At a magazine industry annual conference in the late 1990s, the head of one of the industry’s most prominent corporations told the assembled executives, “As far as I can see, the internet is a black hole that you pour money into and never see again.” About six months later, that speaker was looking for a job.
And now, in the early 2020s, corporate executives face another burgeoning trend that it would be unwise to dismiss as a fad.
It goes by the acronym ESG, which stands for Environmental, Social, and Governance, and it focuses on the areas corporations need to start paying serious attention to be responsible businesses.
Let’s begin by illustrating some key areas under the words that make up the ESG acronym. That is, Environmental, Social, and Governance, often referred to as the “Three Pillars” of ESG.
“Environmental” includes working toward waste reduction and efficient energy usage, measuring greenhouse gas emissions, not contributing to biodiversity loss, and reducing a company’s carbon footprint.
“Social” includes health and safety in the workplace, fair employee benefits, pay matching job responsibility and qualifying as a living wage, equal employment opportunities, obeying labor laws, and a company’s community engagement.
“Governance” or “corporate governance” includes transparency and truthfulness in accounting, compliance in all business areas, managing risk, adhering to business ethics, and resolving conflicts of interest.
In a practical sense, ESG is about the actions a company takes, the policies it implements, and the goals it sets relating to a wide range of Environmental, Social, and Governance issues. These actions, policies, and goals are quickly becoming subject to increasingly comprehensive and sophisticated requirements for reporting to regulators, investors, and the public.
Creating an ESG Strategy and Reporting Process:
First, what exactly is an “ESG strategy”? While there is no single authoritative definition of an ESG Strategy, it can be described as a holistic approach that incorporates environmental, social, and governance risks, opportunities, and objectives into existing organization-wide processes for managing risk, setting goals, and measuring results.
As to “organization-wide processes,” if your organization already considers its impact on some or all of the ESG areas listed above, you have a good head start on developing an ESG strategy. But there is another crucial and essential element to ESG: Creating a comprehensive and reliable reporting process, one that tells your organization’s ESG story in a complete, accurate, and verifiable way.
With the growth of ESG has come increased demand for detailed disclosure and enhanced transparency in ESG reporting. Adding urgency to that demand is a pending SEC rule that runs nearly 500 pages and addresses in detail the Commission’s new requirements for transparency and consistency in ESG reporting and disclosure.
But the SEC proposal aside, organizations that develop an ESG reporting process that is both flexible enough to adapt to change and tough enough to stand up to scrutiny by auditors will meet ESG requirements and be positioned to reap its benefits. Yes, companies that embrace ESG instead of dismissing or avoiding it often realize measurable benefits that can flow through to the proverbial bottom line.
That said, since embracing ESG involves many commitments, lots of complexity, and a range of moving parts, seeking the counsel and expertise of advisory experts and an accounting firm such as Prager Metis can help smooth the process.
Finally, regarding those bottom-line benefits and how to achieve them, look on our website for Part Two of “ESG and You” appearing shortly.