EXPLAINER ON ESG: 101

WHAT IS THE GREEN, SOCIAL, BOSS ?

ESG stands for Environmental, Social, and Governance. It represents a framework for businesses and investors to evaluate and measure the sustainability, environmental and societal impact of a company's operations and practices. The three components — Environmental, Social, and Governance — cover areas such as a company's environmental impact, social responsibility, and governance structure. ESG-aligned thinking provides a comprehensive approach to assessing the overall impact of an organization on sustainability and ethical practices

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

ESG LANDSCAPE: THE GROWING IMPORTANCE OF SUSTAINABLE PRACTICES

In today’s dynamic business environment, sustainability is no longer just a buzzword; it’s a critical factor for success. ESG (environmental, social, and governance) practices are becoming increasingly important for businesses of all sizes, as stakeholders, investors, and regulators demand greater transparency and accountability.

ESG REAL TALK: WHY BUSINESSES SHOULD SPILL THE DEETS!

ESG and climate-related disclosure is rapidly becoming a mandatory requirement for businesses. While corporate reporting has traditionally been voluntary or done at the request of investors, the world is quickly moving towards mandatory disclosure. Governments around the globe are implementing regulations that require companies to disclose their ESG performance. For instance, the European Union’s Corporate Sustainability Reporting Directive (CSRD) mandates that all large EU companies must report on their ESG performance starting in 2023.

ESG BEYOND CSR: DATA-DRIVEN IMPACT

ESG goes beyond traditional corporate social responsibility (CSR) by emphasizing measurable and data-driven impact. While CSR often focused on philanthropic efforts and reputational management, ESG is about integrating sustainability into the core of business operations. ESG companies use data to track their progress, identify areas for improvement, and demonstrate their sustainability commitments to stakeholders.

Sustainability, in the context of business, refers to the practice of meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable businesses operate in a way that minimises their environmental impact, promotes social responsibility, and upholds ethical governance practices.

BREAKING DOWN THE ESG TRIO: ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PILLARS

ESG encompasses three interconnected pillars:

BENEFITS OF IMPROVED ESG MANAGEMENT

Improving ESG management offers a multitude of benefits for businesses, including:

Enhanced reputation and brand value: Strong ESG practices can enhance a company’s reputation and attract socially conscious consumers and investors.

Reduced risk and improved financial performance: ESG risks, such as climate change and labour violations, can pose significant financial threats to businesses. Effective ESG management can mitigate these risks and improve financial performance.

Increased stakeholder engagement: Strong ESG practices can foster stronger relationships with stakeholders, including employees, customers, communities, and investors.

Competitive advantage and innovation: ESG leadership can provide a competitive advantage and attract top talent. Sustainable practices can also lead to innovation and cost savings.

WHY ESG IS THE STAKEHOLDER'S JAM!?

ESG matters to stakeholders for several reasons:

Investors: Investors increasingly incorporate ESG factors into their investment decisions. Strong ESG performance can attract more investment and lower the cost of capital.

Regulators: Governments are implementing regulations to address ESG issues. Companies with strong ESG practices are less likely to face regulatory scrutiny and fines.

Industry Peers: Companies with strong ESG performance can set a benchmark for their industry peers. This can lead to collective action on ESG issues.

NGOs and Public Scrutiny: NGOs and the public are increasingly scrutinising companies’ ESG performance. Companies with poor ESG practices can face reputational damage and boycotts.

HOW COMPANIES MANAGE ESG PERFORMANCE

Managing ESG performance involves a comprehensive approach that encompasses strategy, data management, and ongoing improvement.

Identify Material ESG Issues: Companies should identify the ESG issues that are most material to their business and stakeholders. This involves conducting a materiality assessment.

Set ESG Goals and Targets: Companies should set ambitious but achievable ESG goals and targets. These goals should be aligned with their overall business strategy.

Measure and Track ESG Performance: Companies should establish a robust system for measuring and tracking their ESG performance. This involves collecting and analyzing ESG data.

Report on ESG Performance: Companies should regularly report on their ESG performance to stakeholders. This can be done through sustainability reports, CDP submissions, and ESG disclosures.

CRUCIAL MOVES FOR EXCELLING IN THE ESG GAME

Get Ahead of Emerging Supply Chain Risks and Opportunities: Stay up-to-date with industry changes, upcoming policy changes, and market shifts. Work closely with suppliers and bring them on board early for upcoming regulatory requirements.

Shift the Focus from Carbon to Climate: Define material, non-carbon topics by conducting a materiality assessment with internal and external stakeholders. Identify upcoming ESG regulations that may impact your company and require environmental data outside

NAVIGATING THE ESG FRAMEWORK LANDSCAPE: UNDERSTANDING KEY FRAMEWORKS

The ever-evolving ESG landscape is characterised by a proliferation of frameworks and regulations, particularly from the EU. This abundance of acronyms and standards can be overwhelming for businesses seeking to understand and comply with ESG reporting requirements.

ESG DISCLOSURE ON THE RISE GLOBALLY – STANDARDS, PROTOCOLS, INITIATIVES

TO HELP DECIPHER THIS COMPLEX LANDSCAPE, HERE'S AN OVERVIEW OF SOME KEY ESG FRAMEWORKS:

1. International Sustainability Standards Board (ISSB) Standards

The ISSB, established under the IFRS Foundation, aims to develop a global baseline of high-quality sustainability disclosure standards. Their two flagship standards, ISSB S1 on Sustainability-Related Financial Information and ISSB S2 on Climate-Related Disclosure, provide comprehensive guidance for companies on reporting their ESG performance.

2. US SEC Climate Disclosure Rule

In response to growing investor demand for climate-related information, the US Securities and Exchange Commission (SEC) has mandated climate risk disclosure for publicly traded companies. This rule requires companies to disclose their Scope 1 and 2 greenhouse gas emissions, climate risks and opportunities, and their transition plans to a low-carbon economy.

3. EU Corporate Sustainability Reporting Directive (CSRD)

The CSRD, replacing the Non-Financial Reporting Directive (NFRD), significantly expands the scope and depth of ESG reporting for EU companies. It mandates disclosure on a wide range of ESG topics, including environmental impact, social impact, and governance practices.

4. Task Force on Climate-Related Financial Disclosures (TCFD)

The TCFD, established by the Financial Stability Board, provides a framework for companies to report on climate-related risks and opportunities. Its recommendations are structured around four key themes: governance, strategy, risk management, and metrics and targets.

5. Global Reporting Initiative (GRI) Standards

GRI, a pioneer in sustainability reporting, offers a comprehensive framework for reporting on environmental, social, and governance issues. Its standards are widely used by companies of all sizes and across various industries.

These frameworks provide valuable guidance for companies seeking to enhance their ESG reporting and demonstrate their commitment to sustainability. While each framework has its own specific requirements, they share a common goal: to provide investors and other stakeholders with transparent and comparable ESG information.

Here's a table summarising the key aspects of each framework:

Framework	Type	Scope	Key Focus
ISSB Standards	Voluntary	Global	Sustainability-related financial information and climate-related disclosure
US SEC Climate Disclosure Rule	Mandatory (for certain companies)	US	Climate-related risks and opportunities
EU CSRD	Mandatory	EU	Environmental impact, social impact, and governance practices
TCFD Recommendations	Voluntary	Global	Climate-related risks and opportunities
GRI Standards	Voluntary	Global	Environmental, social, and governance issues

As the ESG landscape continues to evolve, companies should stay informed about emerging frameworks and regulations and adapt their reporting practices accordingly. By adopting a proactive approach to ESG reporting, businesses can enhance their transparency, attract investors, and position themselves as leaders in sustainability.