By: Amanda Carty, Managing Director of ESG & Data Intelligence at Diligent
The concept of ESG (environmental, social and corporate governance) has been in choppy waters this year with political resistance against ethical investing, as well as criticism of ESG as being virtue-signalling or supposedly distracting from financial returns. This begs the question, how are boards currently thinking about ESG?
The answer varies around the world, according to a survey of nearly 1,000 corporate directors globally conducted by Diligent Institute, the governance research arm of Diligent, and Spencer Stuart. In Europe, for example, where the Corporate Sustainability Reporting Directive (CSRD) has already begun its rollout, 56% of directors say they view ESG as an opportunity for their business, and 34% say ESG metrics have led to better performance of their stock. Meanwhile in the U.S., where there is still more uncertainty around local regulations and reporting frameworks, more directors are likely to view ESG as a risk (34%) than an opportunity (30%).
Regulations are a driving factor behind prioritizing disclosures
Whether ESG is viewed as a risk or opportunity, most boards recognize the value in collecting and measuring climate data, and organizations are mobilizing to prepare for regulatory reporting.
In the U.S., the SEC’s new climate disclosure rules are soon to come into play. Corporate directors are already preparing, with 55% saying they’ll take extra care to ensure their ESG strategies are adequately reflected in annual reports and filings. At the same time, 46% of directors plan to enhance their ESG disclosure methods. In Europe, where CSRD is already in play, directors not taking action on ESG are few and far between, with only 2% saying they aren’t prioritizing ESG strategies; as many as 14% of U.S. corporate directors say the same.
Yet, directors still struggle to link ESG to broader business strategy
Despite variances in how corporate boards are thinking about ESG, directors around the world have one thing in common — nearly half want more clarity on how sustainability goals link to their larger corporate strategy.
Even as ESG is on the upswing, many directors still struggle to grasp what ESG looks like in practice. Lack clarity around what ESG means for the company, as well as trying to balance ESG initiatives with competing business priorities or strategic interests, is where the greatest challenges lie for boards. In contrast, only 2% identified public backlash against ESG as being one of the greatest challenges.
The SEC’s new disclosure rules may provide some guidance. Boards and leadership roles will have to be re-focused to include ESG oversight. But to do that, boards need more visibility into progress on environmental goals, how environmental goals link to their broader business strategy and measure against competing risks and business objectives.
3 ways directors can overcome these challenges
To achieve and measure the new sustainability benchmarks, many boards will need improved technology. Organizations should invest in software that can track their carbon emissions and collect and organize information from across their value chain in a single database.
Technology can also help organizations:
- Adopt GHG accounting best practices, including keeping digital records of scope 1 and 2 emissions.
- Start measuring scope 3 emissions.
- Check for overlap with relevant frameworks.
- Maintain dashboards of key GHG accounting and sustainability KPIs.
- Ensure reports are in an audit-ready format.
2. Standardized and auditable reporting
In the past 20 years alone, supply chains have ballooned. Subsidiaries, suppliers, and third parties have created a complex network that can easily lead to gaps in oversight. The SEC’s new rules will only add to the complexity and volume of reporting requirements and board agendas. But that doesn’t mean directors’ workloads should increase, too.
Organizations need to prioritize credible and defensible reporting. This requires intuitive data, well-curated dashboards, and best-in-class ESG technology. With these functions in place, directors should not only be able to automatically create reports that both offer actionable insights and hold up to future audits, but create engaging presentations backed by the latest data that tells a compelling story to their boards.
3. Skills and education
The proposed rules put ESG oversight squarely on the board and other leadership roles. To effectively champion ESG initiatives, directors need proactive education and skills training that equips them to intentionally and efficiently discuss climate and sustainability with management.
It’s likely that the SEC will hold boards accountable for overseeing sustainable growth strategies. New training and certifications must prioritize climate risk and ESG fundamentals, empowering directors to link business success to ongoing ESG efforts.
Start standardized and streamlined ESG reporting
ESG reporting isn’t going away. If anything, the SEC disclosure rules signal a continued focus on transparency and accountability with respect to organizations’ ESG impact.
But having a standardized and streamlined reporting system makes it possible to both answer to the continued emphasis on sustainability and prevent ESG fatigue. There will also likely need to be modifications and improvements to the SEC disclosure rules to break down barriers to adoption, but organizations can take action, too.
Prioritizing skill enhancements, offering certifications, and leveraging carbon accounting technology now will help your corporate directors work smarter, not harder, no matter how the conversation around ESG evolves.
Diligent is a leading GRC SaaS company that gives organizations the tools and solutions they need to bring clarity to complex risk, elevate impactful insights and get ahead of a world that is constantly changing. With solutions across governance, risk, compliance, audit and ESG, Diligent empowers more than 1 million users and 700,000 board members and leaders to make better decisions, faster. No matter the challenge. Learn more at diligent.com.