The past year has taught us stark lessons about the fragility of our social and economic ecosystem and the devastating impact a truly global crisis can have on human existence. Diligent explores...
The past year has taught us stark lessons about the fragility of our social and economic ecosystem and the devastating impact a truly global crisis can have on human existence.Parallel to the pandemic, the world has also witnessed devastating climate events and large-scale demonstrations against racial injustice and inequality.
Clearly, the defining challenges facing the world today go far beyond financial considerations, which is why – to adapt and thrive in an uncertain environment - corporate organisations must focus on sustainable value creation. Investors, consumers, and regulators are becoming increasingly concerned with the extent to which an organisation’s existence impacts both people and the planet, and how it plans to mitigate negative effects.
However, it is often said that sustainability ‘means something to everybody, but the same thing to nobody’, a phrase which encapsulates the difficulties organisations and governance professionals have experienced when trying to define, implement, and meaningfully report on environmental, social and governance (ESG) performance. What should the key reporting metrics be? Which of the several voluntary frameworks should be adopted? How can fair comparisons be made between organisations?
In September 2020, the World Economic Forum’s International Business Committee (IBC) paved the way for greater clarity by publishing 21 core metrics and 34 expanded metrics and disclosures developed in consultation with the big four accounting firms. Reporting on these metrics will enable businesses to demonstrate progress in alignment with the UN’s Sustainable Development Goals (SDGs). With the support of the five leading voluntary framework and standard setters, these metrics are set to become what the IBC describes as ‘the natural building blocks of a single, coherent, global ESG reporting system’.
For governance professionals, the growing cohesion around the metrics that matter in ESG performance offers valuable clarification and assurance that operationalising ESG in relation to these metrics will have long-term benefit for the business. Now is a critical time for governance professionals to prepare themselves and their organisations to embed an ESG mindset and develop the infrastructure and approach needed to undertake, monitor and report on ESG performance. This process has four key stages.
Many governance professionals will be comfortable with the demands of corporate social responsibility (CSR) programmes and reporting, which have been around for some time. However, ESG aims to move beyond CSR’s often qualitative nature by selecting industry-agnostic quantitative metrics that enable fair comparisons to be drawn between organisations across sectors and geographies. Governance professionals need to familiarise themselves with the specifics of the metrics, the terminology involved and the weight that each metric carries in their own organisation.
Some of the 21 ESG metrics are directly relevant to the day-to-day activities of the corporate secretariat, especially those in pillar 1, which focus on the principles of governance. This encompasses factors such as board composition, qualifications, structures and processes, as well as risk and opportunity oversight and stakeholder engagement.
Beyond immediately relevant metrics, governance professionals must be aware of the wider ESG metrics that must be understood, monitored, and reported.
Most companies already track some of the ESG metrics involved as part of existing CSR programmes, but often the diverse elements can mean that silos develop, and it is difficult to establish an organisation-wide view of performance.
In preparation for a more holistic approach to ESG monitoring, governance professionals need to identify where they are already tracking the relevant data. The organisation should start benchmarking against the IBC metrics where possible and identify what actions are required to facilitate reporting on those where it currently does not have data.
In preparation for an environment where such metrics inform strategic planning, governance professionals need to ensure information flows to a central location for tracking and analysis by executive decision-makers.
Monitoring
There is still a lot of work to be done to implement the proposed standardised global approach, so it is important for governance teams to stay up to date with the evolving situation and keep the board and executive teams informed. It is likely that national and industry regulations will follow on the heels of agreement of a global standard, so organisations must monitor the situation in the geographies their company operates in.
By identifying and curating key sources of intelligence and analysing regulatory changes, organisations can insulate themselves against unexpected risk and compliance challenges.
Action
As organisations progress on their ESG journey, there are many practical ways in which governance professionals can support ESG ambitions. Educating board directors is key, as many will not have operated under an ESG performance imperative previously. Additionally, raising organisational awareness of investor, stakeholder and regulator expectations and keeping relevant and accurate information flowing to and from the board is essential.
It is also critical that ESG metrics don’t descend into a tick-box compliance exercise where the focus is more on getting to a figure to report than trying to meaningfully manage and reduce the impact it represents. As EY CEO Carmine Di Sibio noted: ‘Metrics are just outcomes… what you really have to think about, first of all, is what’s your [long-term] strategy as an organisation?’ Governance teams must prompt boards to devote sufficient time to understand the operations, people and processes that drive these metrics, so they are in a position of knowledge from which to review and challenge strategic plans, ensuring targets for change are meaningful and achievable.
Finally, but critically, board diversity is a foundational element of good ESG performance. Diversity of thought, skills, gender, race and age is the most powerful tool in the board’s armoury given the enormous scope and scale of the challenges businesses face. A strong pipeline of diverse and talented candidates for board appointments is a pre-requisite for companies to meet both the direct requirements of the IBC’s sustainability metrics, and to position itself to drive consistent improvement across environmental, social and governance measures.
ESG performance is taking centre stage in the effort to address the urgent existential challenges humanity faces, and progress towards standardised reporting metrics offers valuable clarification to governance professionals. In this environment, proactively operationalising ESG must be a priority. It will deliver benefits to the business and, ultimately, to people and the planet.
Learn more about Diligent’s ESG solution.
