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Understanding ESG Governance

Understanding ESG Governance

In today’s eco-conscious world, sustainability matters. It matters to all stakeholders from employees to clients along with investors and everyone else in between. In fact, recent years have seen a distinct movement toward sustainable investments. This, in turn, prompted the U.S. Securities and Exchange Commission (SEC) to develop the Environmental, Social, and Governance (ESG) criteria — a set of guidelines that are intended to help aid in the evaluation of a company’s overall sustainability and related conduct risks.

What Are ESG Reports?

The SEC now requires companies to generate Environmental, Social, and Governance (ESG) reports, which are based on key data points that have been linked to various sustainability-related behaviors, activities, and corporate conduct. These reports are designed to provide prospective investors with an accurate idea of a company’s overall sustainability level. The objective is to provide these potential investors with a more informed sense of how well a company’s actions, priorities, and values align with their own.

These reports are starting to become mandatory. The U.S. Securities and Exchange Commission’s Division of Enforcement even developed a 22-member task force to monitor companies’ compliance with the mandate to generate these ESG reports. This underscores the importance of ESG compliance and governance.

Notably, ESG governance and compliance is becoming easier thanks to the development of new software that is designed to help companies track the data and metrics that must be addressed in these mandatory ESG reports. There are three key areas

This has given rise to the development of ESG software platforms that allow companies to track, document, and report key metrics that impact their score in each of the three areas: environmental factors, social factors, and governance. Governance is widely regarded as the most challenging of the three criteria since it is the most nebulous and open to a fair bit of interpretation.

ESG and Governance Factors

The ESG’s governance criteria relates to a company’s rules, mission, principles and policies. These factors are evaluated in terms of how they affect the company’s overall sustainability and eco-friendliness.

Remember, a company is tasked with identifying tangible metrics and data that can be objectively evaluated for their impact on sustainability. That is no easy feat. How do you evaluate a policy? Well, you need to understand the policy’s exact impact and then, you must find a way to effectively quantify that impact. Evaluating a mission or principle in this way is even more challenging. For this reason, governance is a common area of focus for ESG consultants who are assisting companies that need help reporting on their governance-related factors.

A Holistic and Practical Approach to ESG Governance

The most effective approach to ESG governance reporting usually entails a strategy that is both holistic and practical in nature. This may entail examining what measures are already in place, in addition to evaluating your company for opportunities for improvement and advancement.

In some cases, a business may lack solid governance-related criteria to report upon. This could signal a shortfall that could be having an adverse impact on the organization’s overall ESG ranking. In these cases, an experienced ESG consultant can serve as an objective third-party who can be very effective in spotting opportunities for improvement and growth. Your consultant can come to the table with a fresh view, offering ideas and tips for measures that will improve your ranking in relation to the ESG governance criteria.

What Constitutes a Solid ESG Strategy With Governance in Mind?

A winning ESG governance-focused strategy will entail sustainable innovation that spans your organization as a whole. These changes must also be sustainable in the long-term; flimsy, half-hearted modifications simply won’t bring the results you need to find success.

In order to fulfill the governance criteria and establish a robust ESG strategy, you must consider a variety of different factors including the following.

  • Diversity, equity, and inclusion (DEI)
  • Decarbonization opportunities
  • Tax strategies
  • Company culture and ethics
  • Risk management strategies
  • Data privacy and data management

These are just a few of the issues that must be kept in mind as you examine your ESG governance strategy. This is a broad category with an overarching theme of acting responsibly and supporting sustainability in an even, consistent manner across all operations and activities.

ESG Governance as an Opportunity for Corporate Improvement

Some companies may find it useful to view their ESG governance strategy as part of a larger transformation. You can think of it as an avenue for growth and opportunity. Consider these opportunities for value creation as you create a strategy around the ESG governance criteria.

  • Disclosing Data on Governance-Related Issues – As you develop an ESG strategy, consider how you can integrate governance-related data and metrics into your company mission statement. Many prospective investors will be swayed by hard data points. For a sustainability-focused investor, transparent, ESG-focused data can hold major sway and it could position your organization ahead and above a potential competitor.
  • Speaking Directly to ESG-Focused Investors – Leverage your website, marketing materials, and other public-facing collateral as an opportunity to promote your status as a sustainability-focused organization. Cite specifics and be as transparent as possible when you discuss issues relating to ESG in general and governance in particular. This will make your company more appealing not only to sustainability-focused investors, but also to the many consumers who value a sustainable organization.
  • An Opportunity to Implement New Sustainable Practices – There’s never a time like the present to make improvements and this is especially true when it comes to ESG. As you explore the topic of governance and other aspects of your ESG strategy, look for any inefficiencies or problem areas that may exist and be open to opportunities for change. Virtually all of the measures to improve sustainability and reduce negative environmental footprint will also lead to cost savings. There are even ESG software platforms that can be used to help identify areas of inefficiency.
  • Improving Employee Experience – Countless studies have found that happier and more engaged workers have higher levels of productivity and loyalty. Implementing ESG-related programs surrounding employee wellness will not only look great on that mandatory ESG report; you’ll also improve the lives of your employees — both in the office and beyond.

Navigating ESG and Governance Issues

The SEC’s Environmental, Social, and Governance (ESG) criteria is complex to be certain. Navigating ESG-related governance issues is even more complicated, but the experienced team at iTech is available to assist. We invite you to contact the team at iTech today to discuss your ESG strategy and how we can assist with ESG reporting mandates in a way that will position you for success.