5 Key Takeaways on ESG Risks, Regulations, and Reporting

The world of ESG is full of questions and uncertainties. What am I required to report now and in the future? How do we find and gather all of my ESG data? What does this emerging ESG regulation mean for my organization? How do EU regulations affect a particular unit’s operations?

Managing ESG can be intimidating, even for the most seasoned leaders. And when you have the answers, it usually leads to more questions. FiscalNote ESG Solutions recently sat down with ESG experts in a roundtable discussion to answer many of your questions and shed insights into best practices.

Our panel included:

• Lane Jost, Head of ESG Advisory at Edelman Smithfield
• Byron Austin, Head of Corporate Responsibility & ESG Management at Organon
• Candice Bullard, ESG and Climate Strategy Lead, Americas at FiscalNote ESG Solutions
• Moderator: Stina Warnstam Drolet, Head of Sustainability Advisory at Oxford Analytica

Here are the five key takeaways from our roundtable event

1. Transparency Is Key When It Comes To Reporting

If you exaggerate your ESG goals or progress, you may catch the public wrath for greenwashing. The threat of this undesirable tag has prompted some businesses to start green whispering or keeping quiet about their ESG efforts.

While it’s certainly best to err on the side of caution, not being upfront about your ESG efforts and performance can also be detrimental. Consumers and investors can call you out for not having a strong ESG strategy. Being transparent about your performance, true metrics, and data can also help with internal alignment.

The best strategy for ESG reporting is to be direct and transparent. “The goal of [ESG] reporting is to be an exercise in transparency. I’m very intentional about showing the good, the bad, and the ugly. Our guiding principle is the more transparent we are, the more we will gain trust with our stakeholders — and it’s not an easy conversation internally,” Austin explains.

2. Take ESG Ratings With a Grain of Salt

While ESG ratings are certainly important, it can be tempting to chase a good score on one of the world-renowned ESG rating agencies like MSCI, Sustainalytics, or FTSE Russell, and it could lead your company down a misguided path. Rating agencies tend to focus on assuring investors that their investments are safe from ESG risks rather than your company’s true performance across the “E”, “S”, and “G”.

“Do I think it’s right to use the ratings to develop a strategy? No. Do I think it’s right to ignore them? Also, no,” says Jost. “The academic research basically proves that the larger the ESG team size, the higher the rating and ranking performance. From a financial standpoint, ratings and rankings probably aren’t correlated with performance.”

That said, there is value in scoring well, and if it fits the scope of your business, it might be worth investigating, but don’t put all of your ESG stock into chasing a good score.

“Knowing what the reporting and rating systems are asking for is always a good idea, but it needs to align with the business’s core values. If it aligns with the core values, it may be worth spending CapEx or OpEx to implement and have it available to report,” Bullard explains.

3. Mitigate ESG Risks With Materiality Assessments

It might sound obvious, but a comprehensive materiality assessment is key to a successful ESG strategy. It helps you find your path forward and determines what areas of your business should be investigated. Each industry has different ESG factors, and a materiality assessment will identify what aspects of your business warrant attention.

“Materiality matters. It looks different across industries, it looks different for the trajectory of your capital allocation, and it looks different for where you need to go from an outlook perspective,” Jost explains. “If you follow materiality, you should have no issues with trust.”

Interviewing internal and external stakeholders during your materiality assessment helps to identify ESG risks in your industry and your organization.

“What we’re doing is making sure that our materiality assessments and our enterprise risk management assessments align. That’s spurred really interesting conversations internally around what is material, what is risk, what is material risk?” says Austin.

Materiality assessments light the path on the otherwise unfamiliar and uncertain ESG trail.

4. Don’t Let Incoming Regulations Catch You By Surprise

The world is rising to the significance of the climate crisis and important social and governance issues. The SEC’s proposed climate disclosure rules and the EU’s Non-Financial Reporting Directive (NFRD) are pushing businesses to publish extended environmental, social and governance information.

Emerging regulations have put the business community on notice. “The great thing is that everyone is paying attention to it. That has really put ESG at the forefront of a lot of our departments’ and functions’ minds,” Austin explains.

The further along a business is in its ESG journey prior to mandatory reporting, the easier it will be to transition into the legal reporting framework — not to mention the time, money, and headaches saved by being prepared.

5. Don’t Get Too Caught Up in Marketing

Communicating your ESG progress is important — you want to highlight the positive impact your organization is having on your community, climate and the world. Marketing your ESG performance, however, should not be the focal point of your efforts. Businesses often put too much emphasis on their ESG story without solidifying their ESG strategy.

“Story, I think, comes last. If you don’t have a strategy, you don’t have a story,” says Jost. As well, you don’t need to tell a story for each different aspect of ESG that your organization is working on.

“Your head would explode if you had a different story for 35 different material issues,” adds Austin. “I think the bigger overarching story for most companies is about purpose. ESG is just proof points for proving and demonstrating our purpose to the world.”

Concentrate your focus on solidifying your ESG strategy and finding realistic pathways to hitting your targets, and your story will write itself.