Environmental, social and governance (ESG) refers to the non-financial metrics that businesses and investors use to assess a company’s sustainability, social responsibilityand ethical behavior. ESG factors are increasingly becoming essential considerations for business strategy and reputation management for companies regardless of their size or industry, as consumers, investors and regulators demand more transparency and accountability from companies.
Companies that prioritize ESG considerations in their business practices are better positioned to mitigate risks, build resilience and generate long-term value. However, navigating the complex landscape of ESG can be daunting, with multiple frameworks, standards and metrics to consider, particularly for companies that have not yet fully integrated ESG considerations into their operations.
This article aims to provide a roadmap for those newer to ESG, highlighting why ESG matters, the benefits of incorporating ESG into business strategy and operations and practical steps companies can take to get started, collect relevant ESG data and protect confidential ESG information. Whether your company is a small startup or a large corporation, this guide will help you understand the basics of ESG and why it is critical to the success of your business.
Why Should Your Company Care About ESG?
By incorporating ESG factors into its operations, a company can gain significant benefits, including:
Mitigation of risk: Companies with strong ESG practices are better equipped to mitigate risks and navigate challenges that may arise, including regulatory risks, reputational risks and risks related to sustainability and social responsibility. Government and agency ESG regulations and standards are rapidly evolving and becoming more stringent, and companies that fail to comply may face legal and financial risks.
Increase operational efficiency to achieve cost savings: Implementing ESG practices can help companies identify and implement more efficient and sustainable business practices, such as reducing energy and water usage, which can reduce their environmental impact and result in significant cost savings.
Improve Supply Chain Management: By working with suppliers who also prioritize ESG practices, companies can ensure that their supply chains are sustainable and that they are sourcing materials and products in an environmentally and socially responsible way. This can help reduce the risk associated with suppliers that may not meet ESG standards and other supply chain disruptions.
Enhance innovation: Companies that prioritize ESG are more likely to create new business opportunities and innovations that can lead to competitive advantages.
Attract investors: Investors are increasingly interested in companies that have strong ESG performance. Such companies are often seen as more sustainable, responsible and transparent; and research has shown that companies with strong ESG practices tend to outperform their peers over the long term.
Enhance reputation and brand value: Consumers are increasingly conscious of the impact their purchases have on the environment and society. A strong ESG reputation can help differentiate a company from its peers and enhance its brand value, which can lead to increased customer loyalty, and value of a company’s brands.
Attract and retain talent: ESG practices are becoming increasingly important to employees, particularly among younger generations; talented employees are increasingly drawn to companies with strong ESG performance as they value working for a company that aligns with their personal values.
Contribute to a more sustainable and equitable world: Companies that prioritize ESG can play a significant role in creating a more sustainable and equitable world for future generations.
What Can Your Company Do to Get the Most Benefit from ESG Practices?
Some of the steps that a company can take to get the most benefit from ESG practices, and that will be most impactful, include:
Develop a comprehensive ESG strategy: Set specific ESG goals and establish a clear and comprehensive ESG strategy that is aligned with a company’s values and priorities that provides direction for all ESG efforts.
Prioritize material ESG issues: Prioritizing ESG issues that are most material to a company’s business can help ensure that ESG efforts are focused on areas that will have the greatest impact on the company’s financial and non-financial performance.
Conduct regular ESG assessments: Regular ESG assessments can help companies identify areas for improvement and track progress towards ESG goals.
Implement sustainable business practices and technologies: Reducing energy and water usage, minimizing waste and emissions, sourcing materials from responsible suppliers and implementing other sustainable practices can help companies reduce costs and minimize their environmental impact.
Integrate ESG into decision-making: Establishing clear roles and responsibilities for ESG decision-making, such as a dedicated ESG committee or executive sponsor, and regularly reviewing and updating ESG practices, can help companies ensure that the company’s ESG goals and strategy are integrated into all decision-making processes.
Engage with stakeholders: Engaging with stakeholders can help companies understand their expectations and concerns regarding ESG practices and provide feedback on the company’s ESG performance.
Monitor and report on ESG performance and progress: Regularly monitoring and publicly reporting progress towards ESG goals to track performance and adjusting strategies as necessary can help companies demonstrate transparency and accountability and build trust with stakeholders.
Collaboration with peers: Communicating with peers can help companies develop consistent metrics and reporting standards and learn best practices for implementing ESG procedures.
Implement ESG training: Developing ESG training for employees can help ensure that all employees are aware of the company’s ESG goals and practices and can help to promote a culture of sustainability and social responsibility.
How Does Your Company Collect and Manage the Data Needed to Track ESG Performance?
In order to effectively implement and benefit from ESG practices, companies need to be able to collect reliable ESG data to accurately track and report on their performance and identify areas for improvement in a variety of ESG categories. Collecting this data can be a challenging task, as it often requires integrating data from multiple sources and assessing qualitative information. To facilitate collection of reliable ESG data, companies should consider the following:
Identify relevant ESG metrics: The first step in collecting ESG data is to identify the relevant ESG metrics that align with the company’s business strategy and stakeholders’ expectations and with industry-specific best practices; as well as metrics for which disclosure may be required pursuant to applicable laws and regulations. These metrics may include energy consumption, greenhouse gas emissions, water usage, labor practices, human rights, diversity and inclusion and executive compensation.
Identify relevant ESG data sources: Identifying the pertinent ESG data sources, such as internal data and analytics, third-party data providers, or industry benchmarks, can help ensure that the company is collecting comprehensive and relevant data.
Standardize ESG data collection and leverage technology: Using consistent data definitions or reporting templates can help ensure data is collected consistently and accurately across all business units. Using technology solutions, such as data analytics software or ESG data providers, will help to streamline and automate data collection and analysis.
Implement data quality controls: Implementing data validation or data cleansing processes can help ensure that the data collected is accurate and free of errors.
Monitor data over time and regularly review and improve data collection processes: This will ensure accuracy, completeness and reliability of ESG data and help identify trends and areas for improvement that are consistent with the company’s evolving ESG priorities and stakeholder expectations.
Use established reporting frameworks: To ensure that ESG data is reported accurately and transparently, companies need to establish reporting protocols that outline the data collection process, quality control measures and reporting frequency. Companies may want to align their reporting with recognized ESG standards or frameworks, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), or the soon to be issued International Standards Sustainability Board (ISSB) Sustainability Disclosure Standards to ensure consistency and comparability of ESG data.
Engage with third-party organizations: Third-party organizations such as accounting firms, certification bodies, industry associations and ratings agencies can provide independent verification and assurance of ESG data, giving stakeholders’confidence that the reported data is accurate and reliable.
How Can Your Company Protect the Confidentiality of ESG Information?
Implementing ESG practices will involve collection of sensitive and confidential information. To protect the confidentiality of this information, your company should consider the following:
Define information to be protected: Identify and provide written descriptions of the types and categories of information and data that are confidential or privileged, such as legal assessments of regulatory compliance, strategic plans, materiality assessments, supply chain data, trade secrets and employee health and safety and other personal data.
Establish protocols for handling confidential information: Develop clear and comprehensive protocols for collecting, storingand transmitting confidential information, and that explain how the ESG process will address legal issues. Companies should regularly assess the risks associated with collecting and storing sensitive ESG data, and review and update these protocols to ensure that they are current with the latest data protection best practices and regulatory requirements.
Attorney involvement from the outset: In order to invoke a claim of attorney client privilege, communications must be to or from an attorney; and to claim protection under the work product doctrine the communication must be prepared for or in anticipation of litigation. To maximize potential privilege protections, it is critical that in house or outside counsel have overall responsibility for developing, implementing and managing the protocol for handling confidential information.
Use secure data storage systems: Use encrypted databases, password-protected servers and files, anonymization techniques to remove personal or identifiable information from data sets, along with other security measures to protect confidential information.
Limit access to confidential information: To detect and prevent unauthorized use of confidential information, it’s important to limit access to only those who need the confidential information to perform their duties.
Require confidentiality agreements: Require employees, contractors and third-party vendors who have access to confidential information to sign confidentiality agreements that outline the terms of confidentiality and the consequences of any breaches.
Use third-party data processors carefully: When working with third-party data processors, such as ESG data providers or analytics firms, carefully review their data protection practices and ensure that they meet the company’s data protection standards.
Train employees on data privacy and security: For information protection protocols to be effective it is critical to train employees on data privacy and security best practices, including how to handle and protect confidential information.
In a world where ESG concerns are increasingly important to stakeholders, companies that prioritize ESG considerations are better positioned for long-term success and growth. The steps outlined can help companies identify and prioritize material ESG issues, collect reliable ESG data and integrate ESG considerations into their decision-making processes. Ultimately, effective implementation of ESG practices can enhance a company’s financial and non-financial performance, bolster resilience and increase stakeholder engagement and confidence – all of which are crucial for companies to remain competitive in today’s rapidly changing business landscape.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
Published April 14, 2023.
