ESG Reporting and how it adds value

HJ
Hello, and welcome to ESG PRO’s series of podcasts where we’re exploring the topics of ESG and carbon footprint reporting and, basically, the entire topic of sustainability which is really driving the attention
of every boardroom not just in the UK but globally.

My name is Humperdinck Jackman, and I’m the managing director of ESG PRO. I’m joined today by Natashia Lee, our Head of consulting services. Hi Natashia, and thanks for joining me today.

NL
good afternoon

HJ
So, Natashia, I thought today we should just talk about some of the benefits of ESG reporting. You know there’s a big shift these
days from ESG investing and being driven by financiers through to normal businesses SMEs, smaller enterprise corporations.

NL
Yes, ESG did start more as an investment process to the way that it’s morphed now. There is a concrete difference between what investors consider when they’re looking at their portfolios and sort
of the more corporate governance aspects that are actually the bigger driving force of ESG reporting.

HJ
They’re looking at ESG from the standpoint of proving their environmental credentials: their honesty, transparency, and integrity and there is a difference in the perception that the approach you take between financial ESG and – if you like – being a good corporate citizen and doing this because you’re trying to make a difference. What do you say about this?

HJ
I mean what I see very much is that the ‘E’ for the environment everybody’s talking about it because of the Greta Thurnberg effect. There is a genuine climate emergency out there, and the social side seems to be picking up some traction as people start to fathom that it means “what
is the impact of the organization on its community and what’s the effect of the community upon the organization”, but nobody talks about corporate governance. Why do you think this is?

NL
Well, to be fair, corporate governance is the most complex of the three categories. Environment? Everybody understands the idea of carbon and the
climate crisis in general.

As to the social aspects, as you said, the community engagement it’s also
social welfare – so the effect that the company has on an employee’s work life balance but that’s to the point where there’s crossover to corporate governance: how does the company actually behave? how does it treat its staff? how does it work with its competitors?

HJ
That’s interesting! Precisely! You hit it on the head right there: ESG is actually about people, and it’s what we do as an organisation. We impact the environment that’s clear, but who is affected by the environment? The people.

If we make something which harms the environment, we’re harming the people there and governance is about how the organizations treat their employees. For instance, do they exploit indigenous people? Do they tolerate corruption? What are their disability and inclusivity practices? And yet none of these organizations are exploring ESG – Not even the big four accountancy firms – nobody talks about governance. It’s baffling to me.

NL
It’s just very complex because first of all it’s difficult for a company internally to sit in the boardroom and criticize themselves and their
practices.

For one, it takes an outside reporting service to really help them narrow down where there is room for improvement on the corporate governance side. It’s much easier for them internally to consider the social and environmental impacts than their own corporate governance practices; so that’s certainly an element to it. But the good news is that companies are proving to be very receptive to listening to a critique as
to how they might improve their governance, which gives us hope.

HJ
Absolutely, and what I see time and time again with clients is when the board is supporting their ESG reporting program they’re being guided through how to actually look after their employees better (whether it’s privacy or equal opportunities from the materiality assessment), and listening to what their own stakeholders are interested in or what they perceive as hot topics. We then see businesses successfully implementing an ESG program who start to realize lower employee turnover or they’re attracting better talent.

In terms of talent acquisition what have you come across?

NL
Well, as a member of the millennial generation I can definitely attest that my generation cares deeply about their work life balance. There’s a movement to leave jobs that make you unhappy. You spend most of
your time at work and that time should be valued – you should feel like a valued employee. There’s a shift at the moment. It used to be that you put in your application and crossed your fingers and hoped for the job. Now, applicants are researching the companies and they are deciding whether they want to work for you. It is less about how much you want them, and more about how much they want to represent your company.

HJ
I see. So, job candidates are interviewing their employers aren’t they? Let’s just pick on talent acquisition as an example …

NL
Oh, very much so! That’s not to say that they have all of the power, but if you want your business to succeed then you want the best talent; and to get the best talent you need to offer them more than just empty incentives.

Pay is not the primary driving force anymore: it is your work life balance, it is how well you will be looked after as a person, and we go back to the fact that ESG is all about people.

HJ
We’re seeing that there are new regulations coming into force. Across the EU, CSRD basically kicks off next year, and then the year following there’ll be the UK Sustainability Reporting Directive, modelled on the EU version. This actually provides quite a degree of penalties for misrepresenting your business.

If you attract an employee because of your social and your green credentials and show that you’re not harming the environment, and then the employee gets there and discovers actually you take all of your waste and you tip it into one skip and you pay your workers less than a minimum wage and you’re just not an ethical company. Employees are going to have the right to bring legal action.

Greenwashing is going to be a crime and we see this also in terms of how businesses are marketing their products. If you make an environmental claim and it can’t be substantiated then you’ve got the advertising standards agency, the competition and markets authority, and the financial conduct authority bringing claims and actions or enforcement processes where a breach has been reported.

I think this is long overdue, but I think it’s forcing employers to take a much closer look at how they behave as corporate citizens.

NL
Yes. One of the most important aspects of an ESG report is the fact that it’s based around the concept of building an action plan and improving over time so for these sorts of points there is no fail on an ESG report – it’s more a case of where you are now and how you plan to improve over the coming reporting year.

So it’s much better for a business to do the report as they are. You don’t need to get it perfect before you apply for your first report! Get your rating and your report now and then in that report write how you’re going to improve and then implement it; and if you don’t succeed in that reporting year to implement the changes you said you would, that’s okay as well. You just explain why and what you’re going to do the following year and you keep going.

So I do think that companies at the moment that are looking at the reporting process are a step ahead because they don’t have all the answers but they are showing a dedication to finding the answers and improving.

HJ
I think it’s very important you mentioned an ESG rating, and I think what really helps a lot of businesses and chief executive officers I speak to – whether they’re PLC or the very high end of the SME spectrum – and managing directors of the of all sorts of SMEs – what I’m hearing is that there’s a huge emphasis on ESG ratings and Carbon footprints when they are bidding for work.

This is what their supply chain is demanding of them, and I think it’s really important that the businesses who want to really reap the benefits of an ESG report or carbon footprint report that they have a measure of
authenticity. External verification and an internationally accredited rating rather than just some arbitrary or homemade rating by some business. What do you think about the rating side of things?

NL
Well I love the idea of auditing responses versus marking your own
homework.

Basically, the benefit of using an external company to generate your reports is that your responses are audited, any evidence is collected and is provided by the company. It’s not just “oh yes we have it, but it’s in the back room somewhere and can’t actually be found.”

With the rating, it’s nice to be able to have a glancing overview of where you are and to know that it is quantified and substantiated.

HJ
and it’s not it’s so easy to get a rating so it does make you stand
out from competition but it still is important that that rating is coming from a trusted source.

NL
There are companies out there that are basically letting you mark your own homework and just stamping it at the end … and that is not within the spirit of ESG.

HJ
Interesting

NL
ESG is all about transparency, honesty, and integrity; so, yes, if you want to do it right it shouldn’t be too difficult to get your rating and a report that holds up and that has been externally verified. It’s worthwhile.

HJ
So, we’ve got better talent acquisition and we’ve got the ability to win more tenders or work better with your supply chain. Employee retention, and often of course there’s a legal obligation too for ESG and carbon footprint reporting in larger organizations.

I think also there’s a very strong element that companies which embark on a serious ESG reporting and carbon footprint reporting are actually able to make this entire process not just cost neutral but cash positive. That the efforts invested actually pay a positive return.

For instance, if you lower employee turnover and if your organisation is perceived as being more competitively greener, it’s not just a millennial generation it says the generation y and z are also the ones who are parting with the money. They’re the ones who are driving the economy right now so when they are looking for a firm of solicitors to buy a house or they’re looking at a car to buy or pair of trainers they’re looking at the media, the press, and business websites and they choose. They’re voting with their wallets – they’re choosing the businesses which reflect their values.

NL
I’ll take it one step further though. When it comes to how it helps a
business to save costs, if you have the right employment practices in place and you follow your policies and procedures for anti-discrimination and inclusivity which is a part of the “S” of ESG. If you have a good employee welfare package you’re less likely to end up facing a lawsuit.

You’re less likely to fall afoul of a poorly implemented policy or procedure because part of your report will be asking how many times you’ve trained and when and who. Your report actually helps you to not only be accountable but to have a plan in place to make sure that you’re not forgetting something that’s a part of the overhead management that can go missed like your anti-discrimination training.

HJ
Absolutely right! That entire point boils down to good corporate governance. It is about reducing risk – mitigating risk – you can never eliminate risk but you can reduce the chance of it happening and the severity of the impact. We call it mitigating risk and too many
businesses fail in this regard.

You end up with employment tribunals or a different form of risk. Green washing – exaggerating one’s product claims environmentally – or your impact on the environment – exaggerating these or downright falsifying, well they come back to bite you.

There was a case a few days ago of a rather large corporation whose ten-million-pound marketing campaign were told by the advertising standards agency you can’t say that, scrap it. That’s ten million pounds they lost at a stroke, so yeah there’re lots of benefits.

I think what we will do next time is we’re going to talk about what actually makes an ESG report. What are the standout features which you want to make sure you include.

That’s a completely separate topic but it’s something we hope you will tune into.

Thank you all very much for listening and visit us on www.esgpro.co.uk