Is good ESG practice getting in the way of best practice?

Building and demonstrating sustainable long-term value creation, based on strong core values and culture, is at the heart of business reporting now. The key is to recognise signs of complacency or acceptance of ‘good practice’, as the goal should be to aspire to ‘best practice’ reporting that investors and other stakeholders will be expecting.

 

Is good ESG practice getting in the way of best practice?

The World Economic Forum Global Risks Report 2019 tells us that seven of the top ten global risks by likelihood and impact are environmental and social risks.1

Investors and other stakeholders, including Gen X and Millennials, are vitally concerned about their futures and are demanding changes in corporate behaviour and attitude.

With the renewed focus on improving ESG2 risk management, practice and reporting by Australian companies, it’s important for boards and senior management to show leadership in gaining community trust by asking themselves tough questions, including:

  • Are we addressing ESG issues and building trust with investors and the broader community?
  • Are we providing meaningful and valuable ESG data and information to our stakeholders?
  • Or, are we just treading water, or worse, going backwards while other companies and community expectations are moving forwards?

ESG is becoming one of the biggest issues for investment markets and for governance… Boards of large listed companies need directors who understand ESG and how organisations should engage the market on it. 

Australia is probably five years behind. We will almost certainly follow Northern Hemisphere trends in how companies disclose ESG data and how asset managers analyse it.  Australian Institute of Company Directors, Behind the ESG Boom 23 March 20183 

Make no mistake; it is no longer easy to pay lip service to ESG obligations and reporting. Investors and the broader community alike are now seeking leadership in ESG matters – authentic, meaningful and measurable corporate ESG reporting, particularly around risk management, governance and good corporate citizenship, where many organisations have been found wanting in recent years.

Building and demonstrating sustainable long-term value creation, based on strong core values and culture, is at the heart of business reporting now. The key is to recognise signs of complacency or acceptance of ‘good practice’, as the goal should be to aspire to ‘best practice’ reporting that investors and other stakeholders will be expecting.

It is also important to remember that ESG is more than traditional environmental management and filling out environmental surveys – it includes social responsibility (a positive contribution to society), corporate governance and risk management, three of the hot issues around corporate behaviour right now.

ESG assesses organisations through the lens of their ESG performance, is based on hard and measurable data, and is used in investment and other capital-allocation decisions. Australian Institute of Company Directors, Behind the ESG Boom 23 March 2018 

So, does your business meet the latest investor, community, and government expectations for measurable ESG performance? Have you assessed the risks to your organisation’s reputation from ESG sub-performance? Does ESG practice and performance actually match the rhetoric in your organisation?

The great news is that best practice reporting is a journey of ongoing improvement that can commence with your very next annual or ESG report. It’s not necessary to have every ESG element flawlessly addressed and in perfect order before you report on ESG performance. The aspiration to best practice reporting, especially with commitment from the board and senior management, will set you on the right path by putting the right structure and plans in place and proactively improving from there.

An ESG best practice review may even be the trigger for the start of an Integrated Reporting plan that will be a positive for how the company operates and reports – see our articles <IR> Building trust through transparency and Taking opportunities to strengthen investor brand. 

Often, an all-of-company review and subsequent restructure ahead of <IR> adoption drives a different way of operating, measuring and reporting compared to the traditional operating model based on separate financial, operational and ESG reports. In light of this, companies should seriously consider taking the first steps towards integrating all aspects of their business, and begin reporting accordingly.

It is over the long-term that ESG factors – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. Our risk analysis extends across all sectors and geographies, helping us identify companies lagging behind peers on ESG issues. BlackRock Viewpoint: Exploring ESG: A Practitioner’s Perspective June 2016

Consider the following key steps that your company can take on its journey to authentic and realistic ESG action and best practice reporting:
  • Have a strategy for ESG that forms apart of and aligns with your corporate strategy 
  • Ensure commitment and buy-in from the board, management and the wider company 
  • Align ESG with the values and culture of the organisation 
  • Appoint an ESG committee or ESG champions and focus on continuous improvement in ESG with backing from the board and senior management 
  • Incorporate reputation, business climate and other risk management assessments into your ESG program as appropriate 
  • Base your reporting on specific plans and realistic assessment of outcomes using relevant and measurable performance indicators 
  • Provide succinct commentary to assist readers, together with charts and graphics to help convey key messages and depth of performance 
  • Make ESG reporting an integral part of corporate reporting 
  • Avoid the temptation to ‘greenwash’ by overstating environmental performance or understating adverse environmental impacts of your business 
  • Avoid compliance-focused reporting, generalisations and abstract notions. 

 

1 World Economic Forum, The Global Risks Report 2019 14th edition. 
2 ESG: environmental, social and governance. 
3 A Governance Leadership Centre Interview with Dr Ulysses Chioatto, adjunct Associate Professor of Law at Western Sydney University and a former head of Institutional Shareholder Services in Australia.