Navigating the ESG ecosystem

There is no denying that the noise around ESG has become louder. Standards and frameworks have mushroomed, regulatory changes are on the horizon, and there are a myriad of private ratings agencies claiming to offer a one stop shop for ESG assessments.

The concept of “successful” ESG risk management is a moving target. So how can companies navigate the ESG ecosystem and develop an approach that is credible, proportionate, and adaptable to inevitable future change?  

Why now?

These issues are not new. But language has changed, scrutiny is increasing, and companies are under pressure to demonstrate proactive engagement with ESG issues. Stakeholders want more consistent and targeted ESG reporting and many businesses are still unsure how to implement an approach that suits their corporate setup and satisfies these demands. 

The ESG governance landscape is largely defined by a crowded ‘alphabet soup’ of voluntary initiatives. Underpinning many companies’ approach to sustainability are targets and frameworks like the International Finance Corporation’s Performance Standards, the United Nations’ Sustainable Development Goals, and the Task Force on Climate-related Financial Disclosures (TCFD). These tend to be qualitative principles and benchmarks that cut across sectors and are used by companies to direct business strategy and aid voluntary disclosures.

Industry initiatives and coalitions, including the Equator Principles and the United Nations’ Principles for Responsible Investment, also provide users with qualitative guidelines to follow and integrate into risk management frameworks, but with the aim of creating consensus in specific industries or scenarios.

Responding to demand for consistent and comparable data points between companies are the standards setters – non-profits such as the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI), who provide granular details on recommended disclosures and require quantitative and qualitative analysis of responses.

This reporting and disclosure landscape is rapidly evolving. The two most important developments will be calls for performance reporting standardization and upcoming legislative changes, including a proposal due in early 2021 on the European Commission’s plans for mandatory human rights and environmental due diligence in EU companies’ global operations and supply chains.

Take a practical approach

So how do companies reconcile these voluntary standards and regulatory pressures? And how can businesses develop an ESG risk management and reporting process that is credible, flexible and satisfies stakeholder demands? While navigating the ESG ecosystem can seem daunting, it need not be overwhelming. Following are five considerations to keep in mind:

1. Engage a risk-based approach that draws on the voluntary frameworks but is not rigidly structured around a single set of standards or guidelines. This will ensure you focus on the most material risk factors to your business. It will also increase the likelihood of resilience in the face of future change, such as convergence between standards.

2. Take time to understand the risks and opportunities that are specific to certain industries or geographies – and adapt accordingly. An ‘off the shelf’ framework will not take account of local dynamics and may fail to adequately consider asset-level issues. This is particularly important in complex operating environments.

3. Listen to your stakeholders. Which issues matter most to your employees, and have these changed in light of Covid-19? Do your shareholders require reporting structured around certain standards or frameworks? For example, Blackrock is requesting that all its investee companies disclose in line with SASB and TCFD by 2021.

4. Ensure your approach is proportionate to the size and profile of your business, a counterparty or a potential investment. There is no ‘one size fits all’.

5. Map the upcoming regulatory changes or mandatory disclosure requirements and invest in preparing for them. This could include the EU’s wide-ranging taxonomy and disclosure package, the first wave of reporting under the Hong Kong Stock Exchange’s new rule on listed firms disclosing social and climate change risks, or the UK government’s plan to make TCFD-aligned disclosures mandatory across the UK economy by 2025.

While navigating the ESG ecosystem may seem dauting, it need not be overwhelming. Companies should remember that there is no set template to follow. Successful ESG risk management should be a holistic process that accounts for — and responds to — varying and changing business and stakeholder priorities.

Our experience designing and implementing ESG risk management programmes and overseeing the management of ESG issues means that we engage a methodology that is grounded in recognised international best-practice standards and frameworks, but which is proportionate and tailored to industry and geography. This approach underpins all of our work, from ESG risk screening and due diligence or audits, to long-term monitoring and capacity building in social and governance issues, to crisis and incident response. 

We work with clients with differing reporting requirements and varying levels of sophistication in ESG management. All our clients have the benefit of our extensive global footprint and on-the-ground experience – we consider findings in the prevailing operating context and provide remediation advice that is tailored to local nuances. This is complemented by teams dedicated to monitoring national and regional regulatory and political developments, as well as specialists tracking changes in the ESG reporting landscape, who ensure that all clients receive timely advice that enables them to respond and adapt to shifting goalposts.