The Rise and Challenges of ESG – Your Journey to Enhanced Sustainability, Brand and Investor Potential

ESG’S RISE FROM VARIOUS GUISES

Environmental, Social and Governance (ESG) considerations have existed in various guises for decades, but are becoming more important to a multitude of stakeholders, including consumers, investors, credit rating agencies, lenders and regulators.

WHY ESG, WHY NOW?

ESG-related concerns are becoming more meaningful to an increasing number of consumers, especially Millennials and Generation Z/iGens. Many socioeconomic factors, such as protecting the environment, addressing climate change and poverty, and diversity based on race, gender and sexual orientation, are extremely important to these groups.

This ever-expanding base will continue to have a lot of influence and make purchasing and investment decisions based on ESG.

These stakeholders, alongside investors, employees and society in general, demand that companies go beyond mere compliance with legal requirements and, instead, have a positive impact that reflects a true commitment to sustainability leadership. This requires an active contribution to the UN Sustainable Development Goals (SDGs) and a journey towards value creation across the whole business model.

INCREASED INVESTOR FOCUS & REGULATIONS

ESG criteria are an increasingly popular way for investors to evaluate companies in which they might invest. The criteria can help them avoid companies that pose a greater financial risk due to areas like environmental practices.

ESG regulation is also continuing to tighten around the world, from the EU’s Sustainable Finance Disclosure Regulation to the US Securities and Exchange Commission confirming a greater focus on climate-related risks.

NOW IS THE TIME FOR ACTION

According to the KPMG Survey of Sustainability Reporting 2020, 96% of the G250 – the world’s largest companies – and 80% of the N100 – 5,200 companies comprising the largest 100 firms in 52 countries – report on their sustainability performance.

Sustainability and CSR are no longer things that businesses can talk about but fail to act on. Greenwashing – putting an environmentally friendly spin on business practices – is no longer acceptable to the new primary drivers of change – the financial markets. Instead, senior management must find an effective way to quantify their company’s operations against set ESG criteria.

Active engagement by corporate boards stems from a profound change in the way financial markets are approaching sustainability and CSR. Investors are focusing on more than just financial statements. They are now taking an integrated approach to investment decision-making that involves financial information and ESG. This is gaining support from government authorities.

Improving labor standards and human rights, and reducing resource use, carbon footprints and emissions, among other concepts, is vital. Companies must manage their performance and that of their supply chains. Multiple standards exist to help businesses drive positive outcomes in these areas, providing metrics that relevant managers have traditionally focused on when looking to improve sustainability and CSR.

HOW IS ESG DIFFERENT?

ESG encompasses these factors and yet focuses on its material impact on the business. The aim of relevant managers and board members may, ultimately, be the same – to work more efficiently while reducing the impact on the environment and society – but the way they describe and achieve these goals can be quite different.

Relevant managers are concerned with improving sustainability to reduce risk while the board is interested in ESG because it is a vital part of what investors consider – it is part of its materiality.

WHY IMPROVE THE QUALITY OF ESG INFORMATION?

Benefits include:

• Increased recognition, trust and credibility
• Risk resilience and increased chance of long-term success
• Improved Board and C-level engagement
• Strengthened reporting and management systems
• Improved stakeholder communications

EXPLORING MATERIALITY, FRAMEWORKS & ASSURANCE

What is materiality?

Materiality considers all aspects of a business that may affect opportunity and risk. Investors have conventionally focused on financial materiality because their primary interest has been the “bottom line”. But things are changing, investors and regulators are now interested in nonfinancial materiality.

Understanding a company’s ESG materiality has multiple advantages. It enables the reporting of nonfinancial issues to improve investment decisions and risk and opportunity assessment, enhancing stakeholder engagement and helping to future-proof a company against regulatory and legal changes.

The sea change for business leaders is that ESG materiality cannot be considered less important because it is now completely intertwined with financial materiality. Negative ESG-related actions harm performance and financial condition.

Which ESG framework?

Effective materiality analysis requires the correct ESG framework. However, there is no one-size-fits-all approach because each company has its own materiality criteria based on factors, such as industry type, where it operates and stakeholder demands. This affects the approach an organization takes, allowing them to set the agenda and direction for their ESG journey. The approach must be clear, verifiable and defendable.

Several well-established ESG frameworks exist, including:

• The Global Reporting Initiative (GRI)
• The Value Reporting Foundation, formerly the Sustainability Accounting Standards Board (SASB)
• OECD Due Diligence Guidance for Responsible Business Conduct
• The Corporate Human Rights Benchmark (CHRB)
• ISO 26000 – Guidance on Social Responsibility
• Task Force on Climate-related Financial Disclosures (TCFD)

Some are more like traditional standards (ISO 26000) while others are not (CHRB). Their definitions of “materiality” also differ slightly. However, they all cover similar issues, such as emissions, environmental damage, labor standards and equal pay, and will help a company improve its approach to sustainability and CSR.

Choosing which ESG framework depends on factors, such as alignment with objectives (e.g. is there a focus on reducing emissions?), jurisdiction and competitor choice. Each provides a scaffold on which to build and report on ESG objectives.

Why assurance?

Figures published by the International Federation of Accountants (IFAC) in June 2021 showed that 91% of organizations reported some form of sustainability information. However, to be effective in terms of investor engagement, this information must come with assurance, and only 51% of those organizations provided this. Of this 51%, only 63% were conducted by an auditing company or affiliate. The majority – 88% – of the reports with assurance were limited, with assurance only related to defined facets (e.g. emissions) of the sustainability report.

Assurance creates trust in ESG reporting. Verification against a recognized standard optimizes an ESG report’s value. Currently, the dominant assurance standards are:

• AccountAbility’s (AA) AA1000 Assurance Standard
• The International Standard on Assurance Engagements 3000 (ISAE 3000)

AA1000 can be used for reporting and assurance while ISAE 3000 primarily focuses on assurance procedures.

SMOOTHING YOUR ESG JOURNEY

One facet of our suite of Sustainability Solutions, our ESG services are a unique set of competencies to help you mitigate risks while optimizing success, helping you to achieve your targets.

Our services meet the needs of a variety of clients and organizations, whatever their maturity level, industry focus or demand.

Ever-expanding for tailored precision

Our ESG portfolio is constantly evolving to meet new ESG challenges. We can let you know about any new services.

Services for success

Our ESG services broadly fall into six key areas:

ESG Training

Whether you are new to ESG or have a clear understanding of what you wish to achieve, SGS Academy offers ESG courses to help you get started or enhance your journey.

ESG Health Check

Get a snapshot and quick evaluation of where you are on your ESG journey, to understand your ESG performance and prepare for improvements.

ESG Gap Analysis

Organizations implementing ESG strategies must understand their ESG performance in full for continuous improvement.

ESG Gap Analysis can help you continuously meet your stakeholders’ ESG requirements and expectations.

ESG Disclosures & Sustainability Report Assurance (SRA)

Disclosing and reporting your ESG performance demonstrates your commitment to sustainability.

ESG Disclosures & SRA provides you with third-party verification of ESG information for a more consistent and accurate disclosure.

ESG KPI Verification & Assurance

Organizations implementing ESG strategies must measure their ESG KPIs for compliance and due diligence purposes.

ESG KPI Verification & Assurance can help you to validate the metrics and targets set, as part of your KPI disclosures, even helping to reduce your borrowing cost through sustainability-linked finance.

ESG Certification

Make ESG the cornerstone of the way you do business, showing your commitment to sustainability.

Our audit follows international and local ESG standards, regulations or relevant managements systems.

STRENGTHENED BY SGS SUPPLY CHAIN SERVICES

All companies face supply chain challenges, including sourcing issues, unknown risks being imported, or ongoing compliance with national and international legislation and their own codes of conduct. If these areas are not monitored and the risks remain undetected, companies could face reputational damage, reduced revenue and shareholder and stakeholder distrust.

During times of economic instability and strain, companies are inevitably required to reduce costs, typically in non-revenue generating roles, such as compliance teams. Therefore, with a combination of unknown risks and a period of economic constraint, the risk to companies is further amplified.

Supply Chain Assurance

Our Supply Chain Assurance programs cover a multitude of areas and content. Whether using our checklists, customized programs and/or industry-driven initiatives, we are a trusted partner for deploying your program.

We offer subject matter expertise and supplier assurance solutions in many areas, including social compliance, environmental management, quality management, information security, sustainability, governance and health and safety. We have active programs with clients to audit suppliers against a variety of risk-based content.

Our knowledge and global network of experts enable us to leverage large-scale resources for you. With our experience and guidance, you can work quickly and easily towards compliance with local, national and international regulations, reducing errors, increasing consistency and promoting positive values within your company.

SGS Transparency-One: Supplier Risk Management

Suppliers can potentially import numerous risks, from third-party contractors entering your facilities to undertake crucial but high-risk activities to a supplier sourcing from low-cost countries with known social compliance issues.

Whatever the supplier, we know that many companies have international and complex procurement structures. Therefore, the visibility of supplier activities is decreased, which can lead to customer and investor distrust.

Combining our best-in-class technology and subject matter experts, we can partner with you to help manage your supply chain, ensure compliance and increase supplier visibility, no matter the complexity or international coverage.

Our Supplier Risk Management solution has multiple approaches, including risk assessments, third-party data sources, self-assessment questionnaires, data validation and on-site audits based on supplier risk profiles.

Our cutting-edge, cloud-based Transparency-One platform enables you to discover, analyze and monitor suppliers and facilities across your supply chain, using real-time data to reduce risk. It can also provide end-to-end supply chain mapping, visibility, product compliance and safety to help you continually drive performance improvements.

30+ YEARS OF SUSTAINABILITY EXPERIENCE

We have been a leader in sustainability and ESG services for over 30 years.

With expertise in all major industries, we understand each sector’s pain points and have the technical expertise and logistical capabilities to ensure realistic sustainability outcomes.

Our ESG services can help you to mitigate supply chain risks, implement better processes, address stakeholder concerns and accomplish sustainability goals.

Leveraging our compliance, verification and training expertise, we create solutions tailored to your requirements, including support with achieving and reporting on the UN SDGs.

We have also implemented many of the solutions mentioned within our organization, delivering meaningful change, performance improvements and a stronger brand.

Discover how we can smooth your ESG journey. Learn more here.