What is environment, social and governance (ESG)? – Corporate governance

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In this three-part series on social and environmental governance (ESG), we examine the origins of ESG, recent regulatory announcements, new emerging standards, and how to prepare your organization for the future of public reporting.

The term ESG may be buzzing in 2022, but the concept of measuring, disclosing and analyzing companies’ environmental, social and governance performance has been in development for decades.

The ESG performance criteria provide insight into the consideration given by business leaders to environmental, social and governance risks and opportunities related to operations. The process of preparing a company for a public ESG report can help identify missing policies and processes, but also new opportunities for waste reduction, stakeholder engagement and innovation.

ESG encompasses a wide range of issues, but most commonly:

  • Environment criteria: greenhouse gas emissions, waste production, water security, climate change risk management strategy

  • Social criteria: diversity of employees and suppliers, socio-economic impact in the community, equal pay, health, safety and human rights of workers

  • Governance criteria: transparency, policy development, board independence, diversity, anti-bribery and anti-corruption measures, tax practices and executive compensation

WHAT ARE THE ORIGINS OF ESG?

Traditional economists viewed environmental, social and ethical concerns as externalities and therefore not financially important to a company’s performance, but in the 1980s and 1990s this began to change. Numerous revelations about public safety, human rights abuses, and environmental disasters attributed to corporate operations have not only devalued companies, but also forced society to view business impacts differently. A shareholder-centric view of a company’s responsibilities has become inadequate to manage all risks.

Further spurred by calls from civil society to increase transparency and social accountability, companies have begun to engage a more inclusive stakeholder group and communicate their progress on corporate social responsibility. Reporting frameworks such as the Global Reporting Initiative (GRI) G1 standard, first published in 2000, have helped companies qualify and quantify impacts for stakeholders. This practice of voluntary annual public reporting has become the benchmark for all future corporate reporting.

The United Nations Environment Program Finance Initiative (UNEP FI) used the acronym ESG in 2004 to describe its work on sustainable finance with banks, insurers and investors and the concept has continued to grow. develop since. Multi-stakeholder consortia have continued to quietly build and refine public disclosure frameworks that deliver the transparency society demands of modern business and the consistency the financial industry has demanded of environmental, social and governance claims. The Sustainability Accounting Standards Board (SASB), founded in 2011, created a financial materiality map of ESG indicators by sector that established credibility within generally accepted accounting principles. The financial materiality of ESG was strengthened by the creation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015, whose guidance on climate risk disclosure has become part of mainstream finance.

ESG NOW

There were several significant ESG announcements during the first half of 2022, including:

  • International Sustainability Standards Board (ISSB) offers unified disclosure standards for capital markets.

  • The Global Reporting Initiative (GRI) has announced a collaboration with the ISSB; align the multi-party disclosure framework already used by thousands of publicly traded companies.

  • The 2022 Canadian federal budget included an announcement that obligatory climate-related reports are planned for federally regulated financial institutions.

  • S. Security and Exchange Commission (SEC) Proposed rules standardize climate information for investors.

Investor-focused capital market standards and multi-stakeholder sustainability standards are aligning, and North American regulators are beginning to mandate ESG disclosure for financial institutions. While this may not impact your business today, it signals a demand for increased transparency around ESG risks for your business and should create climate disclosure requirements for institutions’ customers and suppliers. financial.

Under the oversight of the Board of Directors, General Counsel and senior management have the opportunity to make your organization more resilient and proactively manage a wide range of issues. Companies that put in place committees, policies and processes to manage ESG performance have the opportunity to go beyond compliance and turn it into a strategic advantage.

By embedding environmental and social value into your culture and prioritizing ESG as a center of excellence, you will learn ideas, inspire employees, and be in a better position to differentiate your organization. Every company has the opportunity to contribute to a fair and sustainable future, but leadership is essential to implementing an impactful ESG practice.

BY: Steven Fish, Independent ESG Advisor

In Part 2 of this 3-part ESG series, we’ll talk about organizational leadership, engaging your teams, and creating value for all stakeholders.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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