Environmental, Social, and Governance (ESG) aspects of a business have become increasingly important to how we determine the actual value of organisations and their ability to create long-term value and positive outcomes.
Environmental, social, and governance (ESG) refer to criteria that characterize an organisation’s operations as sustainable, responsible, or ethical.
ESG/Sustainability is concerned with the risk, opportunities, and impact an organisation has on its internal and external stakeholders across the Environmental, Social, and Governance elements of their organisational practices. Business owners’ responsibilities now include factoring ESG/Sustainability practices into core business practices.
ESG topics fall under one of the three main categories represented in its acronym:
- "Environmental" considers how an organisation performs as a steward of nature and the impact organization's have on the surrounding environment. The impact includes carbon emissions, waste management, water management, raw material sourcing, and climate change vulnerability.
- "Social" examines how organisations manage relationships and interaction with internal and external stakeholders, including employees, customers, and the greater community. Risks that fall under this category include corporate social responsibility, labour management, data privacy, general security, health and safety, compensation, and reward system. Also, Social ESG-related topics such as diversity, equity, and inclusion have become popular.
- "Governance" refers to variables such as business ethics and corporate policies, leadership, executive pay, internal controls, intellectual property protection, shareholder rights, and anti-corruption. While social in nature, diversity risks can also fall under the governance umbrella, such as actions to improve board diversity.
Benefits of ESG/Sustainability Culture
ESG/Sustainability considerations vary across organisations and sectors Identifying and closing the gaps in ESG business practices increases value creation in a virtuous circle of continuous growth and progress that will establish sustainable business profitability.
Understanding your organisation's ESG aspects provide an in-depth exploration of non-financial risks that adversely affect organisational performance. Benefits of ESG integration include:
- Increased Brand Value - considering the different ESG aspects will enable value creation by recognising the gaps present in their ESG business practices and closing the gap to extract that subsequent value.
- Increased Stakeholder Trust – stakeholders, from customers to investors, are increasingly influencing their decisions on the ESG aspects of an organisation companies can actively seek to attract and retain shareholders with longer-term and more sustainable agendas.
- Strengthen Reputation - ESG elements provide an organisation with an opportunity to present their attitude towards being a good corporate citizen. While ESG aspects are typically referred to as non-financial elements, they can directly impact the financial performance of an organisation.
- Reduced Business Costs - Studies have found that organisations with robust ESG practices are more likely to have a lower cost of capital, fewer accounts of corruption, and reduced volatility. Meanwhile, organization's with poor ESG practices were more likely to have a higher cost of capital and increased volatility due to organisational disruptions, possible liabilities, or legal compliance issues.
- Business development opportunity - Companies can proactively seek out the business development and revenue growth opportunities that arise from sustainability strategy. For example, many companies have established teams whose sole function is to identify new sustainability opportunities, such as new products and services.
Define the right strategy
An effective sustainability strategy should be integrated into your wider business and aligned with your goals and objectives to create long-term value for your organisation, your internal and external stakeholders, and wider society while preserving the world's natural resources for future generations.
Organizations must fully integrate sustainability strategy into their business model to achieve new opportunities effectively. Key questions to be addressed in achieving an ESG Maturity level includes.
- What are the relevant sustainability risks and opportunities for our business? What impact does our activity have on the planet, people, and society? This is usually done by conducting a materiality assessment.
- What critical aspects of our business model need to evolve to become sustainable? How should we adapt our strategy?
- What is the appropriate governance to deliver our sustainability strategy? How should our internal organisation evolve?
- How can we build the policies, action plans, and targets to make our sustainability strategy go live? What are the required resources?
- How can we track progress versus targets and the achievements of our sustainability policies and action plans? What indicators should we follow?
The Board/Management should take up responsibility for planning and executing ESG risk and impact strategies, creating related policies, procedures, and internal controls, identifying relevant metrics on which to base sustainability reports, and overseeing the creation of those reports.
Each organisation must identify and evaluate its top ESG opportunities and impacts and determine key performance indices (KPI) to manage them. KPIs should be realistic and measurable because of the risk of not meeting them. Without a reasoned ESG risk management strategy built on a clear-eyed understanding of the issues, poorly executed sustainability strategies and reports can quickly run afoul of regulatory compliance and astray of investor expectations. To avoid such missteps, each organisation ultimately must identify and evaluate its top ESG impacts and determine objectives and strategies to manage them. Target objectives should be realistic and measurable.
Internal control is a process effected by an entity's governing body, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.
Proper control activities must be designed and operating effectively from the operational steps to the collection and analysis of the data used in reporting. Operationalizing sufficient control activity is the responsibility of management, while the internal audit is responsible for providing independent assurance that the activities are designed properly and operating effectively.
Standards, Regulations, and Frameworks
In the Nigerian context, growing regulatory interest in sustainability has focused on whether what is being reported accurately reflects an organisation's sustainability efforts, how those efforts relate to long-term value creation, and how that influences investors. The following standards and regulations currently address ESG/ Sustainability requirements for public and private organisations:
- According to Principle 26 of the Nigeria Code of Corporate Governance “paying adequate attention to sustainability issues including the environment, social, occupational and community health and safety ensures successful long term business performance and projects the Company as a responsible corporate citizen contributing to economic development”.
- SEC Code of Corporate Governance for Public companies – Section 28 addresses the need for public entities to pay adequate attention to sustainability issues to the interest of their stakeholders such as its employees, host community, consumers, and public. They should also pay attention to corruption as a threat to their business and establish a zero-tolerance culture of integrity and zero tolerance for corruption. The code also requires entities to report the nature and extent of social, ethical, safety, health, and environmental policies and practices annually.
- Nigeria Climate Change Act 2021 - The Act requires all ministries, departments, and agencies (MDAs) of the Federal Government; and public and private enterprises in Nigeria to develop and implement mechanisms geared towards fostering low carbon emission, environmentally sustainable, and climate-resilient society.
The era of stand-alone ESG/Sustainability strategies, without adequate alignment and integration of sustainability into the organisation’s overall business strategy, needs to end; the creation of resilient business strategies that take ESG/Sustainability as their foundation needs to begin.
ESG/ Sustainability reporting requirements are now rapidly becoming a mandatory item on the corporate agenda globally. Early preparation means reduced compliance costs and an enhanced reputation.
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