2022 is going to be a big year for ESG! Public companies, both national and international, are going to be expected to comply with new regulations that standardize the disclosure of Environmental, social and governance factors. Here in the U.S., the SEC has established a Climate and ESG Task Force that is in charge of addressing ESG related misconduct. President Biden’s Executive Order on Climate-related Financial Risk and Congress’ Climate Risk Disclosure Act add to the SEC’s reach in enforcing ESG disclosures in order to establish more standardized regulations for public companies. This means that in 2022, businesses are expected to include an ESG report with their annual 10-K Submissions.
Additionally, the G7 countries have agreed to align their ESG enforcement strategy with the TCFD recommendations. As the SASB Standards have been the dominant framework for ESG Disclosures, the addition of the TCFD recommendations signify a more standardized and stringent approach to reporting. With these frameworks in their tool belt, these regulatory bodies mean business, and they are on the hunt for greenwashing.
At the helm of ESG development, the EU has been first movers in implementing comprehensive regulations, which they’ve coined the Sustainable Finance Disclosure Regulations (SFDR). These regulations went into effect in March, 2021, with a much more robust Phase 2 being implemented in 2022. These regulations focus on increased transparency in corporate sustainability, and the impacts they have on the public markets will no doubt spill over into other countries. These developments create ripple effects across the world’s most powerful markets, and their influence has been officially stamped into history with the recent COP 26 Agreements. At this climate conference, 151 countries submitted new climate plans to drastically cut emissions by 2030.
This is a lot to take in, I’m sure, but the bottom line is that ESG disclosure is going to be a basic requirement of businesses from here on out. And while you might be weary of these changes, the good news is that there is a lot you can do to prepare now. The sooner you jump on board, the better your company will fare in the long run. Getting these processes up and running internally will put you ahead of the curve, protecting you from sanctions for non-compliance and more importantly, creating a competitive advantage for your company. Those who wait until the last minute will be scrambling to implement these new policies and will likely struggle to produce fruitful results, leading to costly investigations.
If you’re struggling to wrap your head around this new space, that’s okay, you’re not alone. Our ESG Advisors are experts in Corporate ESG Strategy and have been following these regulatory advancements for years. To help you get a handle on what your business can do to get started, we’ve put together this short guide on actionable steps you can take to prepare for these new disclosure standards.
Step 1: Get familiar with the ESG Space
Before you can start including ESG in your company’s strategic plans, you first need to get familiar with what ESG actually means, and the opportunities it presents for your business and the market as a whole. ESG training is an integral part of developing an effective ESG Program, which is why we provide executive and employee training as part of our offerings. Our platform hosts a number of videos compiled to give you a general understanding of topics related to ESG, but we prioritize the Introduction to ESG Course offered by CFI. This open-source video series, designed by Rho Impact’s Co-Founder, provides an overview of the ESG Framework and how it supports a company’s risk management. By understanding the corporate and investor perspectives of ESG, you’ll gain a better understanding of these topics and identify relevant ways you can implement these practices in your organization.
In addition to growing your understanding of ESG topics, you’ll want to read up on the different disclosure standards that are out there. SASB and TCFD are the main ones to pay attention to, but there are a multitude of additional standards available for public use. Knowing how each of them compares will help you wrap your head around the requirements your company is expected to abide by. The important takeaway from this learning process is to outline the metrics and disclosure practices that are applicable to your business. This will give you foresight on the initiatives you’ll need to pursue as well as the data you’ll be collecting and reporting on.
After you’ve gotten up to speed with this general ESG knowledge, you’ll want to do some digging to see what other big players in your industry are up to. Identifying trends in your space will help you understand which practices are essential for your ESG program, as well as practices that you can engage with to set yourself apart from the competition. You can investigate what customers or employees are saying about competitors’ ESG programs to gain insights on material issues. You can also read up on greenwashing allegations to make sure that you avoid these pitfalls. A strong ESG strategy creates a distinct competitive advantage in the marketplace so doing your due diligence beforehand can make all the difference when it comes to implementation.
Step 2: Board and Employee ESG TrainingNow that you’ve gotten yourself up to speed with ESG, you’ll need to spread the wealth of information to some of your most important stakeholders, the Board of Directors, and your employees. Engaging with everyone in the company and gathering consensus on the direction they want to take the ESG Program is integral to identifying which issues you will act on. This is a vital step because, in a recent study, 70% of respondents felt that Board understanding of ESG was “poor”. Without a proper understanding of these issues at the highest level of the company, the rest of the company will struggle to make progress. Board members need to be aware of what investors and consumers are asking of the brands they support in order to implement ESG as an effective risk management strategy.
The second part of this step is assembling a team of employees who will spearhead the ESG program. As we know with any strategic initiative, success cannot happen in a vacuum. And more importantly, with the amount of data collection, project management, and communication that is needed to design a strong ESG program, you’ll need a team of strong players to help move things forward. As you are training your employees, take note of those who are more engaged than others. Find individuals who are passionate about this work and ask them what issues they think are most important for the company to address. Two of the most important components of job satisfaction are the opportunity to work on things they are personally passionate about, and the ability to work on multi-disciplinary projects. Both of these aspects will be satisfied by giving employees the opportunity to guide the ESG implementation. As you gain consensus on the direction of your program, establish a committee of employees who meet regularly to discuss ESG as it pertains to the business and organize working groups that will be responsible for different aspects of the program. Doing this ahead of time will ensure that progress is made smoothly, and that you’ll be able to balance the ESG work with these employees’ day-to-day tasks.
Step 3: BaseliningOne of the most arduous undertakings of any ESG program is establishing your baseline metrics. Before you can start making progress in different areas, you’ll need to see how your company is performing on the set of metrics outlined in standards like SASB, TCFD or GRI. This requires an immense amount of data collection and parsing to calculate values such as your energy consumption, waste levels, labor and product management capabilities and most importantly your carbon footprint. This process is tedious because it requires you to identify what each metric is asking for and then determine how to calculate that value. This is a high-stakes game because it leaves you open to investigations and sanctions if not done correctly or if your data is not backed by auditable documentation.
This process is one of our most popular services because of the critical nature of this step. Our advisors have done this for large public companies and MNC’s so they have developed a process for sorting through the immense amounts of data that is involved. We also use software tools to expedite the process as it can be incredibly time intensive. For this reason, we typically recommend that you get started by compiling the internal documentation but leave the data collection and calculation up to the professionals.
Step 4: Materiality DeterminationsAnother step that is quite tedious, yet so important to the success of your ESG program, is determining which issues are most material to the business. You’ll want to start by engaging with all your stakeholders, surveying them on which issues are most important to them. Stakeholder Engagement is also an important metric to track, so you should strive to survey a representative sample of all your stakeholders. Once you’ve surveyed these stakeholders, you can superimpose the results on to a materiality map. By ranking the issues and organizing them in an easily digestible visual, you’ll have an easier time making the case to the board about the strategic direction the company should take.
Designing the right survey and making sure that it reaches as many stakeholders as possible is tricky and time intensive. It is a process that we’ve honed through experience and have developed tools to expedite the collection and analysis of the results. This is another critical step in the journey where you’ll want to consult with an ESG expert to ensure that you’re doing it correctly. The results of this process will directly inform the strategic vision and long-term goals of your ESG Program.
Step 5: ESG Update ReportThough you’ll need to produce a full report to effectively communicate your ESG practices, because the focus here is on preparation, we often advise those in the early stages to start by creating an interim ESG report. This report will be the culmination of steps 1-4, outlining what you have done to kickstart your ESG journey and listing the next steps as well as long-term goals you’re actively pursuing. You want to show the public that you are aware of the issues that exist and are working on reducing the negative externalities created by your business.
The focus of this report should be transparency. You want to show that you place a great importance on addressing these issues and though progress may be slow at the start, you have a plan for getting where you need to be. Avoid a narrative-style report by using data, timelines, tables, and charts to provide evidence of your efforts and be holistic in your explanations on how you will achieve the stated goals. This report should fit with your brand but should also be the starting point for branding yourself as a mission-driven organization.
Step 6: Talk to an ExpertAlthough all of this can be achieved by someone who is starting with no knowledge of ESG, doing it right requires an immense amount of context, research, and planning. You have a lot on your plate already with your normal responsibilities, and it’s crucial that this work is done correctly to prevent issues later down the line. For that reason, we always recommend speaking with an ESG Expert before going off on your own. They have the knowledge and experience needed to understand the risks that are specific to your business and have refined a set of processes to do this work effectively and efficiently. For businesses starting fresh, we offer ‘ESG-as-a-service’, which is a critical component of growing ESG’s presence in the market. By providing strategic guidance, training, and process optimization, we help our teams wrap their heads around these concepts so they can hit the ground running. We start by doing the heavy lifting for you, leading the efforts on all the steps outlined here to build capacity and increase your ability to do this work independently.
These first steps in your ESG Journey are critical for the longevity of your business. By laying the groundwork early, and by taking the time to ensure your strategic vision is well-informed, you’ll be able to pass these new regulations with flying colors. The time has come to recognize ESG as an effective long-term business strategy that influences a prosperous economic system, all you have to do is capitalize on the opportunity! Ready to get started and want to talk to an expert? Head to our website to contact us and we can show you how!