Businesses are under increasing pressure to be more ethical, sustainable and climate friendly. Failure to comply with environmental, social and governance (ESG) criteria can have significant legal, reputational, and financial consequences.
ESG issues are driven by consumer, investor and stakeholder demand, and rapid regulatory change have experienced a meteoric rise. Over time, all companies will need to demonstrate that they carefully consider the risks and opportunities they face in the light of climate related and broader ESG concerns. In this respect it is similar to the emerging risk of data protection or cyber security a few years ago. But what is ESG and what should, or could, you be doing at this stage?
ESG
ESG (Environmental, Social, and Governance) is a criteria, not a definition. It captures a huge number of topics from climate change to fair supply chains, and risk management to financial inclusion. While ESG is a relatively recent concept, it’s now frequently the focus of policy, legislation and regulation, with ESG reporting is sure to grow substantially in the coming years.
Environment – has undoubtedly been the high-profile pillar in recent years. Climate change, for example, have you ever thought of the impact on your business? Let’s consider three ways it could impact your business.
1. Physical impact. We’ve seen significant flooding throughout the world as well as wildfires. These kinds of effects are becoming more and more frequent, more and more severe and the risks to businesses, their operations and supply chains are a concern.
2. Legislation. ESG reporting is only applicable to the larger companies at the minute. However, this is going to change soon to apply to all businesses, and, when that comes, that’s likely to be very quick. The level and speed of change could be very disruptive to businesses.
3. Cultural type of impact, what is expected of businesses in terms of ESG, including employee pressure, consumer, and client pressure to reduce carbon footprint. These pressures can have a significant impact on a business’ operations.
It has been reported that “mining” Bitcoin consumes around 121.36 terrawatt-hours (TWh) a year – read more here. To put that into context, this means that if Bitcoin were a country, it would be in the top 30 energy users worldwide.
Similarly data centres can use 200 TWh per year. If you use a data centre consider your retention periods data and data minimisation obligations. Less data stored on servers equals less data centres consuming vast amounts of energy.
Social – The social pillar addresses the relationships your company fosters with stakeholders such as suppliers, customers, employees, and local communities. Stakeholders are increasingly demanding over higher ethical standards and transparency in areas such as equality, diversity and inclusion, data protection, human rights and workforce wellbeing and much more.
Governance – Governance encompasses business values, risk management, reporting standards and transparency and anti-bribery/corruption policies, among others, and is probably the best established of the 3 strands of ESG, given its similarity to Corporate Social Responsibility (CSR).
Governance has historically been seen as more of a compliance issue, however ESG decision-making will become more prevalent in the coming years for all businesses, with the introduction of new ESG rules and regulations. Some businesses will see this as yet more red tape while others will see it as an opportunity. Consumers are no longer going for the cheapest option at the expense of all else, while most investors require ESG commitments before lending and employees are increasing preferring to work for a business that take their ESG obligations seriously.
What can small to medium businesses do now?
- Businesses should start horizon scanning and thinking about risk and mitigation strategy to deal with ESG, however don’t try to do everything at once; this will be a marathon and not a sprint.
- Consider how for example climate change risk could impact their business. For example, think about the top 3 or 4 geographical locations that impact your business (eg your office, asset, data centres and supplier locations). What will these geographical locations look like in the event of a one-and-a-half or two degree change in the global temperature? Is it a potential physical risk to your business directly or indirectly?
- Reporting – Many companies have already been reporting on their emissions and wider corporate social responsibility for years. However, these specific reporting requirements have focused on backward-looking reporting of greenhouse gas emissions. As a result, companies have taken different approaches to more general climate disclosures under the existing regimes.
- New voluntary standards for reporting have been established by the Taskforce on Climate-Related Financial Disclosure (TCFD) and these are gradually being adopted by companies in varying degrees. However, be cautious how you report on voluntary initiatives; it is better to over-deliver than to over-commit.
- Consider matching or exceeding external ESG ratings and scores.
- Make sure that ESG has a firm place on the Board’s agenda going forward. Ensure Directors are briefed regularly and are comfortable with the topic before they have to take decisions; the strategy must come from the top. The Board may want to consider how to integrate climate change factors into its structures and processes.
- Keep climate change and ESG embedded across the business.
- Listen to stakeholders about their expectations.
- Consider implementing policies and procedures in the workplace including:
- Environmental, human rights and other social policies
- Diversity and inclusion in the workplace
- Clear anti-bribery and corruption policies
- Compliant internal reporting channels (whistleblowing)
- ESG due diligence.
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