Environmental, Social and Governance (ESG) has become a leading issue for company stakeholder groups in recent years – especially investors. Regulators and policymakers are quickly realizing that in order to meet the goals of their ambitious sustainability agendas, international treaties, pledges and diplomacy are not enough. Furthermore, the dangers of prioritizing operational over strategic ESG are increasing and will continue to increase.
So, how do companies present ESG information in their financial disclosure? And how are they talking about it? Are they disclosing actions or just reporting?
With the volume of data that digital technologies can process at rapid speed, ESG leaders can make intelligent, evidence-based decisions more rapidly. By keeping the pulse of ESG issues as they evolve and emerge, businesses can adapt their strategies, operations and messaging before a potential reputational liability appears.
Strategy
The pressure on businesses to incorporate ESG in their strategy, capital allocation, performance remuneration and risk management is rising faster than ever. Implementing ESG strategy is not only imperative if we care for people and the planet. It's important to consider how investors, consumers and employees about an organization when making decisions.
With a strong ESG strategy in place, ESG leaders take proactive steps to address future ESG issues, communicating the right priorities with stakeholders, customers, employees, board members, investors and regulators. The delivery and implementation of a clear ESG strategy results in a powerful business brand that attracts customers, talent and investment. In addition, a more efficient use of resources will keep responsibility and valuable knowledge in-house, boosting the corporate governance factor of an ESG framework; ultimately, the risk of greenwashing accusations or financial penalties will be reduced.
Materiality
A materiality assessment provides the foundation for analyzing risk and opportunities and shaping a company’s ESG strategy. When conducted as a strategic process, it has proven to produce a number of positive outcomes.
For instance, a clear assessment of material issues followed by transparent reporting, shows an improvement in a company’s performance while reducing its exposure to different risks - including reputational, financial and legal. Moreover, a credible and detailed explanation of materiality has been determined as a fundamental requirement to attract investors, and a meaningful argument to get leadership buy-in.
The success of this approach requires the continuous engagement of the management, and in particular C-suite and Board members. They should have reliable data to support the development and ratification of ESG strategies.
Datamaran's data-driven approach provides reliable reliable data on material issues that boards and senior management can act on.
Board and C-Suite engagement
The responsibility of overseeing external risks does not solely lie on the shoulders of the C-suite. It is the result of a multistage process managed by executive teams, and enabled in different ways across companies. The ultimate goal is to provide board members with good quality data that allows them to make fact-driven strategic decisions on current and emerging risks.
Identifying and monitoring those ESG issues is not possible without a reliable process that ensures full oversight of external risks and limit a company’s exposure to ESG blindspots. But to do so, Board members should trust the information they receive.
Adopting a data-driven approach, backed by technology, enables companies to proactively identify and monitor material and emerging risks, making informed decisions and advancing Board oversight. The alternative is to remain anchored to traditional approaches, not being able to identify emerging risks before they become major issues and, ultimately, get left behind.
ESG & Emerging risk monitoring
The regulatory landscape for ESG is changing faster now than at any other time. Companies face an increasing challenge to keep up and be clear on their ESG strategy before they even consider what they need to report effectively. This is why it’s essential that information on material ESG risks are rigorous and supported by traceable data, making sense of the vast range of information out there.
While the precise financial implications of the SEC proposals are difficult to calculate, helping company leaders make strategic decisions early and then monitoring their progress is key. This reduces both the cost of compliance and the negative impact on share value if a company is not prepared.
Reporting
Until now, ESG has been defined mostly by voluntary practices, as the key policy makers (market regulators as well as national and international policymakers) left it to the markets to decide how to deal with ESG.
The tide is turning, with jurisdictions now racing to introduce strict mandatory requirements that bind companies to contribute to the public policy goals governments are setting in relation to climate primarily, but also ESG more broadly.
Companies are already testing their processes and building expertise with voluntary disclosures before they become mandatory. Understanding the voluntary landscape and identifying the specific ESG risks for a business helps focus resources and attention on the right areas.
Conclusion
ESG can be challenging territory. With so many competing expectations and moving targets, the leaders of Fortune 500 companies trust Datamaran as one of the critical inputs to their strategy, risk management, and disclosure. It is the starting point of everything. It provides clarity on which issues matter most - giving evidence of changing regulatory expectations, how competitors are responding, and shifting public opinion.
This enables Datamaran clients to lead with confidence, as they have a more credible and accountable process to oversee key risks and opportunities. Get in touch with our experts to learn more.
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