Why Your Business Needs To Be ESG-Compliant
Starting as a mere campaign by activists decades ago, Environmental, Social, and Governance (ESG) standards now play a big role in various companies. While it was not a core business initiative, industries have pivoted heavily to sustainability that many companies’ return of investment (ROI) now correlates to its ESG efforts.
More environment-aware, customers and investors are now keen and careful about where their money goes, particularly if it contributes to certain ESG resolutions. Stakeholders choose organizations that focus on social and environmental responsibility with greater reason.
But, what factors should companies and compliance managers look into to appropriately shift their gears to attain and create a robust ESG program?
The Goal of ESG
ESG, commonly called corporate social responsibility (CSR) to eastern countries, puts a business model in the spotlight on how it addresses sustainability in reducing the negative impact its daily business operations have on the environment and other elements in place.
ESG compliance is vital for organizations in any industry, especially with the United Nations (UN) Paris Agreement signed in 2016, which calls for all European companies to be ESG compliant as part of the onboarding process.
Companies are in continuous operations or production cycles as much as end-users are also in the habit of consumption. The infinite cycle is beneficial to the economy, but it can negatively impact or add up on pollution, climate change, deforestation, and waste.
In an ESG-aware environment, companies are checked if their practices and response comply with or go against environmental standards or benchmarks to issues such as energy efficiency, water conservation, climate change, and production of carbon footprint and greenhouse gas.
Companies are expected to employ systems or specific utilization of technology that can help cope up with the environmental stressors of today’s businesses.
Investors and consumers nowadays are looking for companies that revolutionize the world. Building rapport and becoming reliable creates impact as stakeholders tend to lean towards brands that connect with them on a personal or emotional level, and take care of their employees as much as they can shape societies.
You have to look into the social benchmarks and check how well you respond to pressing issues on social injustice, diversity and inclusion, wage and gender equality, and workplace hazards.
Principals and investors prefer to put in their money to companies with an executive or internal control, and support businesses capable of uplifting and providing long-term benefits to their employees and shareholders while contributing to the betterment of society as a whole.
Businesses can show this valuable trait to uphold transparency and fairness within and outside of the organization.
Benefits of Being ESG-Compliant
Pushing further on ESG initiatives would be worth it in the long run because it’s not just attractive to investors but, more so, to customers. While ESG restrictions or regulations are still slow and low, many companies are now heavily investing in it, and here are some of the reasons why.
Improved Efficiency and cost-efficiency
ESG compliance translates benefits in terms of cost reduction and enhanced efficiency in businesses. For instance, the risks and costs associated with data processing or production can be minimized by ESG-focused.
Increased profitability and business sustainability
ESG risk management is all about an organization’s ability to mitigate the negative impact of business disruptions and ensure business continuity despite political, economic, or health crises.
Risk management and ESG are found to directly impact profitability. Companies that are big with ESG in their business appear more sustainable, and easily attract and retain top talent and get more customers and investors because this also means reduced risk of losing monetary or human capital investments.
A high sustainability score for organizations is inviting for customers, potential employees, investors, the community, and the planet as a whole.
International compliance and internal control
ESG will soon have a full impact on businesses as several federal, state, and global regulations require ESG claims, reporting, and data collection to ensure that companies meet specific ESG criteria.
This supports the adoption of the Foreign Corrupt Practices Act (FCPA) in 1977 and the Anti-Bribery and Corruption regulations which gained traction and empowered other countries or governments to follow through.
Companies are now strengthening their due diligence process by building teams that put everything cohesive and on the radar. Looking at ESG and the supply chain, you can quickly achieve internal control that way. Data gathering is now easily managed with the use of questionnaires.
Others explore the use of regulatory technology (RegTech) that empowers firms to easily adapt to the pressure of increasing regulatory reporting, which often causes penalties and fines due to its complex procedures. It automates and simplifies the process of monitoring data and regulatory requirements while keeping it secured and cost-effective.
Stakeholders' demands are evolving. With customers and investors being ESG-focused, they will more likely check if you are compliant before making a purchase or investment, which could affect their agenda or businesses at the bottom line.
Risk and Controls
While ESG advantages are streamlined, its costs may sometimes fall disproportionately on businesses.
While a small business can use social media to communicate its CSR policy to customers and the local community, it may take time to monitor exchanges and could involve hiring additional manpower that the business may not be able to afford.
Even for larger companies that can afford to allocate a budget to CSR reporting, some critics suggest that corporate social responsibility can be problematic.
A company's management has a fiduciary duty to its shareholders, and CSR directly opposes this since the responsibility of executives to shareholders is to maximize profits. Businesses that forsake profits in favor of ESG may lose clients that prioritize profits.
Customers are also more aware of greenwashing, corporate practices that make a brand appear to be ESG-inclined without actually employing ESG practices or changes to its business. Some customers may react positively to these “claims”, but others are wary of corporate greenwashing.
Having a cohesive or organized workflow also keeps everything in check when it comes to the ABC perspective. Moreover, independent reviews or self-reporting and profiling are critical to ensure that a company is ESG-compliant.
Whether you want a more cohesive setup for the due diligence process or you want a separate team for ESG compliance and others, you need to find the structure that would work for your organization depending on your industry type, risk profile, as well as your ESG interest.
It’s essential to document the process and make sure that everything works in synergy with the rest of the moving parts in the organization.
It makes sense to start working now on your ESG compliance. Recent shifts and changes on ESG regulations translate the need to do it now so you can cut through the noise and not eat dust and fade out alongside competition.