In a recent article, we looked at the growing impacts of Environmental, Social and corporate Governance (ESG) risks and why these risks can no longer be overlooked.
The increasing importance of managing ESG risks has been highlighted in the growing public scrutiny of companies’ actions and the focus on issues such as climate change.
While awareness and understanding of ESG risks is growing, particularly among publicly traded companies and the public sector, organisations are increasingly establishing best practices for measuring and reporting on their ESG performance and risk management practices. Organisations that embrace ESG for both its opportunities and risks are in a strong position to capitalise on the ever-increasing standards that investors and consumers expect, achieving an optimal ‘triple-bottom-line’ (financial, social and environmental success).
Big business is already acting on ESG, don’t be left behind
Large organisations are already acting to identify, measure and report on ESG issues amid growing demand from investors and consumers alike. 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.
For privately held businesses, it may be hard to see how ESG risks will impact your operations, but high ESG expectations increasingly apply to the whole supply chain of large organisations. For example, a core component of ESG performance measurement among large organisations are policies such as responsible sourcing standards.
To ensure your business remains part of the supply chain for big business it’s important to demonstrate its commitment to effective ESG risk management with the implementation of proactive measuring and reporting systems. Done well, your ability to support the big business reporting obligations may provide an edge over your competitors.
How do you identify ESG risks?
The impact of different ESG risks on your business will depend on the industry you operate in and the products and services your business provides. The first step in establishing effective measurement and reporting processes for ESG is to identify how your organisation performs in terms of key ESG criteria.
- Environmental criteria include factors such as carbon emissions, waste production and management, treatment of animals, and nature conservation and rehabilitation.
- Social criteria examine if your business demonstrates strong ESG standards. Are employees treated fairly? Does the organisation support the communities in which it operates? Does your organisation engage with stakeholders including suppliers who also uphold high ESG standards?
- Governance criteria assesses how an organisation approaches its leadership culture, executive and leadership remuneration, audit, internal controls and shareholder rights.
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 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.
What’s the ROI of measuring and reporting on ESG performance?
Being proactive in managing ESG performance positions businesses as preferred suppliers and leaders in their respective markets. Like managing other risks in business, the return on investment (ROI) of measuring and reporting on ESG performance will continue to grow.
To learn more about how to identify your ESG risks and measure your ESG performance effectively, contact your Pitcher Partners specialist.