Resilience sector insights - ESG

When clients consider their position on ESG, it needs to be based on fact. There are many clients who know the importance of embedding ESG initiatives within their strategy but are not clear on why they are important. Understanding the risks and opportunities and integrating these with stakeholders' expectations means that organisations are better able to make informed decisions which are focused on facts and driven by data. This reduces the risk of establishing ESG initiatives which are opinion-focused and could therefore be unachievable or lacking impact.

When it comes to looking at the data around ESG, there are many clients who work within an echo chamber. Too many are focused solely on what competitors are doing. More focus needs to be placed on consultation with external experts within areas which best relate to the organisation’s business model as well as effective engagement with civil society and affected stakeholders. This is critical to the new legislative demands that will come through the EU Green Deal and mandatory human rights and environmental due diligence. This will allow them to expand out of the chamber. Thus, reducing the chances of missing opportunities due to living in their own self-fulfilling prophecies and, in turn, provide them with a competitive edge.

In terms of systems, there is not one system which helps organisations to understand their ESG data in its entirety. It is difficult to map progress as there are so many tools available. Therefore, it’s difficult for organisations to know which works best for them and their ESG strategy.

For organisations to have access to the best opportunities, they need to know what their data points are as this is crucial to help them manage the direction in which they are going and what actions are needed to help them get to where they need to be.

Our experience has shown that many systems do not talk to one another. You can set a plan, but if it is siloed and doesn’t talk to other systems in the organisation this will result in decisions not being aligned. The risk of this is setting ESG-related targets which are unachievable or difficult to measure and which focus on measuring effort rather than outcomes.

Lastly, within many organisations, there are skills gaps within ESG, and with limited contextual understanding at the top of the business. Those required to make the decisions do not always have the necessary skills or essential training for making ESG-related choices. 

It starts with stakeholder engagement. This means making sure data is structured and scored. There needs to be a strong understanding of what the scores mean, and how they are moving. Part of this process is consulting with the top 20% of customers to ensure the customer impact is understood. From this, the C-suite can assess the potential impact of this data on the business.

Using climate risk as an example, there are not many organisations who have completed climate scenarios. It is difficult to know what output activities are needed without knowing what you’re looking at and understanding what could impact your results.

When you know where you are, and you can establish a plan which is fact-focused and data driven, you can start to work out how to operationalise this.

Then, it comes back to having people with the necessary skills and training in place to action the initiatives and monitor progress. More mature organisations have this, whereas most organisations are still in the first phase of establishing stakeholder engagement. Mature organisations are also honing their base understanding of their core ESG topics.

Regulations are constantly evolving through reporting standards and can be very fast paced. Using the IFRS reporting standards as one example. These are expected to be confirmed in June and standards against these to go live from January 2024. This gives organisations just over six months to make any necessary changes to meet the standards. Support around meeting these can come from internal teams. However, external teams, such as our Sustainability team at Mazars can also support organisations.

Another consideration for organisations is Greenwashing legislation penalties. The Competition and Markets Authority (CMA) and Advertising Standards Authority (ASA) both have new powers, and request for further power is currently going through parliament. It may be that the CMA will gain the power to fine businesses up to 10% of global turnover for consumer protection breaches, amongst other proposed new powers. Following a six-month review, the ASA has recently announced greater enforcement on companies that claim products are carbon neutral through offsetting if companies cannot demonstrate these initiatives are truly effective. A number of well-known brands have since begun removing their carbon neutral claims. If organisations are not mapping or tracking their data and cannot prove the accuracy of claims that they are making, this will have a huge impact such as fines, reputational damage and more.

The main challenge organisations will face is operationalising on promises made around ESG targets. It is easy to be distracted by other initiatives involved in the organisation’s strategy, and for ESG initiatives to be put on hold. As time catches up, a lot of work will be needed to ensure that organisations are able to meet the promises they made.

For example, when looking at supply chains, setting targets can be difficult due to a lack of visibility. It can be difficult to know if targets have been achieved. Many organisations rely on certifications on the supply chain for different confirmations e.g., origin for raw materials. These certifications are not always reliable and is something which may trip organisations up more often over the next few years.

Organisations who have made commitments in something which feels far out and achievable may find themselves being unable to pinpoint the necessary data to see if they have or are achieving their goals. They may also find themselves much further behind than they intended when goals were originally set.

There can be significant damage to the organisation’s brand or reputation. This can, of course, lead to other problems. Falling out of supply chains, limited or no access to funding, and reduced value of the business. There are a range of drivers behind building strong ESG initiatives, other than just compliance. The risks faced by organisations are dependent on their size and sector too, as these will impact the different push and pull factors.

We provide advice and guidance to support organisations who are looking to implement ESG initiatives as part of their strategy. This includes support within business and human rights, pay and reward strategies, decarbonisation services and more.

Mazars are also able to offer support to organisations who wish to streamline their reporting and compliance processes to allow for structured data to help drive important ESG-related decisions.

If you would like to understand more about managing your ESG associated risk exposures, please contact us for an initial conversation.