range of ESG criteria helps ESG investors to feel comfortable in the company that they are investing in as they want to make sure that they are making a responsible investment.
How do I consider key ESG factors and become compliant?
Now that we’ve communicated the importance of prioritizing ESG and the ESG investing benefits that this can bring, you may be asking yourself “how do I become ESG compliant?”
Let’s examine some best practices for ensuring that your organization is ESG compliant across the range of ESG factors:
There are a number of ways your organization can improve its environmental friendliness. Start by identifying ways that you are already acting in accordance with environmental best practices (such as using or supporting sustainable energy) to better prioritize your improvement efforts. You can align your operations with recommendations from the EPA by checking out this page on their website. Leverage best practice guidance by topic, and design and implement effective controls for mitigating your compliance risks.
Complete ongoing monitoring to ensure that the best practices you’re working to adhere to are actually being carried out. This helps you provide evidence to auditors that you haven’t fallen short on your goals and you’re doing what you said you were going to do. Keep in mind that in many cases, state-level environmental agencies administer the federal regulations that the EPA puts in place. Form a plan for staying up to date with the latest regulations at the state and regional levels, compliance assistance, permits and forms for a variety of topics.
How can your organization become more socially responsible? First and foremost: lead by example. Your initiatives should be included in board level presentations. Even if you’re not on the board or reporting to the board, it’s important to crowd-source from your employees for examples to build and present a business case for investing in these social justice initiatives (or at least resources that facilitate these initiatives).
Next, design and implement policies that prove you’re dedicated to these initiatives. Link these policies to controls, so that they’re embedded in your everyday activities. These initiatives should cultivate a culture of trust and acceptance. According to the Society for Human Resource Management (SHRM), employees’ fear of saying the wrong thing often prevents them from having honest conversations. To solve for that, organizations should establish a feedback-friendly culture that relies on employee suggestions for continuous improvement in the workplace. You can also try developing affinity groups that employees can join to create spaces for open conversation.
It’s important to note that social criteria looks closely at your organization’s business relationships. That said, try to work with vendors that align with your values. This should start with a comprehensive vendor onboarding process, and be carried out through a strong vendor due diligence program to ensure these vendors are continually staying in alignment with your values.
There are numerous ways to align your organization with corporate governance factors to avoid any corporate governance issues. First, establish an internal strategy for growing leaders within your organization. Creating a culture of promoting from within results in more motivated and experienced employees, and ultimately leads to internal candidates being selected for a CEO role or other C-level positions.
In this same vein, it’s important to implement and demonstrate fair compensation structures.
Corporate governance should be equitable and inclusive. Like any community, your organization’s wellbeing results from all of its members feeling their interests have been considered by management in the decision-making process. This means all customers, employees, and ESG investors should have opportunities to escalate concerns whenever needed. Foster transparency and communication in your everyday activities and across ESG criteria.
Did you know that having a strong Enterprise Risk Management (ERM) program in place helps you inherently satisfy ESG requirements and ESG factors? That’s because having a robust ERM program promotes corporate responsibility, compliance and good governance throughout your everyday activities.
LogicManager not only houses fully integrated ERM technology designed to help you bridge gaps and siloes at your organization, but we also offer a point ESG software for becoming ESG compliant. Here’s exactly what the package offers:
- Risk assessment templates, tasks to conduct those risk assessments and mechanisms to formalize your policies and track them systematically through our sustainability software.
- Testing and metrics collection to automatically prompt for the necessary evidence on an ongoing basis (and then provide evidence that you are doing what you say you are doing)
- Full governance activities that help ensure that everything is working the way that it should
- Sustainability reporting to ensure that your organization is on track
- Gain the ability to integrate your risk management program with any other enterprise systems to help support and gather the evidence you need to prove that ESG goals have been achieved.
Plus, leverage our Risk Maturity Model (RMM) for a way of actually measuring how strong your risk management program is, and therefore how strong your ESG program is:
- Using 25 success factors and 71 competency drivers, the RMM will uncover areas of improvement in order to qualify for an ESG disclosure.
- Then, use your results to prioritize and draw a roadmap to achieving an adequacy level that you can put in your 10k and 10q disclosures.
- Generate sustainability reports on an ongoing basis to back up your statements.
- Before you know it, you’ve eliminated your compliance and regulator exam risks by having sound reports that support the strength of your ESG program.
Rounding Up: What Is ESG In Business?
The more you are committed to making better business decisions and getting strong business results, the more you align your organization with the standards of ESG.
Simply put: to have a strong risk management program, you need to be a socially responsible company.
An effective ESG program requires collaboration, insight and metrics from across the organization to work towards common goals as a team. Many organizations start with ESG risks and readiness assessments as a part of their overall GRC program.
With ethical investing taking center stage in recent years, it is important to consider not only the fundamental benefits that ESG considerations can bring to your bottom line but also the benefits that ESG investing can bring. It has become a key part of the investment process as socially responsible investors want to evaluate companies that ensure that their money is going somewhere with a strong long term vision.
Another way to measure yourself against these best practices is through our Risk Maturity Model, which has proven to help companies achieve up to 25% higher market valuations. LogicManager provides certification and evidence-based statements that can be disclosed with confidence on SEC documentation.
Want to start your journey to becoming ESG compliant today? Start by scheduling a free demo of our software and one of our experts will demonstrate how our solutions can solve your organization’s unique challenges.