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Debunking ESG Myths
Many organizations realize the importance of ESG (environmental, social, and governance) performance. Putting effort into ESG can improve organizations by making them more efficient and helping them manage risks. Organizations use ESG programs as a differentiator when telling their story to investors, customers, employees, and other stakeholders. However, some organizations have concerns about whether putting effort into ESG programs is worthwhile. Below are a few myths about ESG:
Myth #1: ESG is a waste of resources.
ESG covers an extremely broad range of topics, which could lead to organizations giving their attention to areas that do not bring as much value. Having the right ESG proposition provides value. Here are some overall best practices for incorporating ESG into your organization:
- Focus your resources on matters that are important for stakeholders. Conducting an ESG materiality assessment can help you identify and understand the importance of specific ESG topics to your organization and your customers, employees, investors, and other stakeholders. The organization can then concentrate its effort on those areas that are determined to be important to stakeholders and also contribute to business success. Start by focusing on a limited number, e.g., three to five, of topics or initiatives, and don’t try to do everything at once.
- Link ESG reporting to the organization’s strategy and enterprise risk management (ERM) process. Companies often work to improve metrics when those metrics are tracked and included in an ESG report. Therefore, it is valuable to report on ESG metrics that are important for the organization’s success. Linking those metrics to the organization’s ERM helps make them relevant and provides additional focus and executive sponsorship. Answering the following questions can help to link ESG reporting with the organization’s strategy and ERM:
- What things will be increasingly important to future profitability?
- What risks would prevent the organization from being successful in the future?
- Is employee turnover, efficiency improvements, or employee health and safety important for your organization’s success?
- Commit to getting value out of the process. Using ESG reporting for only marketing and other external purposes brings limited benefits. Committing to learning from and improving upon the organization’s ESG metrics makes your organization better.
Myth #2: There are too many ESG reporting standards and frameworks for ESG reporting to be beneficial.
Currently, there are a number of different ESG reporting standards and frameworks that organizations are using to report ESG information. However, this number is shrinking. Six of the seven most commonly used ESG reporting standards and frameworks are in the process of being consolidated with the International Sustainability Standards Board (ISSB) or have committed to coordinate their standard-setting activities with the ISSB. This process is intended to bring more consistency to ESG reporting. On March 31, 2022, the ISSB released exposure drafts of its new standards, which include industry-specific standards.
On March 21, 2022, the SEC proposed new rules that would require most public companies to disclose their greenhouse gas (GHG) emissions and details of how their business is affected by climate change. The SEC proposed rules align with the climate portion of the ISSB’s proposed standards. These proposed rules would bring increased consistency in GHG emissions disclosures if these rules are finalized. The proposed rules include attestation requirements for these disclosures.
The proposed SEC rules make the reporting of climate data even more critical. With the universe of ESG standards shrinking considerably due to the ISSB consolidation, the process of selecting the proper framework for your ESG reporting is being made much simpler and more relevant to your organization’s needs.
Myth #3: ESG information isn’t reliable.
Information contained in ESG reports needs to be accurate and reliable since it is used in decision making. This decision making may be internal, e.g., board or management, or external, e.g., customer or investor. Having controls in place for the accurate reporting of ESG information is important, similar to the importance of having controls in place for an organization’s financial reporting.
Accounting firms that provide ESG services can conduct a pre-assurance readiness engagement that includes evaluating controls and providing recommendations on improving the quality of ESG data. Assurance of ESG information also can be provided to increase the credibility of the information reported and can be either limited assurance, similar to the level of assurance in a financial statement review, or reasonable assurance, similar to the level of assurance in a financial statement audit.
Myth #4: ESG is focused on environmental factors.
Although diversity, equity, and inclusion (DEI) and climate risk are hot topics, governance is a very important, but sometimes overlooked, aspect of ESG. Governance includes such critical areas as risk management, fraud prevention, and oversight of cybersecurity. ESG rating organizations calculate composite ESG scores for companies by using varying weights for ESG components. In many industries, ESG rating organizations often give governance the largest weighting when compared to environmental and social components. Good governance helps organizations capitalize on opportunities and address challenges and risks they may face now and in the future.
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