Business
The role of governance and controls in meeting changing ESG expectations
Global Banking & Finance Review®
Company
By Erik Saito, SVP, General Manager of EMEA & APAC at Workiva
Erik Saito, SVP, General Manager of EMEA & APAC at Workiva
Recent conversations around ESG often revolve around the ‘social’ and ‘environmental’ activities that companies are undertaking, but ‘governance’ tends to be lower on the agenda. Within the context of ESG, ‘governance’ refers to the rules and processes that decide how an organisation operates, compensates executives, ensures compliance and the like. It underpins the processes that make ESG activity and measurement possible and is essential for creating a complete, transparent picture for shareholders and stakeholders.
Industry leading businesses are now vying for the top ESG ratings from independent ratings agencies, to demonstrate their contribution from corporate responsibility to stakeholders and investors. As such, robust governance is crucial to providing fully representative and trustworthy insights into a business’s ESG performance – even though its impact is often underestimated. Governance needs to be a key part of the ESG conversation, particularly when looking at making changes to reporting processes to meet evolving expectations.
The role of governance in a holistic sustainability strategy
Globally, conversations about governance and controls are moving up the business agenda. In fact, recent research from Workiva found that over the next 12-18 months, ESG professionals will be allocating nearly a third (28%) of their internal ESG budget to governance.
The main drivers for prioritising governance are concerns about minimising risk and ensuring compliance with new EU mandates around ESG. Having the right controls in place ultimately makes processes more robust and repeatable, ensuring that the resulting metrics stand up to scrutiny. For many businesses this means transposing the rigorous processes and checks used for financial reporting to how they measure and report on ESG metrics.
As ESG data is more complex and tends to live in different departments across the organisation, a collaborative effort between finance teams, sustainability teams, and ultimately the entire business is needed. This will create a single source of truth for all financial and non-financial information, enabling more trustworthy decision-making to be carried out.
There is a growing demand from shareholders and stakeholders for clearly demonstrated ESG efforts, but businesses are finding this difficult to do. In fact, from a UK perspective Workiva’s research also found that communicating corporate value to address investor (or stakeholder) needs was one of the top three biggest challenges for decision makers. The best way to address this is through transparent and easily accessible ESG metrics, which in turn are only produced with clear governance and controls.
The relationship between governance and trust
Even when ESG metrics are available, there is the tricky issue around trust. As ESG reporting – and the associated processes – are comparatively new, many businesses are questioning whether their ESG data can be trusted. This wariness also extends to employees, customers, investors and other stakeholders, fuelled by a perception that companies are only reporting on positive progress or greenwashing. To address this, a clear and consistent demonstration of how businesses are delivering on meeting ESG goals is needed.
Fortunately, there are industry-level initiatives in progress. ESG reporting requirements from bodies such as the International Sustainability Standards Board (ISSB) and governments aim to provide consistent standards for businesses across the world, significantly reducing cross-framework mapping, and simplifying some of the more complex elements of the reporting process. As a result, applying proper governance that aligns with the ISSB can play a pivotal role in control over reports. In doing so, business leaders can ensure that they are meeting demands from investors for transparent, reliable and comparable reporting on sustainability-related matters.
That being said, transparent, trustworthy reporting is not achieved overnight. Existing efforts from ESG leaders include encouraging the implementation of technology that allows for seamless, automated data collection from different teams across the organization. With the long-awaited Corporate Sustainability Reporting Directive (CSRD) being pushed back a year, businesses can use the time extension to ensure they have assembled the right teams and implemented suitable technology to enable effective reporting.
Navigating the evolving regulatory landscape of ESG
Various mandates are already in place and more are planned which will further affect businesses in the UK and the EU. While common standards, regulation clarity and transparency will help businesses achieve ESG compliance for existing mandates, business leaders can ensure that ESG standards can be continuously met through robust governance.
Hitting ESG targets is a long-term process, and although the introduction of various mandates present new challenges, business leaders are empowered to ensure they have the right policies and controls in place to keep up with changing regulatory needs and address pain points. Successful integration of teams is critical to achieving transparent and consistent reporting of both financial and non-financial data.
With ESG increasingly being front of mind, the ability to adapt processes alongside regulatory changes will determine a business’ success. Through management, understanding of regulations, clarity and implementing strong governance, business leaders can drive efforts to address ESG goals through achievable, sustainable action.
ESG stands for Environmental, Social, and Governance. It refers to the three central factors used to measure the sustainability and societal impact of an investment in a company.
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled, focusing on the relationships among stakeholders.
Risk management involves identifying, assessing, and prioritizing risks followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events.
Compliance refers to the process of adhering to laws, regulations, guidelines, and specifications relevant to an organization's business processes.
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