The past two years have seen winds of economic uncertainty blowing across markets all over the world. Unexpected natural disasters and social disruptions have pushed businesses to rethink their current business strategies and look for more holistic ways of redefining business processes with better risk and compliance frameworks. Of these, ESG – Environmental, Social, and Governance – is emerging as a business strategy that companies are looking at to deliver long-term value. With consumers and employees demanding sustainable ESG practices and regulators insisting on stricter corporate involvement on social and environmental issues, companies are left with no choice but to make ESG a business priority.
Focusing on ESG may not be a bad thing for business after all. As research reports go, there seems to be a strong connection between an organization’s ESG score and financial performance. Most businesses leaders will attest to this. A report by a top business consulting firm has shown that 92% of business leaders in the US, Brazil, the UK, Germany, and India agreed that companies with commitments to ESG policies will outlast competitors that don’t have them.
So, what is ESG, and how is it reshaping business strategy?
ESG is basically a metric to measure the impact of a company’s ethical contribution to stakeholders, the environment, society, and its own governance. It may also be understood as a corporate social credit score. Companies can use it to build new transformational business models that are aligned to the goodwill of the ecosystem and the people.
Organizations are increasingly being held accountable for corporate practices regarding climate sustainability, social responsibility, and governance. ESG risk factors are also emerging as financial risks that carry significant impacts on a company’s bottom line and valuation. Investors and asset managers are shifting investment appetite toward companies with sound ESG management programs. As part of good governance that fosters trust, transparency, and longevity, companies need a clear line of sight to an ESG measure.
The Securities and Exchange Board of India (SEBI) recently mandated sustainability reporting norms that necessitate an environmental, social, and governance (ESG) overview. The regulatory body for the securities and commodity market in India is hoping to bring both sustainability and financial reporting at par. Going forward, the business will be held accountable to its ecosystems from an ESG standpoint, which includes shareholders, customers, employees, and investors.
A standalone ESG strategy may not be enough
As businesses re-evaluate their ESG strategy, they often focus on the ‘environment’ aspect of ESG and neglect the ‘social and ‘governance’ parts. Unfortunately, most available technology platforms and solutions are also either heavily focused on the ‘governance’ aspect of ESG or only on either ‘social’ and ‘environmental.’This fragmented approach does not allow companies to put a robust ESG strategy in place. To be effective, an ESG strategy must be integrated into the overall governance, risk, and compliance (GRC) architecture of the organization. This is only possible if ESG monitoring and reporting start with governance.
Hence, this calls for an integrated approach – ESGRC.
Integrating ESG with GRC is the key to building a robust long-term framework
An integrated framework should be able to leverage the natural connection between ESG and GRC. It should enable a simplified and streamlined approach toward addressing all the organization’s requirements related to not just environment, social, and governance, but also to risk and compliance.
For example, a large, diversified media and entertainment company had merchandise licensing agreements with some of the leading licensees across the world. As a result of some issues with licensees, they faced huge social compliance issues, customer backlash, and reputational risk. Multiple consumer products were manufactured by the licensees under their brands, but the company and licensor had no visibility into who was manufacturing the products and where they were being manufactured. One of the licensees subcontracted the manufacturing work to another manufacturer, and they further subcontracted to a factory in another country. The overseas factory had poor working conditions, labor policies, and safety measures. A fire at the factory killed hundreds of workers and the brand was held responsible for the subsequent revenue and sales impact.
Following this tragic incident, the company implemented an integrated ESGRC framework and mapped the entire supplier, sub-supplier, contractor, and factory ecosystem across the world. They automated the entire factory audit process, creating visibility across the merchandising supply chain to ensure social and international labor standard compliance. With this, the company was able to quickly complete all audits of the factories, collaborate with them to ensure compliance with international labor standards, and avoid future reputational risk.
Benefits of an integrated ESGRC framework
According to industry experts, five key benefits may be derived from an integrated ESGRC framework:
- Enabling top-line growth: Creating a better public perception to attract new customers and gain the confidence of existing customers. Revenue growth by offering environmentally and socially responsible products/services to the market.
- Investment and asset optimization: Increase capital allocation from public investors and asset managers by enabling long-term growth, effective ESG risk management, and governance practices.
- Improving market perception: Gaining trust and confidence through transparency and effective ESG management. Customers are more willing to be associated with environmentally and socially responsible products and services. Investors lean toward companies with transparent governance practices.
- Cost reductions: Reduce overall energy and natural resources consumption. Decrease regulatory fines and legal costs.
- Regulatory and legal benefits: Decrease regulatory fines and legal costs. Reduce long-term restrictions through healthier relationships with regulators
An ideal ESGRC framework helps the company define and manage ESG standards, frameworks, and disclosure requirements. It should also link standards to organizational entities, key metrics, automate the collection and aggregation of data, and report through real-time analytics and dashboards. The framework should enable a centralized risk repository and provide tools to manage ESG-related risks and perform various assessments across business units and suppliers. It should be able to identify, track, and remedy ESG-related issues in an automated manner. Companies should look at frameworks that use AI-powered engines to classify and recommend remedial actions.
The article has been written by Aravind Varadharajan, Senior Vice President & Managing Director, APAC, MetricStream