ESG ... three letters that have become must-haves for businesses who wish to build a better world. Louisa Knox explains how ESG can be effectively evaluated and implemented and where its future lies . . .

The Herald:

1 Describe the three pillars of ESG and what topics might fall under themBroadly sustainability is the overarching principle beneath which the three pillars of environmental, social and governance sit. Environmental covering an organisation’s climate impact and emissions – the carbon footprint of an organisation and its impact.

Social encompasses the contribution to fairness across society. Underpinning a range of people-related issues it includes – diversity and inclusion, treatment of colleagues, and treatment of consumers and the community. Governance spans a full range of processes, operations, approach to risk and accountability.

2 Which is viewed as the most important and influential of the three pillars?
Environmental issues could be argued to have taken a front-row seat in recent years – perhaps inevitable as this area has been given prominence with COP, the UN’s widely commended sustainable development goals and, not least, the visible impact of climate change. The risk of environmental becoming the sole focus has largely been addressed with a widespread recognition that there needed to be a balance. 

Social and governance pillars are critical to any successful ESG strategy – we certainly have seen more focus on those pillars.

3 Why is ESG important for organisations?
Whether interested parties are funders, customers, investors or employees they are keen to understand the purpose and principles of an organisation. If we look at sustainability in its broadest sense, it is a long-term play. An embedded approach to ESG which can be demonstrated and tested provides that structured and clear base from which to assess organisations.

4 Are some businesses more sympathetic to adopting ESG principles than others?

Some businesses are further advanced in their ESG journey. And we can’t ignore that some businesses are focused entirely on providing services within ESG strategies and assisting others to embed this into their businesses. 

Where they are on their ESG journey depends on their scale, their sector or the pressure brought to bear on them by, for example, investors or funders.

Some will be driving forward advanced ESG structures, committed to full disclosure on developments they are making, while others will be embracing smaller changes and developing plans at a slower pace. 

Investing in the time and processes needed depends on available 
funding too.

5 What are the benefits to an organisation of having an ESG strategy in place?

A strategy and a plan are key. Both to communicate what is being done internally and also to explain to external organisations, including funders and investors what the strategy is and how the plan will be implemented. And as we know, plans are fluid – designed to accommodate change. Whether that is guided by legislative requirements, an organisation’s culture and values 
or societal pressure, reform in this space is inevitable. 

We are on an ESG journey. Within, for example, the environmental pillar our aim should be for a ‘just transition’. Avoiding a cliff edge as we reach the targets for carbon footprint reduction – including net-zero targets. Clear ESG strategies with plans in place will assist with testing against milestones. With an increase in reporting and disclosure, organisations are under pressure to look at all their processes and showcase their ESG approach.

6 How is ESG assessed? Is there a common or standard measure?
There are various ways of measuring ESG performance and a number of tools available to assist organisations in doing so. This is a developing space with challenges in comparing organisations and their individual approaches. 
The availability of data to enable reporting which is common to all organisations remains a challenge.

Clearly, advances have been made and with increasing disclosure and reporting requirements for many organisations improvements have come alongside that. There is also pressure from investors and pressure groups to look for answers to their ESG concerns.

7 Is having a good ESG strategy something you would advise for organisations of any size?

That’s not to say that those businesses are not walking the walk – it may be a matter of committing more time to developing the strategy and working through the details. 

If we look at ESG and its interplay with risk and risk registers some of that thinking has already been done. Accelerating that approach would be valuable. 

Wherever organisations sit in that journey moving forward with a strategy will be of benefit to them.

8 How can a company ensure that pursuing an ESG agenda doesn’t undermine its competitiveness or effectiveness?
All businesses have to step back and test their ESG approach. Addressing the challenges of remaining effective and competitive means knowing what is currently required from an ESG perspective, what is coming down the track, or what may be a ‘nice to have’. 

There will always be challenges in assessing future risk versus immediate risk and balancing that within the ESG sphere. Looking at the ‘G’ – keeping on top of governance requirements is fundamental. No organisation wants to be caught out on the basics – not least with the reputational damage which can result. Being on top of the ESG detail can support competitiveness and done in the right way should enhance.

9 How often does an ESG strategy have to be reviewed to ensure that it lives up to the standards of the day, which may be evolving or affected by outside issues such as supply chain problems or rising interest rates and costs? 
It’s fundamental that this is seen as a strategy which needs to be reviewed, monitored and updated regularly.  Sticking it into a corporate drawer will not do. ESG is evolving and has already changed enormously since it was first introduced. As laws develop, more data becomes available, and tracking of carbon emissions increases, those reviews will ensure that organisations stay on top of their commitments and their reporting. And equally that they remain fit for the organisation’s purpose and approach. 

  • Louisa Knox is a partner in the pensions team and an ESG and risk management specialist within law firm Shepherd & Wedderburn