Are we prepared for the Environmental, Social and Governance (ESG) challenge?
Organizations are facing heightened expectations from interested parties such as regulators, customers, consumers, investors, community activists and others when it comes to ESG. ESG means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
Multiple criteria are taken into consideration. Environmental factors include the contribution a company or government makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency. Environmental criteria consider how a company performs as a steward of nature. Social factors include human rights, labor standards in the supply chain, exposure to illegal child labor and more routine issues such as adherence to workplace health and safety. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance factors refer to a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of corporations. Governance criteria deal with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
In the US, the Securities and Exchange Commission (SEC) is considering requiring reporting of ESG-related information, whether or not it is financially material. Governments of countries such as Denmark, South Africa, China, Malaysia and the Philippines require certain companies to make disclosures in relation to their non-financial performance across ESG aspects. The national laws in some EU countries are also undergoing legislative changes in line with the EU Non-Financial Reporting Directive. Other countries such as Australia, Mexico and France have embarked on the journey of climate change-related reporting.
In 2015, the Securities and Exchange Board of India (SEBI) prescribed the format for the Business Responsibility Report (BRR) regarding the reporting on ESG parameters by listed entities. In May 2021, the amended SEBI Listing Obligations and Disclosure Requirements (LODR) regulation notification introduces new reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR). The BRSR replaces the existing BRR. SEBI has issued a legal circular to all listed entities and all recognized stock exchanges, requiring the top 1,000 listed companies (by market capitalization) to report ESG-related information in the financial year 2022-2023. However, the filing of BRSR has been made voluntary for this financial year 2021-2022.
The benefits of ESG
ESG investing considers environmental, social and corporate governance criteria to generate risk-adjusted long-term returns with positive societal impact. The purpose of ESG is to achieve multiple benefits for the corporation such as increased profits and enhanced shareholder confidence. The citizens and ultimately the earth also reap the benefits when ESG becomes part of the day-to-day culture and ethics of society.
The responsibility for ESG starts at home
Citizens need to take responsibility for contributing to ESG. Small steps toward protecting the environment and advancing sustainability from every one of us matter and goes a long way in securing a sustainable future. As part of World Environment Day 2021, my family made a small contribution to nature. We re-used worn-out plastic buckets to plant various types of plants – flowering and medicinal – on our home terrace.
By doing so, we:
- Repurposed: waste material
- Reduced: water leakage from the worn-out bucket
- Re-planted: re-potted existing plants for better growth
- Recycled: vegetable peels, dry flowers and dry leaves to form compost
- Reaped: the harvest
- Respected: nature
- Realized: created awareness in our children of nature, the environment and sustainability
- Reinforced: the message to our family, colleagues and friends
- Refused: to go out during the lockdown due to the COVID-19 pandemic and enjoyed nature at home!
- Recollected: a song sung by Tom Jones that goes … “It’s good to touch the green, green grass of home.”
ESG action steps
Action in three areas is suggested for companies to meet the expectations of investors and to ensure their ESG performance plays a critical role in a crisis-hit world:
- Build a stronger connection between nonfinancial and financial performance. Research shows that investors are stepping up their game when it comes to assessing the performance of companies using ESG or nonfinancial factors. Companies need to consider disclosing ESG risks along with other types of risks such as financial, cybersecurity, business continuity, etc. and adding them to their current business models. Nonfinancial performance is playing a pivotal role in investors’ decision-making. This trend in using nonfinancial information to determine businesses’ value is likely to continue in a post-pandemic world, as investors look not only at businesses’ resiliency but also at the alignment of their purpose to long-term value-creation.
- Build a more robust approach to analyzing the risks and opportunities from climate change and the transition to a decarbonized future. Communicate this more comprehensively through reporting.
- Instil discipline into nonfinancial reporting processes and controls to build confidence and trust.
Remember, we all have a Role to play in ESG.
Editor’s note: For further insights on this topic, download ISACA’s new free ESG white paper.
Chetan Anand, CDPSE, Certified Cyber Crime Intervention Officer (CCIO), Fellow of Privacy Technology, NLSIU Privacy and Data Protection Laws, CPISI, ISO 27001 LA, ISO 22301 LA, ISO 31000, ISO 27701, ISO 9001 LA, ISF IRAM2, SQAM, Lean Six Sigma Green Belt, Agile Scrum Master
Serves as the Associate Vice President – Information Security and CISO, Profinch Solutions, and oversees all strategic and operational aspects of information security for the company. Chetan brings 18+ years of professional experience in information and cyber security, business continuity, privacy, risk and quality. He has worked in various industries such as IT, ITES, fintech, healthcare/pharma, manufacturing, research and development, and in various capacities including technical, managerial and leadership roles.