Introduction
The COVID-19 pandemic has created chaos across the globe, impacting almost every business and industry. Among the many things that COVID-19 has taught us, being environmentally and socially responsible has been acknowledged as the most important. This is one of the contributing factors to the recent focus on Environmental, Social, and Governance (ESG) as a key corporate function.
What is ESG?
The Environmental, Social, and Governance (ESG) framework is much bigger than the financial aspects of an investment or credit portfolio and is expected to become all-pervasive in its commitment to a greater cause.
‘E’ stands for Environment, which focuses on the impact of investments on the environment such as carbon footprints and emissions. This includes the usage of clean energy, waste management, and conservation of natural resources, including the protection of animals.
‘S’ for Social focuses on how companies interact with communities. It also looks at internal policies such as labour, diversity, and inclusion. It looks into business relationships and measures what a company gives back to society.
‘G’ for Governance focuses on policies and practices vital for compliance and business strategies. It also looks at cost reduction, talent attraction, and the ethics of business management.Frameworks
ESG in corporate governance has been in the spotlight across the globe – be it in terms of the UK Financial Conduct Authority’s (FCA) new rules on climate-related disclosures to meet the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) or the European Central Bank’s (ECB) supervisory climate risk stress test requirements to assess how well banks are prepared to deal with financial and economic shocks stemming from climate risk, and so on. In the US, SEC’s climate disclosure proposal is expected to set new guidelines for climate-related data disclosures, if it comes to force.
There are many frameworks prevalent for ESG, the most prominent among them being:- UN Sustainable Development Goals (UN SDGs)
- Global Reporting Initiative (GRI)
- Carbon Disclosure Project (CDP)
- Sustainability Accounting Standards Board (SASB)
- Climate Disclosure Standards Board (CDSB)
- International Integrated Reporting Council (IIRC)
- Task Force on Climate-related Financial Disclosures (TCFD)
However, ESG disclosures are voluntary for many sectors, and many countries and their regulators are slowly pushing toward mandatory norms for climate-related disclosure.
Benefits of ESG
ESG helps in the long-term success of the organization by embedding its framework (E-S-G) into the strategy and decision-making process.
Following are some of the factors that could impact the ESG value proposition to a business:
- Organization success – Top-line growth, cost reduction, lesser legal intervention, productivity boosters, investment and asset optimization.
- Attracting talent – Employees tend to have positive morale if the company depicts a positive social impact, and this eventually helps to attract the best talent.
- Reducing costs – Alternative methods of energy consumption and reduced usage of natural resources.
- Regulatory compliance – When a company depicts strong external ESG value, it tends to get more support from the government and regulatory bodies and needs lesser intervention.
- Investments – Strong ESG practices help to build interest among investors thereby attracting future investments.
Conclusion
Organizations need to constantly adapt to the changing environment and prepare themselves for ESG reporting requirements. In the near future, ESG may permeate all industries and all organizational levels requiring companies to identify processes, people, and technologies that will help them to achieve higher ESG-related metrics, targets, and better reporting thereby contributing to the greater good.
Author
Swaminathan KS
Associate Vice President – Products, BCT DigitalSwami has 18+ years of experience in the areas of Governance, Risk Management, and Compliance working with Fortune 500 clients across diverse industries such as Banking & financial services, Energy & Utilities, Hi-Tech & Manufacturing clients. He has spearheaded multiple projects focused on Enterprise Risk, Trading Risk, IT Risk, Business Continuity, and Third-Party Risk Management. He is also a PECB Certified ISO 31000 Senior Lead Risk Manager.
Author
Pradheep Subbaraman
Product Consultant, BCT DigitalPradheep has expertise in the areas of enterprise risk and process audits working with one of the top 4 audit firms. His focus has been on internal financial controls, control effectiveness, and assurance. He is an MBA graduate from Great Lakes Institute of Management.
