EDITORIAL: MAKING THE MOST OF ESG

In today’s world, companies are no longer evaluated based solely on their financial performance. They are now being scrutinised by a wider range of stakeholders, such as investors, customers, employees, and suppliers, who have concerns beyond their financial performance. These concerns often include Environmental, Social and Governance (ESG) issues.

Several companies have been accused of greenwashing, which is the practice of overstating the sustainability of their actions or not being able to provide evidence to support their claims about the ESG credentials of their actions. Some of the high-profile companies that have been accused of greenwashing include Volkswagen, DWS (Deutsche Bank’s asset management arm), IKEA and HSBC.

In one of our reports featured this month, ESG-Infused Governance, Deloitte outlined four key pillars that they believe form the foundation for what they call 'ESG-infused Governance'. Although the report focuses on financial institutions, the principles outlined in it can be applied to other sectors as well.

Oversight structure - How the board, its committees, and the senior management team are structured either allows for ESG matters to rise to prominence or remain a sidebar discussion.

Compensation structure - People do what they’re financially incentivised to do. Executive compensation is a powerful lever for boards to prompt change and increase accountability throughout their organisations and linking compensation to specific, measurable ESG targets can only be helpful.

Policies and risk management - Rules, regulations, practices, and processes have a direct correlation with the effectiveness of corporate governance. A company-wide code of conduct, for example, helps set expectations for appropriate conduct by making it official policy. In most cases, the extent to which internal policies and programmes are aligned with external ESG commitments and disclosures will determine how successfully an organisation can avoid claims of greenwashing.

Transparency and accountability - Transparent and accountable business practices instil confidence among stakeholders and help drive enterprise value. Regular reporting on ESG and nonfinancial performance is becoming as important as the reporting of financial data, including clear communication of goals and targets for creating internal and external goalposts.

As Deloitte pointed out in the conclusion of the report, the benefits of being able to address these broader stakeholder issues successfully not only leads to stronger relationships but can also provide a path to better returns and better risk management – in other words, real and measurable results.

The full report can be read here.