Integrating ESG into Your Business
It is easy to get lost in ESG. Focus is the key. Leadership has to define the ESG strategy. A designated officer has to lead implementation.
The ESG bucket can carry a variety of causes, issues and priorities. Leadership has to sift through these individual items and commit to action. The ESG program now has to be implemented.
A first step is to identify opportunities and objectives for the program. Risks in these areas have to be identified as well. (e.g. climate change and carbon footprint). Strategic analysis coupled with a risk assessment is a fundamental issue.
Strategic planning, business analysts and risk management in the company have to incorporate ESG issues. There is no need to design an ESG process outside existing business planning procedures. The trick is to add the ESG focus to existing procedures and controls.
To ensure proper integration of ESG issues, corporate internal controls have to be updated and ESG training has to be required for a broad audience. This objective has to flow from a corporate ESG policy. Just like any other corporate policy, a broad statement of intention is the first step, and specific procedures/controls need to be defined to guide the process.
This leaves an important question – who should be the policy owner? A designated ESG team, like ethics and compliance, has to have authority and access to the C-Suite to get the job done. ESG also needs line of sight across the organization. ESG is a practical, high-priority initiative that should reflect the overall commitment and stature. Public relations, communications and investor relations should not be managing the program. ESG is a business priority, one that adds value to every aspect of corporate business. Its organization, leadership and operation has to reflect these fundamental principles.
Like compliance, ESG has to be part of the organization’s fabric – its day-to-day operations and its decision making functions. Each company function has a role to play – human resources, legal and compliance, business development, investment planning, corporate reporting, and on and on. Each function has a responsibility to operate consistent with and in furtherance of the organization’s ESG program, prioritizing ESG objectives and being held accountable for ESG objectives.
ESG challenges companies to reframe business operations to incorporate longer-term planning, social values and initiatives and, of course, effective governance structures. This is another way of restating the obvious trend in global business – companies have to develop forward-looking, long-term strategies that incorporate future economic, environment, social, regulatory and ethical developments. Organizations cannot isolate themselves from social, environmental and economic influences and events.
Reporting on ESG performance has to be managed by a disclosure team. Regulators are likely to provide guidance on reporting requirements. The SEC intends to develop a comprehensive ESG disclosure regime. Investors and shareholders will demand accurate disclosure of ESG performance.
Corporate boards have to play a significant role in the design, implementation and operation of the ESG program. Similar to ethics and compliance programs, directors have to ensure that ESG priorities are aligned with the business interests, that ESG risks are managed, and that the ESG program is advancing the company’s ESG objectives.
Corporate boards have to determine the best way to organize its oversight function. The entire board is responsible for the ESG program. Whether a separate committee (e.g. ESG Committee) should be created or each existing committee charter should be amended to incorporate ESG responsibilities, is an issue that should be determined by each organization. Given the broad application of ESG priorities and requirements across the corporation, most companies probably will add ESG responsibilities to existing committee responsibilities.
ESG and compliance are natural partners with basic overlap in the governance area. Both compliance and ESG require line of sight across the organization, and share the interest in having every part of the corporation incorporate compliance and ESG principles. Given this basic reality, companies will look to ethics and compliance professionals for a valuable perspective on how to design and implement an effective ESG program.
Corporate sustainability programs reflect stakeholder, shareholder and government demands to address societal issues from environmental harms, racial justice, employment practices, and community injustices.