ESG, environmental, social and governance, is a term used more and more by the investment community. For companies, an ESG program refers to the policies, management systems and processes that the organization has in place to manage material environmental, social and governance risks.
ESG criteria as an opportunity for success
A large number of companies recognize the opportunity for long-term success that comes as a result of an effective environmental, social and governance (ESG) strategy. The high expectations of stakeholders (investors, customers, employees and society in general) indicate that high performance in terms of ESG can translate into better access to capital, talent and business opportunities.
To navigate successfully in a changing and complex landscape such as ESG criteria, companies must avoid approaches that could lead to missed opportunities.
The main mistakes when managing ESG
Here are some of the most common misconceptions among companies when it comes to managing ESG criteria:
- Excess attention to ratings
Many times, companies consider that improving their position in ESG matters implies an improvement in their ratings by rating agencies.
A company that focuses exclusively on improving its rating may risk allocating more resources to reporting rather than developing strategies that are tailored to the company’s unique perspectives and risk exposure.
Certainly, positive ratings can help companies gain recognition. However, they should be considered as the result of the efforts that the company has made.
It is important for companies to focus on their own perspective on how to manage their material ESG risks and opportunities, and to use the views of third parties as input, not for their own ends.
Focusing companies on their own perspective on how to manage their material ESG risks and opportunities is critically important.
- Address ESG criteria only through communication
Trying to improve the image of the company, focusing only on the communication and public relations strategy without having a solid management system that addresses material risks, can expose the company to significant reputational crises.
While it is true that communication can help companies to gain recognition and that an action loses much of its relevance if it is carried out but not communicated. It is important that companies focus their attention and efforts on actually having an effective ESG management strategy.
- Lack of supervision by the board of directors and management
As the company’s ESG management strategy must be positioned as a fundamental part of the company’s vision and values, the participation of the board of directors and senior management is essential.
Therefore, the board of directors and senior management must not only monitor, but also drive the company’s ESG strategy, aligning it with the business strategy.
- Disassociation with the business strategy
For an ESG strategy to be successful, it should not be considered separately from the company’s business strategy. An ESG strategy that does not take into account the strategic objectives of the company and does not inform the main corporate strategy does not serve its purpose.
On many occasions, these separations can occur when an exhaustive evaluation of the material issues has not been carried out.
- Compliance-oriented approach
When companies present their ESG programs referring only to compliance with environmental, labor practices, health and safety rules and regulations, among others. It may seem reactive and indicate a resistance to going beyond the minimum requirements.
To position themselves as leaders, companies should proactively showcase the best programs that exceed the minimum requirements as part of an ESG strategy.
- Inconsistencies in the company
Companies should map out their policies and programs across business units, geographies, segments, and align efforts across the business to have a consistent approach with equivalent practices on how to address material risks.
Lack of proper coordination can result in the company adopting different standards in different divisions without clear reasoning. As a consequence, this approach can leave “gaps” in the company’s ESG management programs with the consequent exposure to risk.
- Lack of evaluation and follow-up control
To monitor ESG performance, continuous and thorough collection of data and information is important. Failure to track ESG performance can lead to the fact that the company is unable to progress and receive credit for all its ongoing efforts and initiatives through reporting.
Creating methodologies and mechanisms for the adequate collection of information to later have a correct performance management, involves great efforts for companies. However, it can prove to be decisive in establishing a successful program.
The periodic evaluation of the effectiveness of the company’s programs is key when adjusting to achieve continuous improvements.
| SOURCE : The Seven Sins of ESG Management Posted by Kosmas Papadopoulos and Rodolfo Araujo, FTI Consulting, on Wednesday, September 23, 2020 |
Making the most of the opportunity offered by an ESG management system
These “most common mistakes” of ESG management do not have to qualify as “fatal” for companies, however, they can be dangerous, as they can lead to poorly managed or superficial approaches to risk management.
A company can take full advantage of the opportunity offered by a strong ESG management system to address risks and protect long-term shareholder value.
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