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Organisations are now facing a range of challenges when it comes to successfully implementing, integrating and reporting on ESG (Environmental, Social and Governance) factors. Regardless of the many unknowns of ESG, it is too important for asset owners, regulators and governments to ignore. Without definitive standards, sustainability reporting remains complex – and a barrier to progress.
Implementing ESG is a strategic imperative
At the World Economic Forum Annual Meeting in Davos 2022, business leaders grappled and deliberated on how organisations can track and deliver on ESG promises. Integrating an ESG program is not a walk in the park. Organisations adopting and measuring ESG, within their supply and value chains, may face emerging areas of challenge. Environmental, Social and Governance are increasingly growing factors of importance for companies to measure within their supply and value chains.
A strong ESG framework reflects greatly on an organisation's brand – and how it is viewed by investors and broader stakeholder groups such as customers, suppliers and the community. With the way the current world is changing, due to climate change, COVID and social awareness, monitoring of and progress in ESG is more essential than ever.
Included within the internationally acknowledged ESG standards and frameworks are:
• The Global Reporting Initiative (“GRI”), a widely-used sustainability reporting framework that sets out principles and performance indicators for companies to report on ESG performance.
• The Carbon Disclosure Project, a reporting system through which companies disclose greenhouse gas emissions, water management and climate change strategies.
• The United Nations Global Compact, a sustainability initiative for companies to align their strategies and operations in the areas of human rights, labour, environment and anti-corruption.
• The International Finance Corporation Sustainability Framework.
• The Equator Principles.
Challenges: Implementing ESG
1. ESG Governance Issues
Governance is therefore critical to get right and has been the cause of some of the biggest corporate media scandals when neglected. With the changing world, the law and media are more so than ever putting ESG and the importance of human rights across the value chain into the limelight. This now raises the stakes further for companies to effectively monitor ESG factors.
If not, reputational damage, compliance costs, the potential loss of business, plus the lack of a company's ability to attract top talent may come into play. If a company does not comply with ESG policies, legislation and regulations correctly, it could lack secure funding and the ability to attract potential investors.
2. Scope 3 Emissions
There are many challenges to consider when implementing ESG within a supply chain, but Scope 3 emissions may just take the crown as the most complex to manage. Greenhouse gas (GHG) emissions are broken down into three categories or 'scopes.' Scope 1 refers to direct emissions. Scope 2 refers to indirect emissions from the likes of purchased energy generation. Scope 3 covers all other indirect emissions from the company value chain.
3. 'Walking The Talk'
Organisations often talk about monitoring ESG factors but fail to follow through with the process. Issuing marketing and PR statements about achieving goals and net-zero targeting is simply not enough.
In order to successfully monitor ESG, companies need to have a strong employee culture, clear policies and software systems already in place. Systems must fully integrate with each other, or better yet, be situated on one software management platform. This is to gain a clear overall picture of the company value chains and entire organisation. Only then can a company base any future decisions around sustainability.
4. Culture Change
When it comes to integrating ESG factors into an organisation and value chain, it is not just about the tools used to measure effectiveness – employee mentality and values matter too. Senior members at the top must lead by example, maintaining a high-value company culture through being transparent about the company's goals, needs, policies and ESG mission. Employees, customers and stakeholders need to understand what the company stands for and why sustainability plays a vital role within company efforts. The more employees understand about ESG benefits and importance, the more they can help to drive the company's sustainability mission and goals.
5. Forming Partnerships
ESG is a huge area to monitor, especially for larger organisations, and many companies cannot manage or measure it by themselves. Unless companies are in continuous contact with both suppliers and clients within their supply and value chain, companies are never going to know their exact measurements or hit ESG targets. In order to gain better visibility and understanding of ESG factors, companies, agencies, employees, stakeholders and investors need to collaborate, have increased communication and open, honest conversations with others about climate and ESG factors. By joining forces, more can be achieved and longer-term sustainability goals within organisations can be realised.
6. Ethics: Compliance Regulations
Supply chains are not lifeless and sometimes, it can be easy to forget there are real people working within them. State legislations are greatly needed areas of protection for those out-of-sight employees in order to eradicate any forms of social inequality or dangerous workplace practices. With compliance on the rise, advances in technology will be needed in order to track, measure and maintain the ethically rising standards within compliance laws.
Overall, from broad areas like company culture to specific issues like Scope 3 Emissions, there are many challenges needing to be tackled when companies implement ESG goals, strategies and controls into their supply and value chains. By creating and maintaining a strong company culture – through ensuring ESG goals are transparent, keeping up to date with legal regulations, building strong relationships with other organisations and implementing modern monitoring technology – the above issues are a lot easier to overcome.
At Gestaldt, we provide solutions that will help you conquer these points of challenge and achieve your company ESG targets. For more information on how to implement and manage ESG, request your guide today.
Gestaldt Consultants, Partners and Thought Leaders.
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