The ESG Imperative and Its Impact on Organizations

Design to enable an active response to changing conditions.

Analyst Perspective

Environmental, social, and governance (ESG) is a corporate imperative that is tied to long-term value creation. An organization's social license to operate and future corporate performance depends on managing ESG factors well.

Central to an ESG program is having a good understanding of the ESG factors that may have a material impact on enterprise value and key internal and external stakeholders. A comprehensive ESG strategy supported by strong governance and risk management is also essential to success.

Capturing relevant data and applying it within risk models, metrics, and internal and external reports is necessary for sharing your ESG story and measuring your progress toward meeting ESG commitments. Consequently, the data challenges have received a lot of attention, and IT leaders have a role to play as strategic partner and enabler to help address these challenges. However, ESG is more than a data challenge, and IT leaders need to consider the wider implications in managing third parties, selecting tools, developing supporting IT architecture, and ensuring ethical design.

For many organizations, the ESG program journey has just begun, and collaboration between IT and risk, procurement, and compliance will be critical in shaping program success.

Donna Bales
Principal Research Director
Info-Tech Research Group

Executive Summary

Your Challenge

• Global regulatory climate disclosure requirements are still evolving and are not consistent.
• Sustainability is becoming a corporate imperative, but IT's role is not fully clear.
• The ESG data challenge is large and continually expanding in scope.
• Collecting the necessary data and managing ethical issues across supply chains is a daunting task.
• Communicating long-term value is difficult when customer and employee expectations are shifting.

Common Obstacles

• The data necessary for data-driven insights and accurate disclosure is often hampered by inaccurate and incomplete primary data.
• Other challenges include:
  • Approaching ESG holistically and embedding it into existing governance, risk, and IT capabilities.
  • Building knowledge and adapting culture throughout all levels of the organization.
  • Monitoring stakeholder sentiment and keeping strategy aligned to expectations.

Info-Tech's Approach

• Use this blueprint to educate yourself on ESG factors and the broader concept of sustainability.
• Learn about Info-Tech's ESG program approach and use it as a framework to begin your ESG program journey.
• Identify changes that may be needed in your organizational operating model, strategy, governance, and risk management approach.
• Discover areas of IT that may need to be prioritized and resourced.

Info-Tech Insight

An organization's approach to ESG cannot be static or tactical. ESG is a moving landscape that requires a flexible, holistic approach across the organization. It must become part of the way you work and enable an active response to changing conditions.

Putting ESG in context

ESG has moved beyond the tipping point to corporate table stakes

• In recent years, ESG issues have moved from voluntary initiatives driven by corporate responsibility teams to an enterprise-wide strategic imperative.
• Organizations are no longer being measured by financial performance but by how they contribute to a sustainable and equitable future, such as how they support sustainable innovation through their business models and their focus on collaboration and inclusion.
• A corporation's efforts toward sustainability is measured by three components: environmental, social, and governance.

Sustainability

The ability of a corporation and broader society to endure and survive over the long term by managing adverse impacts well and promoting positive opportunities.

Source: United Nations

Putting "E," "S," and "G" in context

Corporate sustainability depends on managing ESG factors well

• Environmental, social, and governance are the component pieces of a sustainability framework that is used to understand and measure how an organization impacts or is affected by society as a whole.
• Human activities, particularly fossil fuel burning since the mid twentieth century, have increased greenhouse gas concentration, resulting in observable changes to the atmosphere, ocean, cryosphere, and biosphere.
• The E in ESG relates to the positive and negative impacts an organization may have on the environment, such as the energy it takes in and the waste it discharges.
• The S in ESG is the most ambiguous component in the framework, as social impact relates not only to risks but also prosocial behaviour. It's the most difficult to measure but can have significant financial and reputational impact on corporations if material and poorly managed.
• The G in ESG is foundational to the realization of S and E. It encompasses how well an organization integrates these considerations into the business and how well the organization engages with key stakeholders, receives feedback, and is transparent with its intentions.

Understanding the drivers behind ESG

$30 trillion is expected to be transferred from the baby boomers to Generation Z and millennials over the next decade
– Accenture

Drivers

• The rapid rise of ESG investing
• The visibility of climate change is driving governments, society, and corporations to act and to initiate and support net zero goals.
• A younger demographic that has strong convictions and financial influence
• A growing trend toward mandatory climate and diversity, equity, and inclusion (DEI) disclosures required by global regulators
• Recent emphasis by regulators on board accountability and fiduciary duty
• Greater societal awareness of social issues and sustainability
• A new generation of corporate leadership that is focused on sustainable innovation

The evolving regulatory landscape

Global regulators are mobilizing toward mandatory regulatory climate disclosure

Canada

• Canadian Securities Administrators (CSA) NI 51-107 Disclosure of Climate-related Matters

Europe

• European Commission, Sustainable Finance Disclosure Regulation (SFDR)
• European Commission, EU Supply Chain Act
• Germany – The German Supply Chain Act (GSCA)
• Financial Conduct Authority UK, Proposal (DP 21/4) Sustainability Disclosure Requirements and investment labels
• UK Modern Slavery Act, 2015

United States

• Securities and Exchange Commission (SEC) 33-11042– The Enhancement and Standardization of Climate-Related Disclosures for Investors
• SEC 33-11038 Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure
• Nasdaq Board Diversity Rule (5605(f))

New Zealand

• New Zealand, The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021

Begin by setting your purpose

Consider your role as a corporation in society and your impact on key stakeholders

• The impact of a corporation can no longer be solely measured by financial impact but also its impact on social good. Corporations have become real-world actors that impact and are affected by the environment, people, and society.
• An ESG program should start with defining your organization's purpose in terms of corporate responsibility, the role it will play, and how it will endure over time through managing adverse impacts and promoting positive impacts.
• Corporations should look inward and outward to assess the material impact of ESG factors on their organization and key internal and external stakeholders.
• Once stakeholders are identified, consider how the ESG factors might be perceived by delving into what matters to stakeholders and what drives their behavior.

Understanding your stakeholder landscape is essential to achieving ESG goals