What is ESG (Environmental, Social, and Governance)

What Does ESG Have to Do with GRC?

GRC is no longer just about monitoring regulatory compliance or managing known risks. It’s about sustaining an organization’s license to operate—ensuring that business practices, operating procedures, and corporate behaviors are acceptable to employees, stakeholders, and the public at large. ESG is integral to that effort.

How a business manages its environmental footprint, gender diversity, or transparency in reporting impacts the company’s license to operate and therefore its GRC mission.

The link between ESG and GRC is even more evident when you look at the World Economic Forum’s (WEF’s) Global Risk Reports. Back in 2010, fiscal crises and underinvestment in infrastructure dominated the risk report. But in 2021, all the top 5 risks by likelihood and four of the top 5 risks by impact are related to ESG issues, including climate action failure, infectious diseases, and biodiversity loss.

GRC professionals have a significant role to play in mitigating these risks and building trust with stakeholders through robust ESG measures. In fact, at MetricStream, we believe that ESGRC will be the future of GRC.

What is the Board’s Role in Shaping ESG Strategies?

ESG risks are business risks – which is why they can’t only be the responsibility of Chief Sustainability Officers or compliance and ethics committees. Ownership must begin with the board. Corporate directors have a duty of care to consider how ESG factors impact the corporate strategies, performance, and risk health of the companies they serve.

Here’s how boards can lead the way on ESG:

• Provide effective oversight of ESG risks and opportunities: ESG risks are typically varied and dynamic with wide-spread impacts on corporate reputations, bottom-lines, compliance, litigation, and more. Therefore, they need to be examined not just in isolation, but in terms of their connection with other risks.
  Boards must be clear about who owns ESG risks, how they impact strategy, and where the organization’s risk appetite ends.Boards must also determine whether existing enterprise risk management (ERM) processes are effective enough to keep ESG risks in check. Wherever there are gaps, directors must work closely with the executive team to identify steps for improvement.
  Another board responsibility is to drive the adoption of ESG frameworks – be it the Sustainability Accounting Standards Board (SASB) sustainability metrics or the Global Reporting Initiative’s (GRI’s) reporting standards. Determining which framework to use depends on a number of factors such as whom the company will be reporting to, what that audience needs to know, and what kind of resources the company has to dedicate to disclosures.

• Track ESG progress: By regularly monitoring ESG objectives and metrics, boards can keep companies on their toes. The key is to ask the leadership team specific questions: Are our ESG goals compelling enough? What are we doing to achieve them? Where do ESG responsibilities and accountabilities lie? Are our ESG efforts integrated with strategic decision-making? Are they aligned with relevant standards and reporting frameworks? Are investors and regulators satisfied with the quality of our reporting?

  The more informed boards are about ESG performance, the more effectively they can guide and support their companies in delivering long-term value.

• Ensure that disclosures are reliable and credible: Boards must ensure that robust control systems and processes are in place to regulate the ESG information that’s reported, including how, when, and where. Is the information accessible, credible, and backed by quality metrics? Is the messaging consistent across the corporate website, sustainability reports, and regulatory filings? Is it aligned with the company’s purpose? Has it been validated by a third party? Boards also need to probe deeper on the transparency and truthfulness of disclosures. Too often, companies cover up the shortcomings of their ESG programs, focusing only on its successes and achievements. This makes the content sound biased. Having the courage to talk about both the good and bad in an ESG journey goes a long way towards building trust and credibility. The board must help their organizations drive towards these objectives.

5 Benefits of Building a Strong ESG Profile

It’s never too early to incorporate ESG propositions into your GRC and business strategies. By embracing ESG practices, you gain multiple benefits, including:

• Stronger revenue growth: There is growing evidence that a higher ESG rating correlates with higher financial performance. Companies that prioritize ESG are perceived as credible and trustworthy. This helps them attract more customers, enter new markets with ease, and acquire permits and approvals faster.
• A competitive edge: Sustainability and good governance matter to consumers. When you demonstrate a clear commitment to ESG and a purpose beyond profits, you’re more likely to win consumer favor and loyalty. In fact, 52% of consumers say that what attracts them to buy from certain brands over others is that those brands stand for something bigger than just the products and services they sell, which aligns with the consumer’s personal values (Accenture).
• Better talent acquisition and retention: Young and talented workforces are choosing employers whose values are aligned with theirs. So, when potential recruits see that your business genuinely cares about issues like employee development, diversity, ethics, and climate change, they’re more likely to want to work for you. Employees are also more motivated, engaged, and productive when they know that their work is purposeful and makes a difference.
• Lower costs: Being more energy-efficient or using less packaging material will help you cut costs. McKinsey research finds that reducing resource costs can improve operating profits by up to 60%.
• Fewer regulatory compliance risks: By demonstrating strong ESG measures, you minimize the risk of regulatory sanctions, penalties, fines, and other enforcement actions. ESG-focused investing also often comes with attractive tax incentives, as governments seek to reward responsible financial behavior.

What are the Challenges of ESG Compliance?

ESG, while important, can often be a challenge to implement. For starters, it’s a very broad discipline that covers a range of issues – from carbon footprint and biodiversity loss, to labor practices and corruption. Many of these issues can be hard to quantify in terms of their magnitude as well as their impact on financial risks.

But perhaps the biggest obstacle is the lack of a universally accepted ESG framework to assess and report ESG progress. Without it, companies end up using multiple different standards and metrics, which leads to inconsistencies and confusion. Stakeholders often find it difficult to compare ESG data or determine how it links to financial performance.

However, steps are being taken to standardize ESG reporting. For instance, the WEF, in association with the Big 4 accounting firms and Bank of America, have released a set of universal ESG metrics and disclosures. These “stakeholder capitalism metrics” are organized around the principles of governance, planet, people and prosperity

Further, the International Financial Reporting Standards (IFRS) Foundation is actively engaging with authorities like the International Organization of Securities Commissions (IOSCO) to develop a common set of global sustainability standards. These initiatives will help make ESG reporting more consistent, comparable, and reliable.

7 Common ESG Frameworks and Standards

• The Global Reporting Initiative’s (GRI’s) sustainability reporting standards are widely used by companies to understand and disclose their impact on the economy, environment, and people. The GRI Universal Standards apply to all organizations; the GRI Sector Standards cover sector-specific impacts; and the Topic Standards list disclosures relevant to a particular topic.
• The Sustainability Accounting Standards Board (SASB) has created a set of 77 industry-specific sustainability metrics that help companies and investors analyze how ESG issues impact financial performance.
• The International Integrated Reporting Council (IIRC) developed the International Framework to improve disclosures about value creation, preservation, and erosion. It encourages reporting around six broad capitals, including natural capital, human capital, and social and relationship capital.
• The Climate Disclosure Standards Board (CDSB) offers companies a framework to report environmental information with the same rigor as financial information. This approach benefits a range of stakeholders, including investors, analysts, companies, regulators and stock exchanges.
• CDP runs a global disclosure system that enables thousands of companies to measure and manage their risks and opportunities on climate change, water security, and deforestation.
• The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework to help public companies and other organizations effectively disclose climate-related risks and opportunities. The TFCD recommendations are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.
• The UN Sustainable Development Goals has set out 17 broad objectives for companies to achieve. They range from responsible consumption and production, to climate action and gender equality. These goals provide a foundation for companies to shape and prioritize their business strategy and reporting.