A purposeful approach to environmental, social and governance factors has been saved
A purposeful approach to environmental, social and governance factors
Meeting your stakeholders’ expectations
As a responsible purpose-driven organisation, you want to embed environmental, social and governance (ESG) factors in the management and assessment of your performance. This enables you to measure your progress and share your purpose journey with your stakeholders. But how do you quantify and measure ESG factors? In this blog, we set out a few simple steps to get you moving down your ESG path.
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Running a responsible business extends far beyond what we find in typical financial reports. Being able to measure and report on your ESG performance in a trustworthy manner can distinguish you in the eyes of both internal and external stakeholders. Internal stakeholders want to know about an organisation’s responsible practices and see that rewards are fairly allocated, while investors, customers, creditors, ratings agencies, regulators and the media increasingly demand transparency to understand an organisation’s risk and opportunity profile. If you’re able to prove that your organisation’s decisions, policies and practices are environmentally and socially responsible, it will benefit both your reputation and your market position.
It is important to note that ESG raters, who publicise their results, base their assessments solely on publicly available data. As a public company, you cannot opt out of these ratings, which underlines the importance of solid ESG data over time.
In the past few years, we have advised many clients in setting up an ESG reporting framework that meets their stakeholders’ demands or is compliant with new regulations. Some of our clients started by identifying and measuring ESG performance in an unstructured and ungoverned way and now need a refresh and a new ESG baseline. Others started with a clean sheet.
ESG governance and structure
Whatever your starting point is, sound ESG reporting begins with a good governance structure that fits your organisation’s long-term strategy. If you want your ESG reports to look as robust as your financial reports, leadership and structure are essential. This is mainly because the required data comes from all parts of your organisation, often outside the area of financial reporting. In most of these areas, working with data from a controlled and even audited process and system is new.
In addition, it is necessary to run processes around ESG data collection along with existing processes for collecting financial data. For example, banks ideally should also embed the collection of relevant ESG data in the Know Your Customer/loan origination and monitoring processes they have implemented. The same applies for manufacturing companies when it relates to safety and accident reporting. In this way you build on existing capacity and experience.
Proper governance also means that ESG performance should be included in organisational KPIs and even as a bonus remuneration component. This signals you’re serious about ESG performance. In addition, supervisory directors should be trained to ask critical questions pertaining to ESG numbers.
Material ESG issues
Just as in financial reports, ESG reports should focus on material issues. Involve finance, control, internal audit, data and subject matter experts on ESG performance metrics to professionalise your reports.
It is important to focus on the ESG factors and material issues where your organisation can make an impact. For example, a beer brewer or clothing manufacturer might focus on water consumption, the impact on other natural resources and human rights. A financial institution might focus on responsible investment, inclusion and transparency towards clients and investors, while a chocolate factory may focus on a sustainable supply chain through fair compensation for cocoa farmers.
Tell your story in a credible way
Governance and the quantification of material issues are the foundation of proper ESG disclosure. When you’ve built a solid foundation, you can start sharing your story. Explain in a public-friendly way why you used the data and definitions you used and why you chose not to include other data. Translate internal data into data that is relevant to readers. Be transparent about weaknesses, uncertainties or data gaps, and explain what you are doing to make improvements. Credible and authentic ESG stories take your stakeholders on the purpose journey with you.
If you are interested in this topic and would like to have more information you can read our report Climate-related disclosure. Do you have any questions or would like to discuss opportunities feel free to reach out to Harvey Christophers, Eric de Weerdt or Han Hindriks via the contact details below.