Whilst Environmental, Social and Governance (ESG) issues are certainly not new, they have evolved and expanded in recent years, partly due to the new social context in which we find ourselves.
There has been growing recognition that there are large global challenges for society, from climate change to the aftermath of Covid-19, which global governments cannot solve by themselves.
The challenges are much bigger than one country, one government, or one company, and this is where the private sector is stepping in to help deliver a solution. Financial institutions and governments are regulating and legislating, but there is now a movement of companies taking responsibility for themselves and their supply chains in a more proactive way.
Motives for addressing ESG issues may vary between organisations, from reputational to legal compliance, but a core component must be identified as consumer expectation. Whether we take global warming or gender disparity, there is greater expectation on how companies should manage themselves and their products, at a time where societal trust is in decline.
It has now fallen to the private sector to set standards and targets to move the dial. Businesses need to address these issues and offer solutions to protect the public in the absence of consistency. As a result of engaging with ESG principles and data, they can build trust through being transparent with stakeholders.
Building trust
To establish trust, independent assurance is essential. Building credibility through independent assurance can help demonstrate an organisation’s commitment to openly tracking progress against its goals and values.
Standards set by bodies and charities such as CDP and the International Organization for Standardization (ISO) have long been established as marks of trust and integrity. In the world of sustainability, verification and assurance, standards such as World Business Council for Sustainable Development (WBCSD) and World Resources Institute (WRI)’s Greenhouse Gas Protocol, plus international standards such as ISO 14064, SASB, SMETA and TCFD, are widely recognised by investors and stakeholders and support the comparability and transparency of reported ESG data.
International initiatives are also underway to tackle regional and corporate variations in ESG reporting requirements. For example, the International Sustainability Standards Board (ISSB) was launched at COP 26 as an independent, private-sector body to develop and approve Sustainability Disclosure Standards.
Transparency
In order to leverage the value of data (ESG metrics), it is not just important to measure the right things; it is also necessary for the data (and insights) to be made easily available for all stakeholders.
Without transparency it is difficult to report on risk exposure associated with all aspects of ESG, from waste management, to wage underpayment, to tax transparency. Supplier transparency is therefore vital for the effective mitigation of risk.
Some say “numbers don’t lie” but in reality, people use numbers to ‘prove’ all sorts of points, so the way for organisations to ensure that their numbers tell the absolute truth, is to make sure that they are disclosing the right numbers – relevant, key metrics, and most importantly, if they want people to trust their numbers, they have to be checked and validated by an independent third party.
Engaging global supply chains
Whilst companies may start to invest in their ESG performance, extending this work to their global supply chain can add a layer of complexity. It can be perceived as easier to manage ESG objectives in your owned facilities, buildings and operations, but those mandates need to be applied further.
Businesses need to find ways to embed ESG into their extended supply chains; to endorse a code of conduct with issues such as carbon reduction or ethical performance etc., and then to perform due diligence. Purchasing decisions and the procurement process can be used to reward suppliers that meet prescribed ESG objectives and penalise those that do not. Many progressive companies have been transparent about their suppliers; publicly sharing audit reports on their ESG performance.
In the past, approaches to supply chain due diligence simply involved yearly checks – but as reputations are at stake for brands connected to unsustainable practices or human rights violations, the approach has shifted from a basic compliance check to a year-round risk-based monitoring and mitigation programme. This deeper level of engagement helps ensure organisations are building capacity in the supply chain for more responsible practices.
Summary
At the turn of the century, ESG was an adjective for ‘issues’ and ‘factors’ – today it has evolved into an adjective for ‘metrics’ and ‘performance’. Thanks to the continued digital transformation of the assurance industry and the expertise available from assurance providers such as LRQA, support is available to ensure that ESG can be integrated into businesses so that they can manage risks and exploit the many benefits.
All stakeholders are investors in one way or another, and transparent, verified ESG metrics allow investors to spend their time, money or resources in those businesses that are able to demonstrate good risk management – a vital attribute in any geopolitical climate, but especially now.