Meeting the ESG Challenge

Perhaps I am little bit behind.  That would be nothing new – but we are getting to the point where we no longer need to spell out ESG.  Everyone knows what it means – directors, officers, employees, investors, shareholders and other stakeholders can spell it out.  ESG is firmly implanted in the corporate governance landscape.  Prosecutors and regulatory agencies are quickly adding ESG to their lexicon.

The real question for every organization is “what are you doing to address it?”  ESG is a terrific opportunity to leverage an organization’s corporate culture to address a broad set of values beyond ESG principles.  Step one in this process may already have been done – an organization has to define their mission, communicate that mission, and rally the organization to the mission cause.  With that foundation in place, let us know use ESG demands and principles to reinforce our corporate culture and bring a refined layer ESG principles as part of an organization’s.

Companies that have been committed to advancing a culture of ethics will find ESG a welcome challenge.  On the other hand, those companies who have failed to build an ethical culture will find ESG to be yet another challenge.  Organizations in this situation better get started and they better do so now.

Organizations cannot just waive their hands, repeat the mantra of ESG, write a few policies and then call it a day.  Much more is required.

There are many strategic parallels in the process of developing an ethical culture and an ESG program as a fundamental cornerstone of an organization’s operations.  Like corporate culture, corporate leadership – board members and the C-Suite – have to advance, communicate and commit to ESG.  Specific requirements and controls have to be integrated into strategic management, risk management, employee relations and compensation, corporate communications as part of an overall corporate governance plan.  In each context, a manager/leader has to embrace responsibilities and then held accountable for performance of ESG requirements. 

Planning, measuring and reporting ESG metrics in each function will enable an organization to disclose ESG data.  To bring even more value to investors, shareholders, regulators and other stakeholders, companies have to integrate ethics and compliance program reporting into ESG disclosure.  By definition, a combined reporting framework will make an important statement – ESG and ethics and compliance go hand-in-hand.  Companies can publicize this robust report to advance a company’s value and reputational strength.

A company’s most valuable intangible asset is its reputation.  Some estimates have ranged as high as 40 percent of a company’s stock value.  ESG is a powerful multiplier for shareholder value.  Add ethics and compliance to the mix and a companies will experience exponential increases in value.

Companies face a significant initial challenge – climate change.  Regulators, investors and shareholders are demanding that companies address climate change risks.  Companies have to quickly develop information, analysis and climate change factors as part of any significant corporate decisions.  Strategy, risk assessments, and planning have to incorporate climate change risk and impact.  Investors are looking for this kind of analysis.  Companies that ignore this demand will suffer quick negative results.  No one will forgive any company that suffers economic disruption from climate change. 

In this framework, corporate risk management functions are quickly improving as a predicate to prevent supply chain and economic disruption.  Such a process has to incorporate climate change and ESG procedures aimed at identifying risks and mitigation strategies.

ESG has focused corporate and public attention to important public policy issues – employee welfare, fair wages, health and safety, diversity and inclusion, environmental justice and voting rights.  The pandemic exposed weaknesses in corporate activities and priorities when it comes to these issues. 

At the same time, investors are demanding corporate strategy focus on long-term growth versus quarterly profit performance.  Long-term growth requires that companies develop sophisticated, long-term planning that builds on positive employee relations, long-term investment and sustainable financial performance to avoid short-term ups and downs in corporate performance.

Many companies are actively planning ESG programs, disclosure strategies and measurement of ESG factors.  Companies can establish standards for ESG strategies and eventually ESG reporting and metrics.  Corporate leaders have to embrace this quickly to get ahead of investor and stakeholder demand.  By doing so, corporate leaders can establish meaningful standards for companies that are “leading” from behind.

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