Why You Need to Rethink ESG Strategy Beyond Regulatory Compliance

In the current era of digital and data transparency, it is more crucial than ever to adopt an ethical and responsible ESG strategy for dealing with environmental, social and governance issues.

Organizations that ignore social impact risk brand damage, reputational risks, negative PR, and the potential loss of customers.

Thus, instead of viewing ESG (environmental, social, and governance) as a cost or burden on an organization’s profitability, investors, consumers, suppliers, and industry professionals are demanding increased emphasis on these metrics of corporate social responsibility.

As a result, ESG has become a key component of investment strategies for many institutional investors. They want to know if the companies they invest in are taking proactive measures to reduce their environmental footprint, monitor employee practices, and treat their workers fairly.

But even beyond this, a forward-thinking organization should have an ESG strategy that goes beyond complying with regulatory requirements. This article will help you understand why it is crucial to take your ESG strategy beyond regulatory compliance.

Why is ESG Strategy important today?

While regulations surrounding ESG issues have long been a part of the business landscape, the expectations of stakeholders, and industry professionals have increased significantly in recent times. Thus, organizations are under more scrutiny than ever before.

Unfortunately, in order to meet compliance, many companies have developed a simple strategy of doing the barest minimum. Consequently, these companies have more of a “check-the-box” approach when implementing ESG practices.

They create and implement their ESG strategies not because it’s in their best interest, but because the government requires it. From a sustainability perspective, this is a dangerous move.

Why you should take your ESG strategy beyond regulatory compliance

If done well, your compliance with ESG requirements should lead to positive business outcomes; that is, outcomes that go beyond avoiding government sanctions and lawsuits.

However, this depends on your willingness to go beyond regulatory requirements into the “spirit” of addressing ESG issues. It would require your being genuinely interested in making a positive impact on the environmental, social and governance space.

That said, to achieve meaningful impact and make a significant difference in your company’s bottom line, your ESG compliance should be backed with “investment-grade” ESG data. [Tweet that].

This data should provide insights into areas where you can make easy gains and reveal those that are not yielding adequate results. Unfortunately, many companies do not have access to valuable data like this for the following reasons:

A fragmented approach that has resulted in a limited perspective

Companies typically enlist departmental expertise to address their ESG compliance, leading to departments using different protocols and controls.

The result of this is a significant lack of coherence around the ways to direct initiatives and create comprehensive standards and guidelines.

Each department deploys its risk-assessment approaches, making it difficult for the organization as a whole to determine its most pressing ESG issue.

Weak corporate governance

Because of the decided lack of perspective, companies are ill-equipped to develop the governance structures required to support risk management across ESG areas and business units.

Regulatory inexperience

For most companies, ESG compliance used to be a ‘nice-to-have’ until its recent evolution into a ‘need-to-have’. This evolution caught many companies unaware and left them feeling flat-footed.

Thus, they are unable to deal with the high degree of regulatory scrutiny that characterizes ESG compliance.

They do not know what to expect and are still trying to play ‘catch-up’ with a mass of regulations that grows more intricate yearly.

Data shortfalls

Most of the critical data needed to craft an effective ESG compliance strategy is usually unavailable in real time. Thus, companies are usually furnished with outdated data that does not accurately picture the current situation.

One publication postulated that the reason for this data shortfall is that companies’ data collection systems evolve in reaction to changes in regulatory standards, instead of in anticipation of it.


How to take your ESG strategy beyond regulatory compliance

To do this successfully, it is best to have a holistic approach to your ESG compliance. At the very least, C-Suite executives and business leaders should ensure a company-wide synchronization of the methods used to manage risks, and measure and report ESG progress.

The result of this would be ESG compliance that uses the right data to make better sustainability decisions and investments and ultimately, greater profits.

The approach should have at least five dimensions, namely strategy, governance and organization, risk management, enablers, and products and services.

Strategy

Your ESG strategy should describe your company’s ambitions, i.e your regulatory footprints and the specific ESG factors associated with the industry and region in which you operate. Once you have identified your ambitions, the next step is to set targets for making the ambitions real.

For example, a company may have the ambition to increase diversity and inclusion in its employee profile by 20% over 18 months. To do this, the company must first identify why employee diversity and inclusion is a vital ESG metric in the industry and region in which it operates, and then set staggered targets for making it happen.

Governance and Organization

We have established the negative effects of weak corporate governance. Thus, companies should work at creating a governance structure that covers every facet of ESG compliance, including decision-making, escalation processes, committee operations, legal entity management, and roles and responsibilities.

Additionally, there should be a culture of accountability and transparency that enables company personnel at all levels to serve in key roles during the formation of the governance structure.

Risk management

Adapting risk management as an effective ESG strategy
Organizations must adapt a systematic approach to risk management as an effective ESG strategy.

An effective ESG strategy must have a continuous and systematic approach to risk management, beginning with assessing external requirements and moving on to defining internal standards and procedures and implementing training modules.

Enablers

These are the resources that facilitate a holistic approach to ESG compliance. They include the people, culture, data and technology and ecosystems that can foster compliance.

For example, regarding people, you will need trained risk management experts that are also familiar with the latest ESG developments.

In terms of technology, you will need technology solutions that help to automate crucial aspects of the compliance process, such as data management and disclosures.

Products and services

When you make your products and services ESG-compliant, you send a message to potential customers and stakeholders that your company is credible and committed to values like sustainability and diversity. [Tweet that].

When you truly commit yourself to the process, it is not uncommon for entirely new business models to emerge that are closely aligned with the needs of your customers and the wider stakeholder community.

Conclusion

Adopting a holistic approach to addressing ESG issues will move your ESG strategy beyond regulatory compliance and make some other benefits available to you.

These benefits include a boost in your ESG performance, a greater level of synergy in your company and improvements in your strategic decision making.

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