Environment, social and governance (ESG) factors are some of the most important considerations for every modern business – everything from sustainability to human rights, ethics, culture and regulatory compliance fall under the ESG umbrella.
To help examine how ESG influences – or should influence – corporate decision-making, we sat down with Jenny Cutri, Legal and Compliance expert. Here, she shares insights on why ESG should be front-of-mind for all corporations and senior management.
So what is ESG?
ESG refers to how a business manages itself/performs in three dimensions – Environment, Social and Governance – and are the three areas of interest for ‘socially responsible investors’. These are investors who consider it important to assess a corporation’s performance not just in terms of financial sustainability and performance, but in terms of these other non-financial factors:
- Environment: This concerns conservation of the natural world and includes pressing issues such as climate change, energy and water use and environmental responsibility.
- Social: This captures people and relationships and essentially how the business manages relationships/interacts with everyone from employees to customers, stakeholders, suppliers and even their local community. It also covers employee engagement, human rights and labour standards, data protection, diversity and customer satisfaction.
- Governance: This involves the standards of running the business, such as how the organisation deals with shareholder rights, executive salaries and bonuses, anti-money laundering practices, whistleblowers, internal controls, audits and the overall company leadership.
ESG factors are often interlinked, and an issue may fall under more than one area. For example, payment of minimum award rates for employees, or the employment process itself, fall under both social and governance.
Why should ESG be a priority for an organisation?
First and foremost, your commitment to ESG ensures that your business is socially responsible – you mitigate risks and generate sustainable long-term outcomes.
Importantly for the C-suite and key decision-makers, ESG is becoming a critical influencer for both investors and financial institutions. In fact, a study by Ernst & Young conducted during COVID-19 found that 91% of investors considered non-financial performance when deciding whether or not to invest in an organisation.
As more and more millennials make up the investor pool, ESG investing is likely to become more popular. A recent survey by Morgan Stanley Bank found that almost 90% of millennial investors are interested in investments that closely reflect their own values.
Moreover, some corporate lenders are factoring in a business’s ESG strategy when determining whether to approve a loan. ESG is also increasingly weighing in on company decisions in mergers, acquisitions and divestment of assets.
A strong ESG framework is now part of an organisation’s brand, and how it is viewed by broader stakeholder groups such as customers, suppliers and the community.
Having the right ESG framework is not just a matter of ethics, it can have a clear impact on the organisation’s revenues, financial performance and long-term competitive success,.
“As highly regarded McKinsey & Company noted in a recent report, there are five ways that ESG creates value: top-line growth, cost reduction, regulatory and legal interventions, productivity uplift, and investment and asset optimisation.”
Consequently, ESG factors and risk mitigation should play a pivotal role in defining the organisation’s values and decision-making across the entire organisation from the board, executive, management to a junior person.
“This includes HR departments who are generally tasked with promoting and exuding the values defined by corporate leadership. HR managers also have a responsibility when making HR decisions to ensure that they comply with appropriate social standards, legal and compliance requirements,” explains Jenny.
“This includes fairness in the recruitment process and candidate selection, by championing diversity and the correct training, for example, from the beginning of engagement right through to ensuring staff have a positive work environment and are appropriately rewarded for the work that they do.”
Meeting your responsibilities and ESG expectations
While it’s one thing to talk the talk about your environmental, social and governance responsibilities, Jenny says in practice ensuring you are meeting ESG expectations requires a concerted effort across the whole organisation.
“The organisation must first recognise which ESG factors are applicable and the standards expected by a range of stakeholders including: the investment community, suppliers, customers, employees, contractors, financiers, regulators, law makers and the general public. In reality this can be very difficult, as often these stakeholders will have completely different and conflicting expectations or requirements.
“It’s about the organisation having the right ESG values that respect their principles, articulating those values and having a strong ESG strategy or framework.
“It’s then having policies, procedures and systems in place that support those ESG values and strategies and adhering to them,” finishes Jenny.
Jenny notes it’s important that companies then provide regular training and conduct ongoing due diligence of their staff and suppliers to ensure the organisation is meeting its ESG expectations.
Finally, companies must demonstrate transparency and adequate reporting of the organisation’s performance in the relevant areas of ESG.
How to show you care about ESG
- Publish your commitment to ESG on your website
In addition to releasing your own sustainability reports, you can also publish relevant ESG information on your website detailing how the organisation respects, adheres to, complies and performs in terms of applicable ESG factors. - Commit to regular reporting
While there is currently no law in Australia that stipulates a company must report on ESG and how they are compliant, it’s a way that some corporations are setting themselves apart. By volunteering this information, they are potentially generating new investor interest in their affairs.
“A lot of companies are choosing to report on ESG factors by releasing their own sustainability reports, which they put out voluntarily. It’s a way for them to set themselves apart,” explains Jenny.“In fact, the ASX Corporate Governance Principles and Recommendations, as opposed to ASX Listing Rules, actually has a recommendation that a listed entity should disclose whether it has material exposure to any environmental or social risks, and if it does, how it manages those risks. So, while that’s not law, it is a recommendation, and a lot of companies are choosing to comply with this.”
The leading organisations setting the standards in ESG reporting – the Sustainability Accounting Standards Board (SASB), CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), and the International Integrated Reporting Council (IIRC) – recently stated their vision and intent to work together towards a comprehensive corporate reporting system on ESG. If this occurs, Jenny says we can expect reporting on ESG to gain even greater traction.
How CVCheck can support your ESG processes
If you aren’t adept at creating a framework of ESG practices and reporting on them, you might need support to point you in the right direction, which is where CVCheck comes in.
CVCheck provides background screening and verification checks, workforce management and compliance systems that can be a critical tool in every organisation’s ESG arsenal and ESG risk mitigation. For example:
- Credit, financial and business history checks ensure the people running your finance department are adequately qualified and have no past convictions (such as money laundering) that could be detrimental to your organisation.
- Employment and qualification checks ensure that a person is appropriately qualified for their role and not putting the organisation at risk.
- National Police Checks include all disclosable details pertaining to a person’s criminal history, including any current pending serious charges, reducing the organisation’s exposure to theft, fraud and other criminal activities.
- Onboarding and induction processes ensure your new hires have an appropriate induction and reach optimum productivity quickly.
- Psychometric assessments ensure a person is the right fit for your organisation and the role.
- Deployment services integrating rostering and logistics (such as flight and accommodation) and location tracking of staff ensure that employees are transported safely, have a safe work place and accommodation.
Regularly re-screening and checking employees demonstrates your company is aware of any qualifications or competencies that may be due to expire, anticipates training needs and updates, and ensures your people are fit to work.
CVCheck’s Head of Marketing and Customer Engagement, Menuccia Tassone says, “The checks and services we provide assist in aspects of an entity’s ESG compliance. For HR managers it not only ensures compliance of an individual at the time of engagement, but on an ongoing basis.
“Our services also assist in providing a positive engagement experience, induction training and the safe deployment of staff.”
And with ESG risks now the top concern for finance executives, it’s important you get every element right.
