ESG and sustainability action items for leadership in 2024

There are many issues and priorities that are high on the agenda of the Board and C-suite in 2024. According to HSBC, environmental, social, and governance (ESG) factors, and sustainability have become essential considerations for businesses worldwide. HSBC says ESG and sustainability are two related but distinct concepts.

Different but related

“While both ESG and sustainability are concerned with environmental, social, and governance factors, ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.”

HSBC

Rita N. Soni, a principal analyst on Impact Sourcing and Sustainability Research with the Everest Group, clarifies that sustainability typically refers to the broader concept of meeting present needs without compromising the ability of future generations to meet their own needs.

“It encompasses environmental, social, and economic dimensions and involves the responsible use of resources, reducing waste and pollution, promoting social equity, and ensuring economic viability over the long term,” she put forward.

She further explains that key stakeholders concerned about the enterprise’s sustainability initiatives would include the chief executive officer, chief operating officer, chief sustainability officer, chief financial officer, etc.

On the other hand, she opines that ESG can be looked at as a framework used to evaluate enterprise performance and potential risks based on its environmental, social, and governance practices.

“It is the tool referenced by regulators and investors alike. Key stakeholders from an ESG perspective would be the chief financial officer and the chief compliance officer,” she adds.

According to Soni, ESG factors are often integral to sustainability efforts. Companies that prioritise ESG factors are more likely to contribute positively to sustainability goals. She cites the example of investing in renewable energy as a sustainability initiative that integrates ESG principles by reducing carbon emissions while also creating social benefits like job opportunities and improved public health.

She posits that areas where members of the C-suite and Board get wrong about ESG and sustainability are:

• Viewing ESG as a compliance checklist: Some executives and board members may approach ESG as a box-ticking exercise to meet regulatory requirements rather than genuinely integrating sustainability into their business strategies and realising the opportunities.
• Short-term focus: There's a tendency to prioritise short-term financial gains over long-term sustainability goals. Executives might prioritise immediate profits without considering the long-term risks associated with neglecting ESG factors. The benefits and opportunities are often also longer-term.
• Lack of integration: ESG and sustainability should be integrated into core business practices rather than treated as separate initiatives. Failure to integrate them leads to inefficiencies, disjointed operations, and missed opportunities.
• Limited stakeholder engagement: A narrow and limited stakeholder assessment ignores the perspectives of employees, customers, communities, and more, resulting in overlooked critical ESG issues and sustainability concerns.
• Inadequate measurement and reporting: Without robust metrics and transparent reporting mechanisms, it's challenging to assess the effectiveness of ESG and sustainability initiatives. Many companies struggle to quantify their impact accurately and consistently.

“To truly embrace ESG and sustainability, enterprise leadership needs to shift their mindset from viewing these concepts as peripheral concerns to recognising them as fundamental to long-term business success and societal impact.”

Rita N. Soni

Three challenges

As ESG reporting becomes more commonplace – albeit not mandatory at this time, Soni cites several challenges leadership will face in the production of such reports.

Many cite scope 3 collection and accuracy as the largest ESG reporting challenges. However, at Everest Group, we see the difficulties as more nuanced in the following areas:

Defining and measuring what matters most: ESG encompasses a broad range of factors, many of which lack universally agreed-upon definitions and metrics. Determining which metrics best reflect their company's unique impact and align with stakeholder expectations can be a complex, subjective exercise. Some key ESG considerations, like employee well-being or community engagement, are inherently qualitative and often lose meaning when quantified using standardised measurements.

With different reporting frameworks and standards emerging continuously, comparing performance within/across companies can also be tricky. Choosing the appropriate benchmarks to assess progress and gauge relative impact becomes a complex navigation exercise.

Data collection and management: ESG data often resides in a plethora of departments and systems across the organisation, making it challenging to gather and consolidate effectively. Ensuring the accuracy and consistency of ESG data can also be difficult, especially for historical data or information outside core business operations, including scope 3 emissions. Implementing robust data governance practices and verification measures is vital to avoid greenwashing and missing opportunities.

Collecting and managing comprehensive ESG data often requires additional resources, from specialised software to dedicated personnel to reliable partners. Striking a balance between accurate reporting and resource allocation can be a critical decision for executives.

Privacy and data governance: Growing awareness of privacy concerns is leading to stricter regulations and frameworks surrounding data collection and usage. Executives need to stay informed about evolving regulations and ensure their ESG data practices comply with relevant privacy laws that can influence how they collect and use personal data in ESG reporting, such as the California Privacy Rights Act (CPRA) and the EU AI Act. That said, regulation is the bare minimum, whereas responsible business practices may go above and beyond.

Best practices

According to Soni, the chief sustainability officer and his or her team will work across the entire gamut of the organisation to collate, clean, and consolidate data for ESG reporting. Two best practices are:

• Partner with technology providers: Invest in data management software or platforms designed specifically for ESG reporting to streamline data collection, storage, and analysis. Ensure that the chosen system can handle large volumes of data, support multiple data formats, and facilitate data validation and quality checks.
• Outline data collection protocols: Clearly define data sources, collection methods, and frequency of data updates to ensure consistency and reliability and document the assumptions, methodologies, and calculations used. Yet, do not hesitate to modify them over time with learnings and expanded scopes.

Connecting ESG with GRC and financial reporting

Soni suggests leveraging existing GRC and financial reporting models to tackle ESG can significantly accelerate enterprises’ journeys to ESG maturity, while also increasing the return on existing investments and expertise:

• Integrated reporting and monitoring mechanisms: ESG factors are increasingly seen as financial risks, and many existing regulations that are being managed within GRC now fall under the ESG umbrella. There’s significant value in implementing systems that can centralise the data collation and management processes.
  Hence, mature ESG-compliant organisations tend to adopt integrated reporting and management platforms, that can seamlessly connect with business systems across the organisation, as well as bring in external market intelligence to drive greater efficiency, consistency, and accuracy in the financial reporting, GRC, and ESG metrics.
• Skill adjacencies: GRC and financial reporting teams have much of the people, processes, and technology already in place to readily incorporate ESG metrics into the risk management and compliance domains.
  Their experience in examining data for insights, identifying emerging risks, and influencing corporate strategy can bring in the same level of robust processes and controls expected of financial reporting standards to ESG measurements and reports.
• Don’t forget your history: Financial reporting standards have evolved over the past 150 years and continue to change with economic shocks, crises, etc. ESG reporting will continue to change and be refined, given the challenges of sustainability goals.

Lessons from US and EU CFOs on ESG and sustainability

In Asia, ESG and sustainability have gained the attention of CFOs with some taking ownership of the initiative. Soni believes that geographic variations of sustainability and ESG practices will converge with time. While embracing local practices and histories, CFOs in Asia can learn from leaders in the US and Europe in three ways:

• Regulatory compliance and beyond: Keeping abreast of evolving ESG regulations and standards is crucial for compliance and reputation management. However, remember that regulation is the floor, not the ceiling. CFOs in Asia are uniquely positioned to anticipate regulations matching those in Europe while witnessing the benefits of robust sustainability practices.

“With this foresight, CFOs can learn from advanced sustainability frameworks and collaborate with industry peers and regulatory bodies to navigate complex regulatory landscapes effectively.” Rita N. Soni

• Long-term value creation: Sustainability leaders prioritise long-term value creation over short-term gains. CFOs can focus on sustainable growth strategies that consider environmental and social impacts alongside financial performance, also known as the triple bottom line of people, planet, and profits. Aligning with stakeholder expectations for resilient and responsible business will create lasting partnerships among investors, employees, customers, and communities.
• Technology for sustainability and sustainability for technology: Embracing innovation and technology can drive ESG progress and efficiency gains. CFOs can explore opportunities such as circularity, green IT, and accessibility to support sustainability goals while enhancing operational performance, sustained value, and differentiation while driving revenue and growth in challenging markets.