It’s sometimes easy to forget that “ESG” has three letters.
Global investors (the priority audience for most companies’ ESG disclosures), regulators, and other stakeholders have historically directed their attention to companies’ performance against “E” issues—particularly regarding climate change-related impacts and risks. Governance, too, gets a large share of attention. And those more subjective “S” (i.e., social) issues? They’re often overlooked.
That’s not good business.
Expectations for companies’ ESG performance and disclosures are changing. The disruptive effects of the COVID-19 pandemic, “Great Resignation,” systemic inequality, and other social ills are compelling investors, regulators, institutional customers, and other stakeholders to put companies’ social performance under the microscope.
Businesses must respond, and they’re flying blind. Without clear definitions for what constitutes financially relevant social issues for companies, business leaders must gather stakeholder input to determine which social issues stand to affect their bottom lines. To overcome the lack of standardized metrics for evaluating companies’ management of those issues, business leaders will need to work with their stakeholders to set unique, actionable goals and corresponding interventions. Cloud-supported ESG data management and reporting systems can help businesses keep track of these financially relevant social issues, their goals for managing them, and their progress toward those goals.
While together these processes may seem a meticulous endeavor, they are crucial. Achievement will not only improve a company’s management and disclosure of bottom line-relevant social issues, but it will also help business leaders yield durable sustainability and financial performance outcomes.
To capture these advantages, leaders can begin with a two-step materiality assessment. First, they should identify industry-relevant social issues and use universally applicable metrics to benchmark their performance against them. Fortunately, companies’ legacy environment, health, and safety (EHS) compliance obligations are a good guide, and their corresponding compliance records can be strategically adapted to meet social disclosure needs.
The second, more challenging component of the materiality assessment is contextualizing this basic framework with the unique social issues that stand to compromise relationships critical to the bottom line.
For example, imagine a mining company preparing to bring a new project online. Codified EHS protocols will help this company determine the social issues relevant to its employees and regulators, namely workplace safety and labor practices. But what about the local social externalities over the project’s lifecycle?
The company will need to work with, for instance, community relations boards to determine their host community’s specific expectations for land use and resettlement, job training, community reinvestment, and other socially relevant factors. Should the community threaten to make the necessary permits contingent upon, say, a certain local employment ratio, then our mining company has not only identified a unique, financially relevant social issue, but it has also acquired the metrics needed to set and evaluate its progress toward social performance goals.
If the mining company has acquired a cloud-supported ESG data management and reporting system, it can use it to enable end users to set up multiple ESG performance targets, update them as needed and, with an automated data collection function, equip them with continuous insight into their progress toward their goals. The performance data these systems collect are automatically stored within a centralized, remotely accessible data repository that, with data traceability features, not only grants users visibility into the sources of their performance shortfalls, but also unlocks two key advantages.
Users of these systems should look to them to report accurate, timely, complete, financially relevant, and auditable social performance data to a range of stakeholders, enabling bespoke disclosures. Second, and critically for the success of the business’s ESG program, it should use this data to inform better business decisions about which initiatives are working and which are not.
These insights can be used to design more efficient and financially attractive management interventions and, in the process, build more holistic ESG programs. Leaders looking to take full advantage of these systems can also use them to build more resilient and comprehensively sustainable enterprises that better reflect the public’s and capital markets’ changing view of ESG.
The conception of ESG as a framework for corporate sustainability is maturing. Investors and others are beginning to recognize the intersectional nature of the three pillars of ESG, and they want companies to appreciate and account for the same. To that end, it’s vital that leaders find the right data collection and management systems for their company. The analysis of the data these systems produce can yield insight into how their social impact and risk management efforts affect not only their social performance but also their sustainability performance writ large.
Isn’t that the whole point of ESG?
R. Mukund is the CEO of Benchmark Digital Partners