Other than the increasing legal and regulatory requirements of having to engage with the ESG agenda, there are a range of other reasons as to why the board should be thinking about ESG and their organisation. Compliance is always a persuasive, if blunt, tool in influencing boards to act in a given way (or not). But, for those entities not currently required to report against ESG criteria, there are likely to be organisational benefits to doing so anyway.
ESG reporting by the board can provide a degree of transparency which in turn can build trust, especially where key stakeholder groups, not privy to shareholder communications, do not currently have adequate data to make informed judgements about an organisation’s sustainability, ethics, climate change, social inequity or general approach to ESG. For boards to be able to report publicly on these issues will require a degree of robust internal assessment, review and scrutiny to inform decisions which impact an entity’s culture, behaviours and values.
Fundamentally, ESG reporting is about accounting and reporting mechanisms which are fundamental to an organisation's ongoing sustainability; whether manifested as people accessing or buying services/activities/products, ongoing customer or shareholder support, funding, resource use, responsible investments, or adapting business plans. Consequently, ESG provides insight into the quality of management and governance of an entity and can help to judge the future performance of the organisation and its ability to deliver its stated purposes. ESG can, therefore, play a pivotal role in organisational sustainability.
The following provides a few lines a governance professional may wish to adopt to advise their board on the benefits of proactively supporting ESG activities.
Why should my board engage in ESG?
Investing in ESG activities is not necessarily going to be cost neutral, but there are likely to be opportunities for efficiencies and income generation to offset the costs associated with collecting data and reporting against an agreed criteria.
Potential impact of ESG reporting
Operational
- Increased costs in adopting less cost-efficient practices in-house and via third-party contractors;
- Changes in supply chains;
- Re-siting physical office/factory locations; Increased insurance costs;
- Challenging talent management; and Uncomfortable employee views of the organisation and its leadership
Resources:
- Energy and water use;
- Resource reduction;
- Design costs and lost revenue from product reuse and extended shelf-life; and Costs associated with recycling initiatives.
Customer satisfaction and retention:
- Changing demands
- Expectations of long-term, new and potential customers and investors
Regulatory, policy and legal:
- Potential future expectations of entities with regard to ESG, therefore, better able to move swiftly and with relative ease to meet changes in regulation, policy and legal matters. For example, greenhouse gas emission reporting, the application of s172 of the Companies Act 2006, risks associated with a more litigious public.
Reputational:
- Being seen as an out-of-date/touch entity in the eyes of investors, customers and others
Potential opportunities of ESG reporting
Operational:
- Potential for a greater variety of income streams, new and diversified and more sustainable;
- Organisational ethics, principles and culture more attuned to target customer bases;
- Possibility of attracting and retaining new shareholders, stakeholders and customers (sustainability, greater awareness, validation);
- Reduction in stakeholder activism or consumer campaigns;
- Attracting long-term investors, shareholders, customers, suppliers, supporters and funders;
- Improving risk management, not just reputational ones as recognised as operating sustainable business models;
- Enhanced human capital - higher quality staff recruitment, motivation and retention.
Resources:
- Advantages in resource efficiencies (such as re-using and recycling initiatives, reduction/increased efficiency of transport, and more energy-efficient ways of working);
- Adoption of new energy sources which may be cheaper or more efficient or aligned to the entity’s values (lower emissions, new technology);
- The ability to access any government schemes to promote ESG factors (diversity, talent management, CO2 emissions).
Customer satisfaction and retention:
- The development of new services and products, or more sustainable current practices, from the use of new technology (effectiveness, better able to meet customer and investor needs, efficiency, sustainability);
- Better and more effective stakeholder engagement
- Organisational growth – new markets, new partners, new talent pipeline, new investors, shareholders, customers/clients and other stakeholders;
- Creating a deeper understanding of investor, shareholder and stakeholder needs, which in turn can drive innovation in the way the organisation achieves its stated purposes;
Regulatory, policy and legal:
- An ability to position the entity more positively within the sector and wider economy (enhanced resilience)
Reputational:
- Demonstrating transparency and effective management in global issues impacting the organisation and broader society, thereby increasing organisational sustainability;
- Driving continuous improvement by creating accountability and collaboration on key global challenges, including the better use of limited resources;
- Enhanced brand value and reputation, harnessing a growing and committed source of supportive stakeholders to champion the brand;
- An ongoing legitimacy to operate in the eyes of some sections of the public through demonstrating transparency and responsiveness to stakeholder concerns.
To help you find resources on ESG, we have put together a webpage with links to our content, including blogs, papers and relevant courses. Take a look at our ESG resource hub.
