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ESG – what is it and why is it important?

ESG – what is it and why is it important?

Organisations of all sizes are experiencing increasing pressure from regulation and shifting societal expectations to measure and improve on environmental, social and governance (ESG) performance.

However, in Pitcher Partners recent Business Radar report, only 18% of mid-market businesses surveyed were implementing and reporting on ESG initiatives. But what does ESG really mean, and why is it important?

What is ESG?

ESG refers to Environmental, Social and Governance factors that contribute to strong business practices. ESG reporting is about disclosure of how well a business is doing on these factors, to satisfy clients, investors, or regulators. The key elements typically being reported on include:

Environmental: Greenhouse gas emissions, land use, water use, waste and management,

Social: Diversity and inclusion, workplace health and safety, customer engagement, understanding your supply chain

Governance: Structure and oversight, transparency and reporting, codes and values, data privacy (cyber risk) and systems

Increasingly consumers and community stakeholders are placing pressure on organisations to behave in a way that mitigates ESG risks. Some economic powerhouses like the UK or the EU are increasingly enforcing reporting and disclosure of ESG factors through regulation and mandatory reporting guidelines. Locally, most super funds are pressuring their investees (generally the larger, ASX-listed companies) to report and disclose their ESG factors. In addition, all levels of government are increasing the ESG-related requirements potential suppliers must satisfy to supply those bodies.

Strong ESG performance is now expected

As such larger businesses are being driven to look more closely at their activities, supply chain processes and related assets through an ESG lens. The fact that big business is already acting demonstrates the paradigm shift that has occurred. Strong ESG performance is now expected, and businesses that fail to act are at risk of being left behind.

Why is it important?

This trickles down to impact the Australian mid-market through contract obligations with larger clients, tender selection criteria and market dynamics such as asset valuation. Another key driver comes from direct consumer or interest group activities, such as social media movements and community activism. What’s more, the influence of sustainability and social responsibility is having a very real impact on how businesses operate and present themselves – organic and MSC certifications and Fairtrade are just some examples. Organisations that can meet these consumer demands are well-placed to deliver investment returns over the long term. There are risks to clients in not being ESG-aware. But when well-managed and reported these risks can become opportunities.

It’s on the middle-market’s radar

Large organisations are already acting to identify, measure and report on ESG issues amid growing demand from investors and consumers alike. When we consider the current state of ESG adoption and implementation within the mid-market, the Business Radar report identified that over half of the respondents were planning (36%) or thinking about it (18%). While not all businesses have a comprehensive ESG implementation and reporting plan that covers all three areas, 47% of respondents had implemented or considered social initiatives, 40% had acted to adopt improved governance initiatives and 20% had taken steps toward environmental initiatives.
Risks that could be associated with mismanaged ESG considerations and reporting include:

Lost opportunities for contract renewal or gaining new work

  • Risk of lower company valuations
  • Constrained lending/funding and higher cost of capital
  • Higher insurance premiums
  • Loss of clients or customers

Less measurable but just as real is the blow to a business’s reputation that can come with bad press and social media criticism, as well as a reduced opportunity to attract and retain good talent.

How do you measure and report on ESG performance?

Many programs measure ESG risk and performance, relative to risk appetite and other risk-related factors. However, a holistic performance process measures demonstrated improvement over time. This helps ensure your organisation is reporting on ESG performance in a way that adds value to all stakeholders.

As a rapidly developing field, there are literally hundreds of ways to measure ESG risk and performance but limited regulated guidelines (areas such as reporting on modern slavery and carbon are mandated in certain circumstances). This significant number of standards may seem daunting, however big business has begun to select preferred measures, commonly aimed at assisting their reporting against the United Nations’ Sustainable Development Goals.

Consider how you can measure and demonstrate your progress by asking yourself about the management of ESG risks in your organisation:

  • How well do you know your operations, supply chains and stakeholders? Do you know what your stakeholders (shareholders, suppliers and customers) priorities are?
  • If you have a program to manage ESG risks, what data are you using to report on them, and how often do you release this data publicly?
  • Have you assessed your operations against these priorities?

To learn more about how to identify your ESG risks and measure your ESG performance effectively, contact your Pitcher Partners specialist.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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