ESG: Commitment vs. Execution
Stop drowning your teams in endless new policies and start showing them how to make a difference.
In business, as with most aspects of life, good intentions seldom transition into commitment that is fulfilled by execution for reaping the benefits of initial ambitions. Today a vast majority of organizations around the world are focusing on their commitments to environmental management and sustainability. In fact, those buzzwords are used so frequently now, that most people simply assume that they have the same meaning.
Environmental, Social, and Governance (ESG) is another business term that is frequently used nowadays, especially in the investment sectors. The commonly used ESG refers to the three central factors for measuring sustainability and societal impact outside of the traditional financial analysis. The integration of environmental, social and governance factors into the investment process and decision making has truly changed how investors view the health of a company and therefore the risk of the investment. Larry Fink, CEO of Blackrock, said this in a letter to his clients in January 2020:
By the end of 2020, all active portfolios and advisory strategies will be fully ESG integrated – meaning that, at the portfolio level, our portfolio managers will be accountable for appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions.
Companies trying to jump on board the ESG high speed train are often adapting existing corporate governance and corporate social responsibility practices, while figuring out the Greenhouse Gas emissions accounting as a measure of environmental impact. At present, ESG reporting is not considered a core enterprise function and is frequently without any BOD or executive level commitment to direct involvement.
In small-cap to mid-cap companies ESG management and reporting is treated as a „We need to do this“ initiative that requires attention to answer regulatory compliance. It’s neither viewed as a requisite to increase viability and financial gains nor does it get the resources required to properly execute. While this approach may keep the company afloat and out of legal issues, lack of board and executive level commitment renders the policies and practices initiated mostly ineffective. More often then not these approaches combine to expose the organisation and the investors to emerging risk scenarios due to evolving regulations, operational inefficiencies, infrastructure damage and reputational harm – all leading to massive financial loss.
Unsurprisingly, such companies fail to bridge the gap between best intentions of the initial commitment to developing the strategy for implementing, monitoring and accounting to ensuring the accuracy and transparency of the entire process to reporting.
To remedy the approach in the previous scenario, companies should embrace the implementation of meticulous ESG best practices that assure:
- The achievement of business objectives and stakeholder expectations through transparent and efficient use of resources
- Adverse occurrence identification and prevention;
- Optimise opportunities and reduction of potential loss; and
- Protect against compliance and regulatory issues.
Don‘t do it on your own
Enlisting the help of experts and technology is highly recommended as the best means to ensure the valuable company resources are utilised efficiently.
We see sustainable investing as the umbrella and ESG as a data toolkit for identifying and informing our solutions. – Blackrock.com
At Klappir Green Solutions we have developed our Smart Environmental Management platform specifically for data management and analytics, along with Social & Governance survey relevancy for producing reporting for multiple frameworks (ESG, GRI, SASB, MSCI, and more). Our services team is working hand-in-hand with customers to ensure that data used for reporting is the most timely and accurate available. The GHG emissions accounting is the hardest element of the reporting and the combination of our platform and expertise limits the burden on you.
Our environmental management system advisors provide many services to our customers. Here is a small list of those services provided:
- Source data accumulation – accumulating the data from a company’s service providers, such as hot water, electricity, waste pickup, etc. is a constant process throughout the year.
- Data integrity – the data provided from the services and the company operations data must be reviewed for accuracy and completeness. Missing data causes a multitude of problems, but incorrect data is a very expensive mistake.
- Analysing the data – the data analytics are crucial to understanding the operational expenses on a finite level. Identifying spikes or other anomalies in the data month to month can save a business large amounts of operational expenses.
- Applying correct emissions classification codes – understanding what the correct codes are and ensuring they are applied correctly is a pain-stacking process for any environmental data manager.
- Correctly calculating the GHG emissions with most up-to-date coefficients – another highly detailed process that requires a lot of knowledge to stay on top of the GHG emissions coefficients and checking the calculations for accuracy. No one wants to report a large emission total based on a math error.
Following the acceptance of the ESG reporting as a core enterprise function to be fulfilled via active involvement of senior management with the help of efficient software tools, emphasis should be given on execution of the data management strategy. Execution is vital because poor execution dwarfs a sound and committed strategy. On the other hand, a disciplined implementation of environmental management practices, social responsibility awareness and engaged governance promotes a sustainable competitive advantage.
As the challenges continue to evolve – due the increasing complexity of a business and the regulatory landscape which demands stricter implementation of prescribed norms and the emerging uncertainties around business performance – conscious efforts to establish a synergy between the two will yield sizeable benefits. Commitment to the ESG strategy coupled with expert execution will magnify the probability of future success, while at the same time ensuring that the evolving challenges are addressed efficiently.
ESG is often tied to Nasdaq, because in 2017 they introduced an ESG Reporting Guide and a voluntary support program for companies trading on Nasdaq‘s Nordic and Baltic markets. The „Who Cares Wins“ initiative launched in 2004 is the actual origin of the ESG term. The investment world is now shifting to this line of thinking for investments, 16 years after it was introduced. Hopefully it doesn‘t take the rest of us that long.