Common Questions About Environmental, Social, and Governance (ESG)

by Justin Neff, CPA, and Colleen Rozillis

Your organization could accelerate its mission, transform its culture, strengthen brand value, and increase the bottom line by aligning business practices with environmental, social, and governance (ESG) principles.

As organizations rapidly pursue initiatives to support their values and meet the expectations of stakeholders, it’s crucial to implement, track, report, and assure standards that accurately define and measure your progress.

Implementing an ESG strategy can help achieve these initiatives, while driving further growth and brand loyalty. Other benefits could include being able to identify tax savings and cash flow opportunities, just to name a few. Here’s a breakdown:

WHAT IS ESG?

The categories that comprise ESG—environmental, social, and governance—provide an opportunity for your organization to evaluate its impact on and position in an increasingly sustainable market.

Each category includes various aspects your organization can analyze to address the needs of various stakeholders: employees, shareholders, customers, and members.

THE FRAMEWORK OF ESG

Your organization can determine other aspects that may hold greater importance depending on your unique brand, values, and goals. Here are examples of each category.

Environmental

Environmental factors relate to your organization’s interaction with the physical environment.

• Climate change
• Environmental policies and regulations
• Renewable energy utilization and procurement
• Raw material sourcing
• Water and waste management, recycling, reduction in waste, or reduction in single-use plastics
• Greenhouse gas emissions
• Land use
• Energy efficiency
• Responsible supply chain or contractor code of conduct

Social

Social factors relate to business practices that impact communities and society.

• Diversity, equity, and inclusion
• Employee health and safety
• Human capital development
• Privacy and data security
• Product quality and safety
• Gender, racial diversity, and LGBTQ+ representation within the workforce and leadership
• Pay equity
• Policies and procedures that support effective workplace culture
• Employee turnover and retention statistics
• Employee engagement survey results
• Community involvement and investments

Governance

Governance factors relate to the corporate structure and how an organization operates.

• Business ethics
• Corporate resiliency
• Board and leadership diversity
• Executive compensation and incentives
• Ownership structure
• Enterprise risk management
• Board oversight of policies
• Lobbying and political activity

WHO IN THE ORGANIZATION SHOULD BE INVOLVED WITH ESG?

Identify a leader to champion the creation and execution of your ESG strategy. The ESG champion should have enough authority across the organization to gather data, engage cross-functional teams, and influence strategy.

You’ll want stakeholders involved from your key internal services—finance, procurement, legal, human resources, DEI, IT, facilities, and risk management—as well as operational functions and those who support the board.

Bring in members of the management team who understand strategy, the bigger picture, and are excited to invest in a change management initiative.

HOW DO YOU START CREATING AN ESG STRATEGY?

Before beginning an ESG plan, conduct a readiness assessment. If you build an ESG strategy that isn’t suitably supported, there are potential risks to your organization’s reputation and strategy effectiveness.

The readiness assessment should identify your desired state and whether you have the organizational resources, skills, data, and capacity to get there; if not, what gaps exist, and what resources may you need to address those gaps?

Each organization’s capacity, culture, and skills will vary, but your ESG committee can help identify existing resources across the organization. If gaps remain, part of your ESG strategy can include initiatives to address them.

HOW CAN YOUR ORGANIZATION CREATE AN ESG PLAN?

Approach creating an ESG plan by starting with your organization’s strategic plan: Where does ESG align with your overall vision, mission, and values?

Establish vision and purpose statements for your ESG initiative and develop both short-term and long-term goals that are relevant to your board, investors, stakeholders, staff, and leadership.

Each goal should be supported by target outcomes and initiatives that are clearly defined and measurable, have ownership assigned, and resources dedicated or budgeted where applicable.

HOW CAN YOU MEASURE ESG INITIATIVES?

The most important part of your ESG strategy is deciding what and how to report your progress toward achieving outcomes. You’ll want to tell your own story and provide timely, relevant information to your stakeholders.

For each outcome area, identify meaningful performance metrics. Performance metrics will vary for each organization based on your unique operations and the outcomes you’ve established. Assess the data you have available, identify any gaps you want to fill, and ensure that the data you report is reliable and accurate.

WHAT IS ESG REPORTING?

Consider creating a performance dashboard to report your ESG targets and metrics. A successful ESG dashboard will be a snapshot of status and trends over time, show performance against defined targets, and encourage dialogue about progress towards goals.

Providing a regular report to your board, on a quarterly or biannual basis, will help you to monitor progress and continue to refine your goals as your ESG strategy matures.

Many organizations also develop narrative ESG reports detailing their data, efforts, outcomes, targets, and other relevant information.

ESG reports can be powerful communication tools to your staff, board, investors, the public, and other stakeholders. They demonstrate transparency and awareness that your organization’s operational and business goals are in service of your values.

There are several existing frameworks and standards that can help guide your reporting efforts, but there’s no universally accepted framework at this time. Many companies also look to CPA firms to validate the reliability of their ESG disclosures through third-party assurance.

WHAT ARE YOU ALREADY DOING THAT COULD QUALIFY AS AN ESG ACTIVITY?

You may already be taking actions that could qualify as ESG activities. By improving your environmental footprint or diversifying your workforce to help meet sustainability or cultural goals, your organization could have opportunities to boost cash flow and reduce tax liabilities.

Here are a few example activities:

• Improve energy efficiency in buildings you own or operate
• Design, develop, or improve your products, process, techniques, formulas, or software to enhance your environmental practices
• Cultivate an inclusive workplace culture that supports career development and retention of a diverse workforce
• Invest in solar and other renewable energy projects or affordable rental housing
• Rehabilitate a historic building you own or operate
• Conduct annual board self-assessments and governance best practices training

WHY SHOULD YOU CONSIDER THIRD-PARTY ASSURANCE OVER YOUR ESG REPORTING?

Stakeholders, including investors, lenders, customers, and employees, value transparency, accuracy, and consistency of ESG issues and related risks at levels equal to a company’s financial reporting.

External assurance will give readers of your report additional confidence in the reliability of reported data and can enhance your brand and business reputation.

Third party assurance can also satisfy the reporting conditions of major customers as well as identify process improvements in the measurement and reporting of ESG metrics.

This article appears in the winter 2023 issue of the Washington CPA magazine. Read more here.