The word ESG (Environmental, Social and Governance) has been around for some time, and while larger businesses are incorporating it into their strategies, many companies are only just beginning to scratch the surface.
In this blog, we will explore the highlights from our latest Fireside Chat with GRC Expert, Michael Rasmussen, including what businesses should care about ESG, what regulations look like now and what to expect in the near future.
What is ESG after all?
ESG stands for Environmental, Social and Governance, and can be complex when you start to break it down. However, it’s not a new thing as we have seen it in the past, when it used to be called Corporate Social Responsibility (CSR). Each letter that makes up ESG stands for the three pillars within the framework in which companies report on, due to regulations and laws, and also for stakeholders and investors.
The E focuses on the environment, which can include carbon emissions, air and water waste, pollution and the use of natural resources.
The S looks at the social aspects, such as inclusivity, diversity, modern slavery, privacy laws, health and safety.
The G covers items, such as internal controls, financial reporting, beneficial ownership, information security, anti-bribery and corruption and money laundering prevention.
Why are we only focused on the “E”?
The E is at the start of ESG, so it makes logical sense that most companies start with environmental initiatives. The problem is that many organisations end up getting stuck, focusing only on the changes they may need to make to be seen as an environmentally responsible entity. However, Michael explains that actually, companies should start with the G. “Proper governance of the organisation, and GRC is how ESG gets done. ESG is the framework and reporting, but it doesn’t tell you the operations and processes you need to follow and how to embed them within the organisation.”
Should small and medium-sized businesses care about ESG?
“No matter your size, you should be focused on ESG," says Michael. Very small businesses won’t usually have it at the forefront of their minds, but companies of a significant size, especially those with 500 employees or more, will start to see a lot of regulation impact, especially in Europe, when it comes to ESG reporting.
For example, Germany’s Corporation Supply Chain Due Diligence Act states that companies with at least 3,000 employees operating in the country have to comply with the regulations (regardless of their legal form, head office, principal place of business or statutory registered office) as of 1st January 2023. From 2024, the Act will cover companies with more than 1,000 employees. This means it’s not just large enterprises that are under the microscope.
Michael explains that it’s not just the size of your organisation under scrutiny, but also those with which you do business. If you’re a small business with only 200 employees and are part of the supply chain dealing with a German company required under the Act to report on ESG, regulators will be looking at you. “Because they’re required to, that means you’re required too,” he adds. This has a big impact on global supply chains and will only get bigger, as the EU directive is going to require every member country to have similar laws as of next year.
What should businesses do now to prepare for a more sustainable future?
Michael suggests the first step companies should take is to do an inventory of all their policies and understand what relates to ESG. Then, they need to move onto the second step, which is reviewing what policies the company follows. Thirdly, organisations need to look at what policies need to change or be added, while keeping in mind what they want to achieve with ESG. This, then, defines the objectives for ESG and can assist businesses with mapping the risks to achieve company-wide goals.
What do ESG regulations look like across the globe and what could we see in the near future?
Europe has much broader regulations, with wider scopes, when compared to the USA, which has a fragmented approach. For example, the SEC is looking at climate disclosures which just focus on the E, while the California Transparency and Supply Chain Act is part of the S pillar. They are pieces of the puzzle that need to be combined.
The future is still unknown when it comes to ESG, but the ideal outcome would be for a unified global approach to ESG policies and regulations, with synergies between countries . If this happens, companies can build an ESG program looking at how an organisation can meet all their requirements on a global scale, picking up on the overlaps as well as the local nuances - as there will be some, based on certain jurisdictions and their specific laws.
What technology solutions can companies leverage to help them manage their ESG compliance commitments, now?
Organisations need to understand there isn’t one solution out there that does everything, and that is because ESG is very broad and complex. “The foundation of ESG is built in your policies, so you need good policy management to ensure that they reflect your ESG values and commitments,” says Michael. He goes on to say, “you need to have technology that can manage the overall assessment, monitor systems, and employee engagement as there are a lot of workflows when it comes to assessing ESG.” It is also important to have robust information architecture that can map ESG objectives and risks because people within your business will be reporting into different frameworks, standards and stakeholders.
“You can’t do this in document spreadsheets and emails as this is way too complex, you need good technology to be able to address ESG - it's absolutely critical,” said Michael.
At Clausematch, we often see companies trying to track and manage their policies in standard programmes, such as Sharepoint, Excel and Word; they are not built to manage policies and procedures. They may seem suitable in the outset, but as time progresses, the organisation grows, and the processes become more complex, you could end up drowning in a sea of polices and human errors in the drafting, reviewing and distribution stages.
To dive deeper into ESG and hear what Michael has to say about “greenwashing” and which industries are the current target of ESG regulations, watch the full webcast.