ESG: Where do I start?
Staying on top of new expectations
Mallory Thomas, CPA, MBA | August/September 2023 Footnote
As stakeholder expectations around environmental, social and governance (ESG) grow and ESG-related regulatory compliance (i.e., the U.S. Securities and Exchange Commission, the Corporate Sustainability Reporting Directive) pressures continue to increase, many organizations are focusing on sustainability and ESG-related priorities and initiatives. As I work with clients on their ESG strategies, risks and reporting, I often find differing triggers that put more focus on these objectives — from compliance reporting to relevancy with their customers and employees. Often, organizations looking to implement ESG-related elements find it difficult to understand what to do and where to start.
Getting started
Organizations looking to initiate or evolve their ESG and sustainability program should start by assessing the current ESG-related activities at their organization. The initial assessment should include a review of ESG reporting, risk management and initiatives currently being performed by the organization. ESG activities may occur throughout various departments (operations, finance, compliance, human resources, supply chain, procurement, etc.); therefore, organizations need to include various departments and stakeholders when performing the assessment.
ESG reporting
Many organizations are initiating sustainability and ESG-related data reporting, including climate-related data and greenhouse gas emissions. In assessing sustainability and ESG data reporting, organizations should evaluate:
- Does your organization provide or produce any ESG-related reporting internally or externally, or provide specific ESG data?
- If you are reporting, evaluate the following:
- Who provides this data and what is the frequency of reporting?
- Does the organization report to comply with regulatory requirements? If so, identify the applicable reporting agencies.
- Does the organization perform validation procedures over the data that is reported? Is it through an internal audit function or an independent third-party verification?
When assessing ESG reporting, the organization should also consider reviewing forthcoming regulatory reporting requirements and their applicability to your organization. Evaluate the processes, data and information you will need to obtain or develop in the near term to comply with these requirements. This may include reporting climate-related risks or impacts and greenhouse gas reporting.
Risk management
ESG-related compliance requires disclosing the organization’s ESG-related risks and impacts and the risk management process, including the evaluation of ESG-related risks, reporting, communication, oversight and governance processes. In assessing risk management programs and ESG-related risks, organizations should evaluate:
- Does your organization have an established risk management program?
- If so, does your risk management program include evaluation of ESG-related risks and opportunities, if applicable?
- How does your organization communicate and report ESG-related risk and opportunities?
- What is the cadence to evaluate ESG-related risks and opportunities?
- What is the oversight and governance process for ESG-related risk management?
Organizations should evaluate applicability of compliance requirements that may require ESG risk management processes, including procedures for reporting and communicating these risks. Many organizations have established risk management processes. However, before establishing ESG-focused risk management processes, organizations should evaluate if current risk management processes and procedures can be leveraged and adapted across the organization to incorporate ESG-related risks.
ESG initiatives and strategies
While an organization may not have an established ESG program or strategy, there are likely ESG-related initiatives occurring within its current operations, such as community involvement and employee volunteer hours, workforce safety initiatives and training, code of ethics policies and corporate governance documents and structures. To assess its ongoing ESG initiatives, organizations should evaluate:
- Has your organization developed or committed to any ESG-related goals and targets?
- Are your goals and targets publicly disclosed?
- How does your organization evaluate and measure the progress of goals and targets?
- How does your organization communicate progress on these goals and targets?
- What ESG-related activities and initiatives are currently occurring within the organization?
- Has your organization included ESG-related initiatives and priorities within the organization’s strategic plan?
Additionally, you should document and inventory the ESG initiatives occurring across the organization. Then, you want to evaluate your current ESG initiatives through the lens of your stakeholders (internal and external) and evaluate how these initiatives are aligned with your organization’s strategy.
Performing an assessment of an organization’s current ESG activities can inform and provide intention as an organization develops its ESG strategy, along with related activities and priorities. Once an organization has assessed its current ESG activities, then its ESG strategy and roadmap can be initiated or refined based on the assessment outcome to align with the overall organization strategy. A key step to informing your ESG strategy is to perform benchmarking by analyzing publicly available ESG data and sustainability reports that your competitors, peer organizations and industry related organizations publish.
Planning ahead
Understanding where you are and what will be required in the near future will help to inform your ESG journey and strategy to protect and enhance the value of your organization.
Mallory Thomas, CPA, MBA, CIA, CITP, CISA is a Baker Tilly risk advisory partner. She specializes in internal audit, ESG/sustainability readiness, organizational governance and compliance, ERM and Sarbanes-Oxley compliance. Mallory is also a SASB FSA credential holder. You may reach her at mallory.thomas@bakertilly.com, 612-876-4726 or visit bakertilly.com/ESG.
