With the increased focus on climate, social, and corporate governance issues in recent years, there’s growing acknowledgment by organizations of the need to communicate their priorities through ESG disclosures. While some midsize organizations aren’t ready to invest the time or resources, the potential impacts have others considering starting their programs now. They include:
- Staff recruitment. As competition for talent continues, organizations may struggle to meet future staffing requirements. Millennials and Gen Z recruits tend to place more value on corporate responsibility than previous generations, and many will make decisions on where they work based on these factors. There’s an increasing probability that your competitors will have an ESG program — and the longer you delay, the likelier it is that competitors will win the competition for top talent.
- Supply chain requirements. More corporate customers are requesting their supply chain partners to disclose on ESG matters, and some are putting demands on organizations with their purchasing decisions. Depending on your industry, this could come sooner than you think — along with the risk of financial impacts if you’re not ready.
- Regulatory action. While ESG reporting is not currently a requirement in the United States, it’s getting closer, and momentum is building for mandatory disclosures such as the SEC’s proposal on climate-related disclosures. If these or other regulations become law, you may need to put a program in place on a short timeline, making compliance significantly more expensive.
- Public perception. If you don’t tell your story, somebody else might — and it may not be the way you want it told. An ESG report is your opportunity to frame the story around what you stand for as an organization.
If you’re concerned that you don’t have the resources or information you need to start an ESG program, here’s some good news: you’re actually closer than you think. Chances are that a lot of the data and information you’ll be reporting is already being gathered within your organization by operations, legal/compliance, and/or human resources teams. All you need to do is gather it, think about it more holistically, and produce a more global view of the organization through the lens of ESG.
Here are some examples of the types of information you may already have:
Environmental
When it comes to environmental disclosures, “carbon footprint” is usually top of mind, and that means greenhouse gas emissions. Depending on your industry, you may already be tracking this. If your organization doesn’t produce significant emissions, there may still be a story about how you’ve decreased emissions by investing in teleconferencing technology and adopted flexible “work-from-home” policies that reduce commuting or business travel.
Another example is waste management. Many organizations have recycling initiatives. This is an important environmental disclosure because you’re diverting something from the traditional waste stream. Another is energy management; you can compare energy consumption over a period of time to previous periods or talk about how your organization has implemented programs to decrease energy usage like reducing the real estate footprint or installing motion sensor lights.
Social
Social disclosures could include common everyday things your organization is already doing, for example, efforts regarding diverse recruiting or other programs related to diversity, equity, and inclusion (DEI). Disclosures could also include existing community relations efforts such as volunteer time or donations to organizations that support your business or industry. Details of employee benefits and wellness programs are common disclosures, as well as employee safety data that’s already being provided to OSHA or other reporting agencies.
Another source of information could be your organization’s employment data — how many new hires you have and how many people leave, etc., and metrics around the amount of training hours it provides to staff at various levels.
Governance
Governance includes topics related to how you run your business. Your organization may have an ethics statement and policies related to anti-corruption, competitive behavior, and regulatory compliance. Corporate governance — such as the makeup of boards, pay ratios, executive pay, etc. — can also be included in this section. If it makes sense for your industry, you can discuss how these topics are incorporated into your organization’s process to add enterprise value. Examples include how you source materials, the location of your suppliers, and whether you have a supplier code of conduct. This could extend to how products are designed and life cycle considerations. And many organizations disclose on innovation and business model resilience as they adapt to artificial intelligence, automation, and other advances in technology.
These are just a few examples that illustrate the vast range of information that may already be available to help get you started. The good news is you don’t have to think of everything now or do it all at once. Just put the initial focus on what disclosures make sense for your organization and pull them together into a cohesive program.
Get started with a materiality assessment
The critical piece in starting your ESG program is the materiality assessment. This is where you figure out who your stakeholders are and what disclosure topics matter to them. Once you understand what topics are material to your organization, the next step is to prepare a plan for gathering data and reporting. Many organizations prepare their initial disclosures around the “low hanging fruit” — material information that’s already being tracked — and plan to add additional topics over time.
Expect that your program will advance. Stakeholders and materiality may change in step with social norms and the evolution of your industry and business. Expect to be nimble and able to respond to what’s called “dynamically material topics” — those that become material but weren’t in the past — as they arise.
Bottom line
ESG is here and is expanding to middle-market businesses across a wide variety of industries. Whether you’re just hearing about ESG reporting for the first time or your organization is getting pressure to disclose, having a program in place will make it easier to respond to stakeholder requests for transparency. Organizations that are early adopters will have a competitive advantage with customers, recruit the best staff, and be well-positioned for future regulatory compliance.
