Most Frequently Asked Questions About the Growing Movement of Environmental, Social, and Governance (ESG) in the Corporate Sphere
Environmental, Social and Governance (ESG) is a list of items for companies to measure how they can create an impact on our well-being and survival. It promotes a long-term creation of a healthy ecosystem with an increase in employee participation and satisfaction, top and bottom-line growth from consumers, collaboration from suppliers, less scrutiny from regulators and government and comparatively easy access to long-term capital.
ESG is complex and, at least for now, without formal mandated regulatory restrictions dictating procedure or compliance. Most ESG reporting is voluntary.
Following our recent podcast on Sustainability and the Future of ESG, we have identified the most relevant Frequently Asked Questions (FAQ) below about the topic.
What Is ESG?
ESG stands for Environment, Social and Governance. The goal of ESG is creating prosperity for all, fairness in the distribution and usage of resources, healthy living conditions for humanity and an environment for nature to thrive; it is about “doing the right thing” for present and future generations.
Let’s break each component into more accessible terms:
- Environmental: includes the energy the company takes in, the waste it discharges and the resources it needs. The Environmental criteria encompasses carbon emissions and climate change.
- Social: addresses the company’s relationships and the reputation it fosters with people and institutions in its community. The Social criteria includes labor relations, diversity and inclusion.
- Governance: encapsulates the internal system of practices, controls and procedures the company adopts to govern itself, make effective decisions, comply with the law and meet the needs of external stakeholders.
Are There Regulatory ESG Requirements?
There is no mandated regulatory requirement for companies to report and disclose. It is a voluntary activity that companies undertake. Hence, the reporting may be inconsistent or difficult to compare between different entities or periods of the same entity. Regulatory bodies you may want to pay attention include:
- Global Reporting Initiative (GRI)
- Sustainability Accounting Standards Board (SASB)
- International Integrated Reporting Council (IIRC)
- Value Reporting Foundation (VRF) – Formed by the merger of the SASB and IIRC
- Task Force for Climate-related Financial Disclosures (TCFD)
- World Economic Forum International Business Council (WEF IBC)
- International Sustainability Standards Board (ISSB)
Why Is ESG Important for Companies?
ESG is assumed to be a significant corporate issue, but the enormous scale at which it is a world, regional, community, family and an individual issue is causing a mindset change. Hence, regulators all over the world are moving in to codify today’s guidelines into laws for tomorrow. Businesses not only have to think about the users who value the integrity of financial accounts and improvement of economic decisions, but also those who want to understand an enterprise’s positive and negative contributions to sustainability.
What are Business Issues Related to Environmental, Social, and Governance?
Crucial considerations and issues relating to ESG are:
- Business ethics
- Business resilience
- Carbon pollution
- Corporate governance
- Cybersecurity & data privacy
- Diversity & inclusion
- Environmental impacts like emissions, effluents & waste
- Human rights
- Occupational health & safety
- Other effects from products
- Risk appetite
There are benefits and challenges for your organization related to environmental, social, and governance factors that may have a measurable impact on financial performance. Many of the risks associated with these issues can be managed with effective ESG practices.
How do Environmental, Social, and Governance Affect Risk Management?
A robust risk management plan is structured and consistent with a continuous risk management process applied across an entire organization that allows you to proactively identify, assess and mitigate risks to achieve corporate and strategic financial and non-financial risk objectives. There are many economic, environmental, geopolitical, technological and societal forces that create risks that can impact your organization’s goals. Proactively identifying and managing threats that affect your success are essential. An ESG program cannot operate in a silo; it must be integrated into the business, strategy, M&A, operations and overall risk assessment and management. Building a culture that embraces sustainability and managing the requirements of the regulators, reporting framework, rating agencies and stakeholders will create value in the long term.
What Are the Benefits of an ESG Strategy or Program?
There are many tangible and intangible benefits to a well-defined ESG strategy. Through practical Environmental, Social, and Governance strategies, you can create a purpose-driven workplace culture, reduce business and operational expenses, streamline processes and minimize regulatory and legal mediations. You can accomplish this in several ways:
- Financial & Operational Performance: Achieve better access to resources, access to different markets through stronger community and government relations, and enhance investment returns by better allocating capital for the long-term (building/creating sustainable plant and equipment).
- Environmental Impact: Invest in efficient processes (e.g., in clean energy, autonomous vehicles, and AI technologies) and the natural environment.
- Investor Relations: Analyze investors’ needs and wants as ESG begins to be a focus for investors as they evaluate the financial performance of potential companies they are looking to invest in. Typically, investors avoid companies with inconsistent or questionable practices. However, they tend to evaluate non-financial factors (e.g., environmental and social impacts, corporate culture, etc.) as part of the overall deal.
- Workplace Culture: Cultivate a corporate culture centered on workplace giving, volunteering & engagement programs (including diversity & inclusion) and community impact.
- Technology: Choose the right technology to collect, aggregate, compile and report data more efficiently. The gathering and reporting data do not need to become a burden.
- Budget & Cost Considerations: Define the roadmap for ESG adoptions. Taking care of short-term priorities and creating long-term value can be done simultaneously.
How We Can Help
We will continue to monitor all the Environmental, Social, and Governance (ESG) developments and share updates as additional guidance related to sustainability and ESG become available. If you have questions or want to evaluate ESG for your organization, consult your Cherry Bekaert advisor or contact our professionals in Cherry Bekaert’s Risk Advisory practice.