Financial Statement Audit: Tips & Insights on Tackling Your ...
Why ESG Is So Important to Your Organization's Future
ESG isn't a buzzword. It's not a corporate flavor-of-the-month that will come and go like an afternoon storm. Nor will it take a long-term backseat to other global headlines. Simply put, there aren’t too many market forces as relevant, powerful, and unyielding as ESG, and that's not going to change anytime soon, if ever.
Sure, for any other topic, you might think we're being hyperbolic with that introduction. However, whether you put credence into it or just see it as an annoyance, ESG will inevitably, inescapably wield a massive presence in your organization's future, helping inform and shape nearly every decision you make in some way. So doesn't it just make sense to fully understand what ESG is all about and, most importantly, why it's so instrumental to your company's well-being and viability? We thought so, too.
What Is ESG?
Environmental, social, and governance-propelled issues and dynamics. As we said, they’re amongst the most consistently relevant, hit-the-nail-on-the-head forces in today's world. And that notion, in a nutshell, explains ESG's placement at the top of the corporate hive mind these days – it collectively represents the elemental forces that will help shape the markets and your organization’s place in them. Pretty heady stuff, huh?
Of course, it's tough to develop an ESG strategy for your enterprise if you still have questions on what it entails. So on that note, let's break ESG up into its components and see what each means from a corporate perspective.
Given how front-and-center environmental issues are worldwide, there isn't much ambiguity concerning this component of ESG. Greenhouse gas emissions (GHG), carbon emissions, climate change, carbon footprints, natural resource management, renewable energy – they're all part of the ever-expanding vocabulary of environmental consciousness.
While the US has yet to codify many rules and regulations around ESG reporting, that will be changing very soon. As in imminently. In the meantime, the GHG Protocol Corporate Standard is already an internationally-accepted framework for reporting on an organization's GHG emissions, breaking emission into three types or scopes:
- Scope 1: Direct GHG emissions from sources owned or controlled by the company, including vehicles, manufacturing equipment, furnaces, boilers, and the like.
- Scope 2: Indirect emissions stemming from an organization's purchases of electricity, steam, cooling, and heat.
- Scope 3: Indirect emissions occurring throughout the value and supply chains, from sourcing raw materials and waste generated to delivering the final product. Although Scope 3 emissions are generally voluntary – though we have yet to see where the SEC will land on that specific area – and get the least publicity, they account for significant portions of total corporate GHG metrics.
Also, note the GHG Protocol Corporate Standard isn’t the only ESG standard and framework already in place. But more on that in a bit.
Equity. Diversity. Inclusion. Human rights. They’re all critical social criteria and essential to an ESG strategy. How well do you treat your people? Are you cultivating a safe, healthy, fulfilling company culture and workplace environment? What steps have you taken to prevent child labor in your manufacturing? These are the types of questions lying at the heart of social practices and driving positive social impact.
Therefore, your hiring practices, diversity initiatives, internal rules and regulations, work safety programs, community engagement, executive pay and compensation guidelines – elements of which are also a part of governance – and so many more are under a bright, ESG-driven spotlight. And everyone from investors and shareholders to potential talent and other key stakeholders are paying close attention to your social ESG metrics and reporting, benchmarking and scoring you against other organizations.
This third sleeve of ESG might not get the same level of scrutiny as the previous two, but don't assume you can fall asleep at the proverbial wheel without having more people than you can count take notice. Because everything rolls downhill from your corporate governance and organizational leadership, making it a critical tone-setter for the entire organization.
Do you have a diverse board that reflects your employee and customer bases? How active are you in vetting and overseeing vendors? Or engaging your stakeholders? People inside and outside of your company want to know you've addressed these governance-related ESG factors and, in turn, ensured your actions and policies are fair, transparent, responsible, and forward-looking.
Why ESG Is Essential to Your Organization's Success
Given everything we just discussed, it's not hard to see why ESG is so critical to your enterprise and future success. Long story short, people expect it from you. And by people, we mean everyone, from institutional investors to potential customers and nearly everyone in between. However, as we're about to explain, there are other crucial aspects to your ESG policies, some obvious but others that might fly a bit under the radar.
ESG Reporting and Regulatory Forces
As we said, the United States will be codifying significant ESG reporting requirements very soon. However, if you're a public company, the SEC already requires disclosures on all information in your quarterly and annual reports that might be material to investors. Thus, building on that notion, the transitive property teaches us:
- If ESG disclosures are important to your investors, and;
- Investors are important to you, then;
- ESG disclosures should be important to you.
Put another way, whether or not you have to provide ESG-focused metrics and information, you should want to. Public or private, your customers are likely to demand ESG information and, if you happen to do business in foreign territories, there's a pretty good chance those foreign governments or regulatory bodies do mandate – or at least recommend – ESG/sustainability reporting in some form, including:
- Global Reporting Initiative (GRI)
- Task Force on Climate-Related Financial Disclosures (TCFD)
- Sustainability Accounting Standards Board (SASB)
- along with Climate Disclosure Standards Board (CDSB), soon to be integrated into the newly-formed International Sustainability Standards Board (ISSB)
- GHG Protocol Corporate Standard
- Corporate Sustainability Reporting Directive (CSRD)
ESG Sets You Up for Long-Term Success
Embracing ESG is less an entirely new skillset – though it may be in part – and more a new mindset. It requires looking at your operations and decision-making process through an additional lens, one that accounts for sources of existential risk that might have been no more than an afterthought just a decade ago.
It’s the same type of perspective you occupy when building out an ERM framework – a robust ERM program is often part of a company’s focus on governance as well – by identifying and accounting for risk that, without sufficient preparation and an eye down the road, could very well blindside your entire organization. As an example, would your people and enterprise have fared better through the coronavirus pandemic if you had implemented a sound business continuity strategy ahead of time? Probably.
In fact, you could have leveraged that strategy – and resulting preparedness – as a source of significant value, helping you establish a distinct competitive advantage while your competitors scrambled to keep the ship afloat. The same notion applies to an effective ESG strategy, providing the tools and reporting framework you need to address similarly existential ESG risks.
Therefore, like ERM and an external shock to your corporate system like a pandemic, a sound ESG strategy identifies environmental, social, and governance-related risks, and, just as importantly, establishes a game plan for you to follow. In this sense, ESG is another possible source of significant value for your company, especially relative to the rest of the market.
Zooming in even further, there will come a point in time – if it hasn’t hit you already – where customers, investors, and partners will only support or work with organizations with solid ESG practices in place. Thus, ESG can set you up for long-term success, helping ensure you stay viable and competitive as the marketplace evolves.
The Fight to Attract and Retain Talent
Out of all the sobering statistics you've heard around The Great Resignation, here's one that probably slipped through the cracks – according to Gallup, roughly 70% of the US workforce says an organization's environmental track record plays a role when deciding to accept a job offer or not. Further, 24% of people say the environment is a "major factor."
Or how about these – by 2025, millennials will account for 75% of the global workforce, of which, according to past research, 76% would rather earn less money to work for a company with a strong commitment to addressing ESG issues. Suffice it to say, there's a strong correlation between your ESG strategy, ESG leadership, employee engagement, and your ability to both attract and retain the talent you need to innovate and grow.
Likewise, the importance of ESG will only expand in the future, making the environmental impact of your operations and approach to social and governance issues prerequisites for access to capital, talent, an expanded customer base, and, ultimately, financial performance. Thankfully, Embark's team of ESG reporting experts is here to help you better understand the many facets of ESG and implement sound solutions, all so you can establish or mature an ESG program that serves your employees, customers, and stakeholders well. Because we're all in this together.