Key Considerations in Developing an ESG/Sustainability Strategy – Corporate Governance
The environmental, social and governance (ESG) aspects of a business have become increasingly important in determining the true value of organizations and their ability to create long-term value and positive results.
Environmental, social and governance (ESG) criteria designate the activities of an organization as being sustainable, responsible or ethical.
ESG/sustainability concerns the risks, opportunities and impact that an organization has on its internal and external stakeholders through the environmental, social and governance elements of their organizational practices. The responsibilities of business owners now include incorporating ESG/sustainability practices into core business practices.
ESG topics fall into one of three broad categories represented by its acronym:
- “Environmental” considers how an organization functions as a steward of nature and the impact of the organization on the surrounding environment. The impact includes carbon emissions, waste management, water management, raw material supply and vulnerability to climate change.
- “Social” examines how organizations manage relationships and interaction with internal and external stakeholders, including employees, customers and the wider community. Risks that fall into this category include corporate social responsibility, labor management, data privacy, general security, health and safety, compensation, and the reward system. Additionally, social ESG topics such as diversity, equity and inclusion have become popular.
- “Governance” refers to variables such as business ethics and corporate policies, leadership, executive compensation, internal controls, intellectual property protection, shareholder rights and anti-corruption. Corruption. Although social in nature, diversity risks can also relate to governance, such as actions to improve board diversity.
Benefits of ESG/sustainability culture
ESG/Sustainability Considerations Vary Across Organizations and Sectors Identifying and addressing gaps in ESG business practices increases value creation in a virtuous cycle of continuous growth and progress that will establish sustainable corporate profitability.
Understanding the ESG aspects of your organization provides an in-depth exploration of non-financial risks that negatively affect organizational performance. Benefits of ESG integration include:
- Increased brand value – considering different ESG aspects will enable value creation by recognizing the gaps present in their ESG business practices and closing the gaps to extract that subsequent value.
- Increased stakeholder trust – stakeholders, from customers to investors, are increasingly influencing their decisions about the ESG aspects of an organization which companies can actively seek to attract and retain shareholders with longer-term programs and more durable.
- Build reputation – ESG elements provide an opportunity for an organization to showcase its attitude towards being a good corporate citizen. Although ESG aspects are generally referred to as non-financial elements, they can have a direct impact on the financial performance of an organization.
- Reduced business costs – Studies have shown that organizations with strong ESG practices are more likely to have a lower cost of capital, fewer corruption accounts and reduced volatility. Meanwhile, organizations with poor ESG practices were more likely to have a higher cost of capital and increased volatility due to organizational disruptions, potential liabilities or legal compliance issues.
- Business Development Opportunity – Companies can proactively pursue business development and revenue growth opportunities that arise from the sustainability strategy. For example, many companies have established teams whose sole function is to identify new sustainability opportunities, such as new products and services.
Define the right strategy
An effective sustainability strategy should be integrated into your broader business and aligned with your goals and objectives to create long-term value for your organization, your internal and external stakeholders, and society at large while safeguarding the world’s natural resources for future generations.
Organizations must fully integrate sustainability strategy into their business model to effectively seize new opportunities. Key issues to address to achieve an ESG maturity level include.
- What are the relevant sustainability risks and opportunities for our business? What impact does our activity have on the planet, people and society? This is usually done by carrying out a materiality assessment.
- What critical aspects of our business model need to evolve to become sustainable? How to adapt our strategy?
- What is the appropriate governance to implement our sustainability strategy? How should our internal organization evolve?
- How can we develop the policies, action plans and targets to achieve our sustainability strategy? What resources are needed?
- How can we track progress against the goals and achievements of our sustainability policies and action plans? What indicators should we follow?
The board/management should take responsibility for planning and executing ESG risk and impact strategies, creating related policies, procedures and internal controls, identifying relevant measures on which to base sustainability reports and overseeing the creation of these reports.
Each organization should identify and assess its main ESG opportunities and impacts and determine key performance indicators (KPIs) to manage them. KPIs must be realistic and measurable because of the risk of not achieving them. Without a reasoned ESG risk management strategy based on a lucid understanding of the issues, poorly executed sustainability strategies and reports can quickly run counter to regulatory compliance and mislead investors’ expectations. To avoid such missteps, each organization must ultimately identify and assess its key ESG impacts and determine goals and strategies to manage them. Goals should be realistic and measurable.
Internal control is a process implemented by the governing body, management and other personnel of an entity, designed to provide reasonable assurance about the achievement of objectives relating to the operations, reporting and conformity.
Appropriate control activities must be designed and operate effectively from the operational stages through to the collection and analysis of data used in reports. Operationalizing sufficient control activity is the responsibility of management, while internal audit is responsible for providing independent assurance that activities are properly designed and operating effectively.
Standards, regulations and frameworks
In the Nigerian context, growing regulatory interest in sustainability has focused on whether what is reported accurately reflects an organization’s sustainability efforts, how these efforts relate to long-term value creation term and how it influences investors. The following standards and regulations currently address ESG/Sustainability requirements for public and private organisations:>
- According to Principle 26 of the Corporate Governance Code of Nigeria, “giving adequate attention to sustainability issues, including the environment, social, occupational and community health and safety, ensures long-term successful business performance and projects the company as a responsible corporate citizen contributing to economic development”.
- SEC Corporate Governance Code for Public Companies – Section 28 addresses the need for public entities to pay adequate attention to sustainability issues for the benefit of their stakeholders such as their employees, the host community, consumers and the public. They should also pay attention to corruption as a threat to their business and establish a culture of zero tolerance for integrity and zero tolerance for corruption. The code also requires entities to report annually on the nature and extent of social, ethical, safety, health and environmental policies and practices.
- Nigeria Climate Change Act 2021 – The Act requires all Federal Government Ministries, Departments and Agencies (MDAs); and public and private enterprises in Nigeria to develop and implement mechanisms to foster a low carbon, environmentally sustainable and climate resilient society.
The era of stand-alone ESG/Sustainability strategies, without proper alignment and integration of sustainability into the organization’s overall business strategy, must end; the creation of resilient business strategies that take ESG/sustainability as a basis must begin.
ESG/Sustainability reporting requirements are quickly becoming a mandatory part of the corporate agenda globally. Early preparation means lower compliance costs and a better reputation.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.