Environmental, social, and governance (ESG) issues are set to dominate the headlines once again this year. With COP26 and COP15 set to be rescheduled in 2021, expectations are high as countries come together to work towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change. In addition, the recent news announced by the SEC to enhance their focus on climate-related disclosures and increase examinations of asset managers who tout their funds as socially responsible has added to this growing impetus.
Investors are also shifting their focus, with funds currently representing US$25 trillion in assets, planning to double their ESG assets in the next five years. Accelerated by the pandemic, expectations placed on businesses have changed. Those who can display a robust ESG strategy are better positioned for success, securing significant financial advantages and proving that they can do the ‘right thing.’
With supply chains growing more complex, and legislative requirements increasing, organizations have an ever-steeper hill to climb to ensure they are aware of their blind spots. Building a sustainable vision for a business requires an ESG framework that is aligned with core values and strategic objectives. But how can you achieve this in practice?
Adapting To ESG Needs and Moving Towards A New Chapter
The sheer breadth and scope of the challenge at hand can feel overwhelming, especially as businesses are being asked by different stakeholders to prove they are ‘walking the talk.’ ESG comprises many different facets — environmental issues, boardroom diversity, modern slavery and human trafficking to name a few. Where do you start to combine these into an overarching ESG strategy and how does it fit in with what already exists?
There is no doubt that this is a large undertaking for any business, requiring an enterprise-wide view that often results in fundamental changes to business culture. Many businesses have been making significant progress, but for others it has taken the coronavirus pandemic to bring the issue into sharp focus. Taking the first step is often the hardest, but there can also be roadblocks further down the road.
When it comes to building successful ESG initiatives, we believe a crucial step involves developing strong foundations. Often, that means starting from the top. Educating the executive team and setting the tone from the top is a good place to start when agreeing on priorities.
It’s important to synchronize efforts across the business, which means success will require everyone to pull in the same direction. There may be many existing initiatives underway operating in silos. Bringing together steering committees who work at an operational level are invaluable at coordinating action towards a common goal.
From a nuts and bolts perspective, metrics for judging performance against agreed-upon standards are essential and required for audit purposes. While the ESG reporting space is still getting up to speed, there may be things already being tracked that are helpful (eg monitoring and assessing calls to ethics helplines or internal audit results) that can help businesses prioritize their efforts.
Taking A Holistic Approach to ESG and Due Diligence
An integral step towards a successful ESG framework involves taking an interconnected view of risk. The business is part of a wider system, so embedding ESG initiatives and values throughout the supply chain ensures a holistic approach.
In many cases, a third-party supply chain is a company’s weakest link. Getting due diligence right is more important than ever. The days of ‘paper-only’ compliance are very much over as lapses can cause significant brand damage. The recent scandal surrounding the fashion retailer Boohoo is case in point. Allegations of modern-day slavery in it’s UK supply chain have caused ongoing financial and reputational problems for this growing business.
Educating third parties on core values at the beginning of the relationship and integrating ESG considerations into onboarding policies ensures expectations are in place from the outset. Third-party due diligence must also incorporate ESG factors, supporting evidence-based impact risk assessments for full visibility of potential issues. Information may include an entity’s non-compliance with environmental standards and regulations, how an entity treats its employees or potential risks that could materialize into labor law litigation.
Ongoing due diligence on third parties will identify changes, making sure there are no hidden surprises or material issues. But businesses must be prepared to pull the plug on a supplier if they don’t meet the necessary standards at any point in the relationship. Responding swiftly and building preventative measures in response ensures violations will not reoccur.
Getting The Most From Impact Risk Assessments
At IntegrityRisk, we’ve developed ImpactCheck to help businesses align ESG priorities and due diligence. Using a systematic, analytically driven and comprehensive approach, we combine due diligence and investigative assets, data analytics tools, and internationally accepted accounting and reporting standards to verify, validate, and authenticate environmental, social and governance investing performance.