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Keeping you in-the-know on environmental, social and governance developments

Ed. note: Today’s post is again courtesy of Advisory Board Member Donato Calace and his colleague Susanne Katus – both from ESG IT service provider Datamaran. This is the second of a two part post – yesterday, they explained their views of what has changed in recent months that is shaping ESG policy. Today, they offer recommendations for addressing change today and for the future.

Changing ESG Policies – What This Means Now

Right now, ESG is a strategic imperative, that’s clear. Corporate leaders are taking ownership, recognizing advantages gained from being proactive and anticipating policy developments. At the core of this acceleration is one thing: a growing focus on making materiality more strategic and cohesive. Now more than ever, the process by which executives determine what’s important is center stage. As evidenced by recent SEC comments, transparency on that process matters. 

We see that the practice of double materiality, which will be mandated with the EU Sustainability Standards, is maturing as the convergence of financial and ESG information takes shape. As such, enterprise risk management processes are advancing to take more of an outside-in and forward-looking perspective.

What that means at an operational level is that traditional barriers between ESG, finance, risk, and compliance processes are dissolving. Corporate leaders are making greater investments in technology to support this, relying on data analytics to fill gaps, connect the dots, and frame a more objective and dynamic governance process. More Executive Councils/Board Committees are forming to facilitate this integration at a decision-making level. It isn’t uncommon for them to meet on a quarterly basis (at a minimum) to check how the external landscape is evolving – using technology to monitor peer reporting, regulation, policy, media, and NGO activity. 

This subsequently supports what capital markets are demanding (specifically, the SEC): better governance reflected in more cohesive disclosures. Financial and standalone ESG/sustainability reports need to communicate a collective story about business-critical issues. This brings us back to materiality, as effective governance is rooted in an evidence-based and transparent approach to identifying, validating, and monitoring key risks and opportunities.

As Tjeerd Krumpelman of ABN AMRO said, “[having a data-driven process] improves the outcomes and also the credibility of the process to get to those outcomes.” The leaders looking ahead are those that will drive us forward.  

What This Means For the Future 

To have a sense of what this might look like in practice let’s draw a future scenario. It’s the year 2025. 

From a reporting standards perspective, the ISSB is the baseline for reporting on ESG at global level. It goes beyond climate risk, covering natural capital and societal marginalization impacts too. It’s been adopted by most countries around the world. Where ISSB guidance has not yet been transposed in national law, IOSCO seeks to make it required for listed companies. Certain jurisdictions, like the EU, have built upon the ISSB baseline to include more advanced requirements, such as double materiality.

Similarly, SEC requirements has taken shape to encompass a wider scope ESG considerations. They model the Task Force on Climate-Related Financial Disclosures (TCFD) framework, focused on governance, strategy, risk management, and metrics and targets. 

ESG rating agencies are now regulated and must comply with strict conflict of interest rules and detailed disclosure requirements on their methodology. ESG scores still have differences from provider to provider, but the assumptions behind the rating approach are now publicly available. However, capital markets and investors use ESG ratings as a baseline and prefer to build their own materiality assessment and ESG performance models based on the high quality and comparable data that companies disclose in compliance with new rules.

For business leaders, ESG data informs all decision-making processes – capital allocation, budget setting, cash flows, and forecasts. The C-Suite has ESG proficiency as a baseline requirement, and relevant metrics are embedded into performance and compensation plans. “Greenwashing” is now an accounting fraud risk and a major legal liability for organizations, with market authorities having dedicated enforcement arms to keep watch. As such, third-party assurance and legal due diligence are must-haves. Tech-enabled materiality and risk monitoring is the norm, given the dependency on combining data analytics and human intuition in order to compete in an ESG-dominated market. 

Future talent is gaining ESG expertise in business schools and MBA programs, a standard component of accounting, risk management, strategy, and finance courses (forward-thinking institutions like Fordham and London Business School are already doing this). 

In a scenario like this, would business finally contribute to sustainable development? That is a hard question to answer, but business would certainly be more transparent and accountable, unlocking capital needed for solutions to achieve this. And that’s a critical step forward. 

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile