Environmental, Social, and Governance (ESG) and Legal Matters
By Şebnem Ceceli
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Environmental, social, and governance (ESG) encompass a comprehensive set of criteria employed by astute investors to assess a company’s performance beyond the non-financial metrics. These metrics include a company’s impact on the environment, its treatment of employees and suppliers, and the overall effectiveness of its corporate governance structure.
In recent years, an increasing number of investors have recognized the significant influence that a company’s non-financial performance can exert on its long-term financial prospects. This realization has prompted numerous studies examining the relationship between ESG metrics and financial outcomes, consistently indicating that companies achieving high ESH scores are more likely to outperform their peers over extended periods. Given these compelling findings, the concept of ESG has gained increasing importance across all sectors.
Various frameworks and methodologies have emerged to access a company’s ESG performance. Prominent among these are the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Global Reporting Initiative (GRI) framework.
Despite the growing importance, several challenges persist in the process of evaluating and incorporating ESG criteria into investment decision-making. These challenges include issues around data availability and quality, as well as the absence of standardized metrics and reporting frameworks. Nonetheless, efforts to overcome these obstacles are underway, as the establishment of ESG standards and the definition of performance criteria progress gradually.
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THREE LETTER OF ESG:
(E)nvironmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change.
(S)ocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
(G)overnance pertains to a company’s leadership, executive compensation, auditing practices, internal controls, and shareholder rights.
CSR, ESG AND LEGAL
All companies are lawfully required to follow and conform to legal obligations. While these obligations encompass a broad spectrum of influence, they further include the responsibility towards the company, stakeholders, employees, communities, and certainly, the environment.
Corporate Social Responsibility (CSR) goes beyond legal requirements and refers to voluntary actions taken by a company to enhance its societal and environmental impact. However, as competition intensifies increases, organizational structures face increasing challenges, and legal compliance alone is no longer sufficient to address the complex issues posed by ESG concerns. Incorporating ESG considerations into a company’s CSR strategy can help the company operate more sustainably, build trust with stakeholders, and increase its long-term value. Understanding and integrating ESG factors into business practices can yield both ethical and financial benefits for companies.
The objective of CSR is to contribute to a company’s long-term success while creating a positive impact on society and the environment. Common examples of CSR include reducing carbon prints, improving labor policies, participating in fair trade, implementing environmentally beneficial corporate policies, and fostering diversity. CRS projects align with ESG goals as they recognize the importance of building sustainable brands and cultures.
The impact of the COVID-19 pandemic and the ongoing climate crisis have accelerated the need for long-term ESG initiatives, underscoring the importance of sustainability as a crucial factor in investment decisions. Sustainability has become a critical issue for policymakers, supervisory agencies, investors, and firms, influencing investment decisions and prompting a shift in the legal landscape. The European Green Accord, the Paris Climate Agreement, and COP26 have further fuelled the development of ESG by seeking to address pressing environmental issues such as the climate crisis, greenhouse gas emissions, deforestation, and biodiversity loss.
ESG MANAGEMENT
ESG score refers to a quantitative or qualitative assessment of a company, fund, or security’s commitment and adherence to ESG standards and principles. In other words, ESG performance management, indices, and certificates serve as tools to measure, track, and certify the sustainability and social responsibility of companies and investments. These ESG performance management, indicates and certificates are crucial for promoting the establishment of sustainable and responsible businesses as they inform investors about the businesses they intend to invest in, enabling them to make quick, informed, and sensible decisions.
Explanations in the context of ESG scoring systems can be categorized into industry-specific and industry-agnostic criteria. Industry-specific scoring systems evaluate issues that have been identified as material within a particular industry. On the other hand, industry-agnostic ESG scores encompass commonly accepted factors that hold significance across industries, such as climate change, diversity, equity and inclusion (DEI), and human rights, among others.
ESG rating platforms determine weightings for each measurement criterion and assess an organization’s performance against these criteria. An organization’s final ESG score is typically a sum-product of the criteria ratings and the (proprietary) criteria weightings.
Scoring systems are developed by finance and investment firms, consulting groups, standard-setting bodies, non-governmental organizations (NGOs), and government agencies.
External and internal stakeholders form two significant categories of raters. External stakeholders focus on researching publicly available information, assessing the company’s management, disclosures, and sustainability plans. Internal stakeholders develop research subjects, scoring systems, and report-monitoring performance systems. Performance measurement is an integral part of business management, as it provides valuable insights into the effectiveness of business operations and the achievement of organizational objectives. It enables organizations to identify areas of strength or weakness, inform decision-making, and optimize operations to drive future success.
One approach to gauge performance is through the comparative analysis of diverse business units or geographic markets. Such a methodology allows for the identification of strengths and weaknesses, thereby informing strategic decision-making. Another method entails measuring actual outcomes against specific issues affecting company stakeholders, including customers, suppliers, or employees. This practice facilitates the evaluation of performance in meeting stakeholder expectations and the identification of areas primed for enhancement.
Furthermore, conducting horizontal analysis by measuring performance fluctuations over time provides valuable insights into business performance trends and patterns. Armed with this information, organizations can employ data-driven decision-making to optimize operations and achieve superior outcomes. By leveraging a diverse range of performance measurement approaches, organizations can cultivate a comprehensive understanding of their performance and make well-informed decisions to propel future triumphs.
Internal stakeholders are currently developing internal research subjects, grading systems, and report-monitoring mechanisms to assess performance. Given its role as a vital component of company management, performance measurement offers substantial insights into the efficacy of business operations and the achievement of organizational objectives. Comparing performance across multiple business units or geographical markets serves as a valuable means to assess performance by identifying areas of strength and weakness and guiding strategic decision-making. An alternative approach involves assessing actual outcomes in relation to specific issues that impact key stakeholders, such as clients, partners, or staff. This allows organizations to evaluate their performance in meeting stakeholder expectations and identify areas with potential for improvement.
DEVELOPING A SUSTAINABILITY STRATEGY
Every company’s sustainability strategy is inherently unique and requires careful consideration of goals, processes, circumstances, and values. In essence, comprehending the intricacies of your company, clients, and stakeholders is paramount to the development of a robust sustainability strategy.
To create an effective sustainability strategy, it is crucial to follow a series of steps:
1-Assess your current situation: This initial step holds utmost importance in the strategy development process. Conducting a comprehensive assessment not only provides a solid foundation for measuring progress but also helps identify areas for improvement.
2-Set clear goals and objectives: Define specific and measurable targets that align with your organization’s values and priorities. For example, you might aim to reduce greenhouse gas emissions by a certain percentage or increase the use of renewable energy sources.
3-Conduct a materiality assessment: Prioritizing areas for action and allocating resources accordingly is pivotal. By evaluating the degree of significance, a company can identify the sustainability issues that hold the greatest relevance to its operations and stakeholders.
4-Engage stakeholders: As we said in the first step Involving employees, customers, suppliers, and other relevant stakeholders in the development of your sustainability strategy is fundamental. Seek their input, attentively listen to their concerns, and incorporate their perspectives into the strategy.
5-Develop action plans: Developing a strategy is a time-consuming process. That’s why breaking down sustainability goals into actionable steps and creating specific plans for each area is important. These action plans should address areas such as energy efficiency, waste management, water conservation, supply chain sustainability, and employee engagement.
6-Implement and integrate sustainability practices: Put your action plans into practice!
7-Monitor and measure performance: Collect data on key metrics and regularly evaluate progress against your targets. Monitoring and measuring performance allow for effective tracking of sustainability initiatives and identifying areas that require further attention.
8-Report and communicate: Transparency is a fundamental aspect of Environmental, Social, and Governance (ESG) principles. As a consequence of this reality, businesses are facing mounting scrutiny and pressure for transparency on climate risk, social justice, sustainability, and corporate governance. That’s why it is recommended to be transparent about your sustainability efforts by regularly reporting your progress to internal and external stakeholders.
9-Improve: Engage in benchmarking activities and foster collaboration with peers and industry associations to exchange knowledge and enhance sustainability performance. Staying up to date on emerging best practices, industry standards, and regulatory changes ensures that your strategy remains adaptable and continuously evolves. In the end, developing a sustainability strategy is an ongoing journey, requiring ongoing commitment and dedication to improvement.
PARTNERSHIPS AND ESG
Collaborating with strategic partners can significantly enhance your organization’s environmental, social, and governance (ESG) performance, thereby contributing to the achievement of your sustainability objectives. By engaging with organizations that possess specialized expertise and abundant resources in sustainability, you can effectively develop and implement ESG initiatives, leveraging their extensive knowledge and experience to effectively address pressing environmental and social challenges.
Adopting the principle of “ESG for innovation, innovation for ESG” should serve as your guiding motto. Companies that embrace this mindset understand the importance of partnering for ESG. Through collaborative partnerships with various entities, such as suppliers, customers, non-governmental organizations (NGOs), and research institutions, novel solutions, technologies, and business models can be developed to promote sustainability practices and ESG principles.
The supply chain plays a pivotal role in achieving sustainability objectives. By engaging with suppliers through partnerships you can drive improvements in the sustainability performance of your supply chain. By working closely with your suppliers and setting clear sustainability expectations, you can promote responsible sourcing, minimize environmental impacts, and ensure social and labor standards.
Partnerships offer a platform for collective action and advocacy, enabling organizations to effect broader systemic change. Addressing sustainability challenges on a larger scale is imperative. By joining forces with like-minded organizations, you can amplify your voice and influence policies and regulations that support ESG practices and sustainable development.
Partnerships have the potential to generate shared value for both your organization and society. By integrating ESG considerations into your partnerships, you can align business objectives with societal needs, thereby generating positive impacts on the environment and communities. Consequently, the creation of shared value will facilitate the progressive development of your company.
Moreover, partnerships can serve as a critical component of ESG risk management. By conducting due diligence on potential partners and engaging in collaborative initiatives, you can mitigate risks related to environmental and social issues. Strong partnerships can help identify and address risks at an early stage, thereby enhancing the resilience of your organization.
It’s, a project of trust, a project where participants are encouraged to learn and to share their knowledge, a project where having fun and sharing great moments.
INDEPENDENCE AND ESG
While independence and ESG are distinct concepts, they possess the potential for intersecting within the realm of independent verification, oversight, and reporting, thereby bolstering the credibility and integrity of ESG practices.
The connection between independence and ESG extends beyond conventional perceptions, as independence assumes a pivotal role in various aspects of ESG considerations:
1-Independent auditing and reporting: External auditors, who are independent from the company, can provide assurance on the accuracy and reliability of ESG disclosures and reports.
2-Independent oversight: Independent board directors can ensure that ESG issues are given appropriate attention and oversight within the company’s governance structure.
3-Independent verification: Third-party certifications and standards, conducted by independent organizations, can verify a company’s ESG performance and provide credibility to its claims.
By incorporating independence into ESG practices, stakeholders can have more confidence in the accuracy, transparency, and reliability of ESG-related information and assessments.
