ESG performance is fast becoming a business imperative.
The movement has gained momentum in status and importance in recent years, and now guides the strategy and direction of all leading businesses. Investors, regulators, consumers, employees and shareholders are increasingly demanding that businesses have strong ESG credentials.
- According to a report by the Environmental Defence Fund, 93% of consumers will endeavour to hold businesses accountable for their impact on the environment.
- Larry Fink, CEO of Blackrock, an investment bank with assets worth $8.7tn under management, saw investments in sustainable assets increase 96% over 2019.
- 76% of 152 global business leaders consider ethics and integrity to be a high priority, according to a BSR study.
What is ESG and what constitutes good performance?
Environmental, social and governance (ESG) refer to three central factors in measuring an organisation’s sustainability and societal impact. ESG originated in investor circles, encapsulating an organisation’s long-term non-financial health. The practise began in the 1960s with investors initially excluding tobacco stocks linked with the South African Apartheid from their portfolio’s. While the concept has developed since then, the underlying principles of business accountability remain.
Today, ESG covers three core pillars:
- Environmental considers how companies use energy and manage their environmental impact as stewards of the planet. Factors considered are energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management.
- Social considers how companies foster their people and culture, and how that has ripple effects on the broader community. Factors considered are inclusivity, gender and diversity, employee engagement, customer satisfaction, data protection, privacy, community relations, human rights, labour standards.
- Governance considers companies internal system of controls, practices, and procedures and how an organisation stays ahead of violations. Factors considered are the company’s leadership, executive compensation, audit committee structure, shareholder rights, bribery and corruption, lobbying, political contributions, and whistleblower programs.
Why is ESG important?
Strong performance across all three pillars of ESG is indicative of business resilience. Simple measures such as reducing office waste can be just as important as wide-reaching social initiatives. Businesses must be able to demonstrate the progress they have made and the actions taken.
The idea is to show that a business is able to adapt to risk and protect the longevity of the environment and society in which it operates. As such, ESG has implications throughout the entirety of an organisation – particularly its supply chain. Indeed, up to 90% of GHG emissions are found in an organisation’s supply chain making it a key area for companies to focus on.
How is ESG measured and scored?
ESG performance throughout supply chains is being measured and rated. These ratings are similar to other risk or performance bench-marking common amongst financial institutions. Though there remains some discretion as to exact scoring methodologies and frameworks governing ESG scoring and rating processes, some best practices have emerged:
- Verifiable ESG disclosures are expected to adhere to a specified set of mandatory and voluntary requirements. This allows stakeholders to compare performance and make meaningful decisions.
- Transparency is critical to the process in which some companies emerge as sustainability leaders, others as laggards. As well as this, transparent reporting enables stakeholders to gain a clear picture of a company’s direction and progression.
- For example, a company might not be carbon neutral today but maybe making significant efforts towards this goal. Stakeholders need visibility on the progress, as well as the goals.
How to improve your ESG reporting?
Good ESG reporting begins with engrained sustainable business practice. If a company has adopted a resolute attitude towards ESG, this should shine through in performance. As ever, action rings louder than words.
There are a few ways to improve reporting:
- Choose the right disclosure framework and metrics. This will ensure that your organisation is taking steps that are recognised as being key to your company’s performance.
- Report on the processes involved, as well as any remediation action, is taken to improve your operations. Methodologies are important to making sound and accurate ESG judgements and careful consideration of these factors lead to better results.
- Integrate ESG data and mindset into everyday business operations. Small actions add up to big changes and can yield demonstrable improvements in performance. As well as this, an ESG mindset enables your organisation to create a platform for further activity both internally and in your supply chain.
- Visualise the process of determining your ESG outlook. Analytics and data visualisation can help your organisation identify which areas of your business need improvements on ESG topics.
Our latest ESG capability on the ethiXbase360 platform, GreenLITE seamlessly integrates with your third-party risk management program to give you end-to-end supply chain coverage in near real-time.