Understanding an organisation’s metrics in relation to environment, social, and corporate governance – referred to simply as ESG – is now one of the hottest topics in business today, and it affects everyone, whether they work in public or private organisations. The benefits of ESG reporting are huge, and every organisation will be affected.
The usage of ESG reports gained traction with investment banks and pension funds for the purposes of guiding sustainable and ethical investment. It’s a mistake to think of ESG as merely a response to the climate crisis, because it is driven equally by attitudes towards how a corporation behaves, and the impact it has upon both the environment as well as upon communities near and far.
As the analysts Gartner have said, if business priorities from 2000 until 2020 were dominated by Digital Transformation, from 2020 it’s ESG which will have centre stage in the boardroom. Fresh impetus has stemmed from the global drive to Net Zero, and nowhere is this going to be more keenly felt than in the United Kingdom which has adopted some of the world’s most challenging carbon reduction measures.
Since 2005, our society’s attitude has shifted dramatically, both domestically and globally. There’s an overwhelming concern for wildlife, disgust at pollution, and an intolerance of corporate corruption and deceit. These factors, and many others are driving consumers to direct their investments and purchases to the most ethical of choices.
ESG ratings are expressed similarly to credit risk ratings, so a top rating is ‘AAA’, while ’CCC’ is the lowest. Applicable to any organisation regardless of size, ESG rating form an immediately accessible guide for businesses and consumers alike to assess the desirability of the organisation. In short, do they want to invest in, purchase their product, be employed by, represent, or recommend?
While the UK approach is currently ‘light touch’ in terms of regulation this is about to change, and mandatory conformance is on the horizon. The evidence is plain to see with the issuance of Public Procurement Notice PPN 06/21, effective September 2021.
PPN 06/21 mandates that all Central Government Departments, their Executive Agencies and Non Departmental Public Bodies, when procuring goods and/or services and/or works which are subject to the Public Contracts Regulations 2015, where there is an anticipated contract value of £5 million per annum and above.
To summarise the requirements, suppliers must have provided a published Carbon Reduction Plan which:
The only solution is an immediate undertaking to comply, and it’s important to note the stipulation for annual sign-offs. In other words, this is not a ‘tick box’ exercise but, rather, it will become as routine as compiling an Annual Report.
Even our nation’s smallest SMEs are discovering that their ESG reporting can carry a hefty ten percent weighting when replying to many tenders. This can affect their chances of renewing a contract to supply a public body such single school, even where the financial threshold is below that of PPN 09/16 and PPN 06/21.
There are supply chain imperatives at play too, so even where your client is non-governmental – such as a housing association – it is often the case that their funding is derived in part through local government. In such cases, they have the discretion to select their suppliers according to what will reflect upon them best.
When a supplier questionnaire arrives in your inbox seeking answers as to your corporate governance, it’s too late to prepare. Expect questions such as ‘how does your organisation manage risk?’, and ‘Does your board have a risk management committee?’, or ‘Do you have a business continuity plan, and when was it last updated?’.
Reminiscent of ISO 27001 questionnaires, there’s no way to fudge the answers, and those who are tempted to do so should bear in mind that false or misleading statements are detected easily in the most cursory audit, perhaps a follow-up email asking for evidence on a few selected questions.
When related to tenders where there is a government project at the top of the supply chain, legal action may follow. Your ESG reporting, which encompasses everything from business continuity to corporate governance, is your only route. Remember, though, this takes a lot of time to complete.
The E.U. has drafted their CSRD, or Corporate Sustainability Reporting Directive, which is increasing those businesses in scope from roughly 10,000 to more than 50,000, with more to follow. For all of these, audited reports will be required.
The issuance of the UK’s own SRD was announced by Chancellor Rishi Sunak on 21 September 2021. Still in its consultation phase, credible experts forecast this to be even more strict that the EU measures. Note that both the EU CSRD and the UK SRD will replace the NFRD, Non Financial Reporting Directive.
SME’s are in the firing line too. The number of companies covered by the expansion of CSRD reporting requirements will quadruple by 2023. While the 50,000+ companies subject to these new expectations are at the heart of value chains, the pressure they will place upon their numerous suppliers and subcontractors will be enormous.
Good governance is as pertinent to a small business as it is to a large corporation or a public body, such as a school. For the small business, a key risk is having a massive reliance upon a single supplier, while for a corporation it might be the unrecognised impact of a forthcoming environmental or social regulation. Schools, have safeguarding dilemmas, as well as complex inter-relationships between trustees, governors, staff, and multiple regulatory bodies.
With ESG, one needs to be vigilant as to the impact of the impressions the organisation gives vs. the reality experienced by those external. Might a staff member have chosen not to accept employment if they were fully apprised of the organisation’s practices? Would the investor have invested, or the consumer purchased?
More rigorous implementation of good governance minimises the risks to all individuals, and it also strengthens the internal controls to deliver a stronger, more robust, organisation.
Millennials comprise the largest generational cohort in employment today, and it’s they and their successors who are applying their social awareness to screen potential employers. The best and the brightest know their talents are in short supply, and they’re voting with their feet.
Law firms, and other professions, are seeing the impact, and so too are corporations which range across the entire spectrum of industry and commerce. Your ‘Head of Talent Acquisition’ is having to be as aware of social media and your group’s reputation as they are of competitive salaries.
Leads the daily operations at ESG PRO, he specialises in matters of corporate governance. Humperdinck hails from Bermuda, has twice sailed the Atlantic solo, and recently devoted a few years to fighting poachers in Kenya. Writing about business matters, he’s a published author, and his articles have been published in The Times, The Telegraph and various business journals.
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