In a recent survey from Diligent and non-profit think tank OCEG, nearly half (46%) of respondents reported having a formal environmental, social and governance (ESG) program. Another 34% of organizations plan to implement one. These figures would be great news — if it were 2019.
During 2021, however, the pressures around ESG have intensified, with two significant developments anticipated by the end of the year:
- The U.S. Securities and Exchange Commission may require corporations to publicly disclose their climate change risks and what they're doing to manage them.
- An international agreement by the Group of Seven (G7) nations for mandatory climate reporting is likely.
As regulatory requirements tighten, investors are also demanding more disclosures and scrutinizing the quality of the data they receive. Third-party audits are becoming standard practice.
The key question is an obvious one: just how prepared are organizations for upcoming ESG challenges? What next steps should they take to accelerate their progress?
Diligent and OCEG spoke to over 500 professionals worldwide from various industries and company sizes and asked questions about ESG concerning governance, strategy, risk management, audit, compliance and operations. Over half of the participants (53%) hold board, C-suite or senior executive titles. Here's what we found.
Increasing Budgets, Lagging Confidence
Organizations recognize that ESG is a 'pay now or pay later' enterprise. Among survey respondents, 55% have money budgeted for ESG, and 73% are increasing their budgets. Additional survey findings shed insight into why.
To start, ESG is making its presence known in critical business areas: sales, recruitment, the supply chain and beyond. Survey respondents reported inquiries about ESG activities from customers (52.4%), potential hires (19.2%) and suppliers (16.2%). Nearly half (44%) reported inquiries from investors.
In short, stakeholders want to know if an organization can address uncertainty, act with integrity, and have a reliable ESG platform to achieve these objectives.
Organizations are drawing stronger links between ESG and the bottom line beyond the usual areas of brand and reputation. Survey respondents described ESG performance and reporting as having an impact on:
- Customer satisfaction (53.9%)
- Employee satisfaction (49.2%)
- Financial outcomes (48%)
- Investor satisfaction (47.8%)
- Product design (21.5%)
A symbiotic relationship exists between these different areas. Customer satisfaction impacts investment decisions. Both customer and employee satisfaction affect brand and reputation. Financial outcomes tie to both customers and investors. All of those factors impact not just the immediate bottom line but also long-term growth and sustainability.
Yet fewer than 1 in 10 companies (9.3%) are 'highly confident' that their organization has mature, well-documented ESG capabilities.
- More than half (50.3%) have not yet published ESG metrics in an ESG report, sustainability report or other formats
- Nearly half (47.9%) say they have not been increasing their alignment of executive compensation with ESG metrics
- Only 1 in 5 (20.4%) consider ESG metrics when making all investments
- Only 14% consider ESG for vendors and suppliers
In short, organizations have made some progress in their ESG activities, but the vast majority are still unprepared for the most pressing ESG challenges. How can these organizations — and yours — bridge the gaps?
Perfecting ESG Reporting
ESG Effectiveness Starts with Data
How does an organization align its activities with the values and commitments in its ESG statements while effectively monitoring uncertainty and risk? Moreover, how does an organization effectively communicate its progress with customers, investors and other stakeholders?
Data and monitoring are key. Yet, many organizations fall short in these areas. Only 43% have KPIs for ESG activities, and only 30% have completed an ESG assessment over the past year. Critically, almost two-thirds (61%) of respondents do not have the necessary software for data collection or analysis.
Information is the fuel that drives a mature ESG program forward. With systems in place to collect, aggregate and review data, organizations can map progress against their own goals and tackle crucial next steps centered around disclosures and reporting.
Yet ESG data collection comes with various challenges, like changing regulations and requirements, the lack of a single reporting standard and numerous reporting methodologies. Survey respondents reported relying on multiple frameworks for guidance, including:
- The Global Reporting Initiative (GRI) — 49.2%
- The Sustainability Accounting Standards Board (SASB) — 32.6%
- The World Economic Forum's environmental and sustainability goals — 23.5%
- The standards of international non-profit CDP — 14.4%
- The Dow Jones Sustainability Index — 14.4%
- International Integrated Reporting Council (IIRC) — 13.6%
- The Global ESG Benchmarks for Real Assets (GRESB) — 11.4%
- The Climate Disclosure Standards Board (CDSB) — 8.3%
What to Look for in ESG Technology
As ESG disclosures swiftly move from a 'nice to have' to a legal mandate, organizations will soon require the right technology for timely and accurate reporting. The question becomes not whether you will need a platform, but what features to look for in an effective one.
A robust, secure and integrative ESG platform enables organizations to collect, standardize, consolidate and analyze ESG data in a transparent and streamlined fashion. Given the multiple evolving frameworks that govern ESG issues today, a flexible platform is also key.
Looking on the bright side, mandated disclosures may serve as a powerful catalyst, pushing companies of all sizes and across industries forward in their paths toward ESG maturity. Once an organization uses ESG data to understand its current state, it can establish or improve a formal ESG program, with a set budget and KPIs, to prepare for what's next in environmental, social and governance issues.
Ready to accelerate your ESG journey? Take the next step by downloading your free copy of Diligent's ESG Buyer's Guide to discover what a market-leading ESG solution looks like and what areas you should pay close attention to within your ESG program.