Gaining a true understanding of environmental, social and governance (ESG) criteria can sometimes be difficult for boards and directors. However, pressure and interest from investors, customers, employees and other stakeholders is moving the dial for boards on ESG from a “nice-to-have” to an essential ingredient tied to organisational purpose, strategy and culture. Here’s how boards and directors can step up and change the game on ESG.
Community interest in ESG has been rising for several years, and rather than abate during 2020 due to COVID-19, it ramped up even further as the world changed and more organisations reassessed organisational basics, says Jane McAloon FAICD, Director of Viva Energy, Energy Australia and Allianz.
Speaking at the AICD webinar An introduction to ESG for boards, she added, “The interest in what is ESG and its underpinning of strategy has become more focused." The fear when the virus struck was that ESG as a major industry conversation would be sidelined by economic survival. However, the reverse occurred.
“Investors look at ESG as not just a nice to have, but increasingly as essential to strategy, culture and sustainable performance. Likewise, you see many organisations responding and realising benefits including enhanced customer and employee engagement.”
No longer is it enough for companies to only focus on the quality and cost of products and services, she said. They also need to focus on sustainable, socially responsible and environmentally aware business practices.
The Global Reporting Initiative reveals that 96 per cent of the world's largest 250 companies by revenue are already reporting ESG performance. “So it's certainly growing in prevalence and recognition as well. While ESG reporting frameworks can be difficult to navigate, they provide structure and a way of challenging organisational thinking and priorities. Consistent transparent reporting, particularly by listed entities, allows relevant stakeholders including customers and employees to better understand strategy, risks and drivers of current and future performance” In Australia, all ASX100 companies report on ESG under ASX corporate governance recommendations, even though it is not mandatory. Under ASX Corporate Governance Principle 7.4, a listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks.
Starting the conversation
Organisations that have not yet started reporting on ESG or even developing a framework to manage this area of governance can follow a four-step process to start mapping out what is important, said Jenny Robertson FAICD, Managing Director of BoardMatters.
- Understand the value of ESG
- Identify a framework that suits your organisation
- Start with a few priorities, then build
- Don’t set and forget (measure and report)
When it comes to developing ESG frameworks, it is important to understand what your company is doing right now and what is relevant in/for your sector, then to identify specific areas of concern that intersect with the company’s operations. Robertson says, “Don't assess for every possible impact, focus on the ones relevant to your business.” Then prioritise which areas to focus on and incorporate these into business strategy.
“You can start having conversations about ESG in your organisation in order to develop a framework that will work [for] your organisation and then learn how to measure and report ESG and its impact going forward.”
Companies should get specific about initiatives and prioritise no more than five to seven areas. “Keep priorities practical, be clear as to how these priorities are linked to value and the company's business model.”
In terms of the three areas of impact – environmental, social and governance – organisations should address these concerns in developing a framework.
- Environment: Assess how your organisation's activities adversely affect human society, or whether your activities are adversely affected by changes in human society.
- Social: In terms of employees, customers or suppliers, determine whether your organisation may be harming local communities, or whether there is a risk that your organisation may do so. Consider whether your organisation is facilitating or somehow creating shortages of food, water, or shelter in the areas in which you're doing business or in your supply chain.
- Governance: Examine internal systems and processes within your organisation that facilitate ethical and good decision-making.
Different reporting frameworks that can be followed range from the United Nations Sustainable Development Goals as a starting point to the Sustainability Accounting Standards Board, the Task Force on Climate Related Financial Disclosure and the Global Reporting Initiative.
In terms of collecting data that can feed into ESG disclosure, many companies are probably already accumulating reporting that can be of use, Robertson said.
“You might be surprised that you're [already] reporting or collecting data on a number of ESG factors. It's just a matter of being able to pull it all together and collating it into something that helps you understand where you're at right now, and perhaps where some of the gaps are in your ESG conversations going forward.”
It is important to identify key performance indicators or measurements and how to monitor them. And not to report just for the sake of reporting, but to measure variables that are meaningful to your organisation, said Robertson.
Good examples of reports on ESG include the Allianz Group Sustainability Report 2019. Guidance on ESG reporting trends in the ASX200 can also be obtained from ACSI.
Benefits of an ESG strategy
Various benefits accrue to companies that execute an ESG strategy for the right reasons, attendees at the webinar were told. These range from attracting better talent to more engaged employees, better growth opportunities and an improved share price.
“If you have a greater social credibility, you've got the opportunity to attract and retain a better candidate pool, when it comes to your staff.”
A McKinsey study also shows that organisations that focus on the three pillars of ESG deliver results and outperform non-ESG organisations, said Robertson.
“Think about simple things through the lens of environment, social, and governance. It gives you the beginning of a framework [that] you can realise and incorporate into strategy, and that's very important.”