February 15

Developing rigorous ESG disclosure systems

Axel Kravatzky

Studies have shown that organizations can derive sustained competitive benefits from ESG (Environmental Social Governance) practices that are strategically derived as opposed to generic ESG requirements developed for industries since it can be assumed that industry norms will be adopted by the majority.

In previous columns we addressed the current trends within the Caribbean where green capital markets are still in their infancy and where stock exchanges and regulators are preparing to build awareness of, the potential for and regulations of green or sustainable finance initiatives.

Green or sustainable investments are set to grow many orders of magnitude over the next few years. Large proportions of investments are set to go into transforming infrastructure and power generation. But adaption to and mitigation of climate change as well as the digital revolution are set to disrupt every sector of the economy. And all over the world, social and human development are in dire need of strengthening as well.

Change brings with it risks and opportunities. All organizations, including private sector companies, are expected to actively innovate and invest into helping our societies achieve the Sustainable Development Goals by 2030.

In order to make progress, organizations will need to be governed in a way that their ultimate value is a contribution to sustainable development. That means that all organizations must be governed and managed so that they enable people to satisfy their needs in the present without undermining the ability of future generations to address their needs. They must also be able to assure themselves and others of their value.  Organizations need to demonstrate that they are generating value in the present while not harming and if possible strengthening nature as well as people and societies.

What aspect of ESG should companies focus on?

One of the advantages of a green capital market in its infancy in the Caribbean is that external investor demands are still minimal. That means that companies can focus on the sustainability issues that are most material for them and not get distracted by or fall into the trap of ticking ESG boxes simply for the sake of complying with an externally imposed standard.

Good practice would be for companies to start by engaging their members, and other relevant stakeholders in reviewing and re-defining their purpose so that it is very clear what ultimate value they are generating and how they ensure that they are not going to be profiting from generating harm.

Boards, and governing bodies of organizations more generally, could use ISO 37000 on the governance of organizations to determine their value generation model. Precisely what, in addition to return on financial capital, constitutes value? What are the parameters within which value is to be created so that mode of operation is consistent with the purpose, the ultimate value that the organization is seeking to generate.  How does the organization seek to oversee that value is being generated within the determined parameters and how is it going to monitor for unintended consequences and adjust course when necessary? Finally, how will the organization sustain its ability to generate value over time? How is value being retained and distributed?

Since organizations exist to create value for stakeholders, one of the most powerful tools organizations can use to determine the ESG dimensions they should focus on, is called the ‘stakeholder materiality matrix’. As the name suggests, the matrix integrates two dimensions:

First, given the purpose of an organization, its value generation model, strategies and business models it employs, as well as the industry and societies in which it operates, the organization determines which dimensions impact its ability to fulfil its purpose most materially. The second dimension articulates the perspective of stakeholders, what they consider to be the most material factors of the organization affecting them.

In the course of this assessment, the organization should also consider which international standards and frameworks with associated indicators are most relevant. To this end, for example, an organization can be utilizing the UNDP SDG Impact standards to guide its assessment of how it can be best addressing the Sustainable Development Goals. Organizations  should also be referring to and utilizing various international frameworks so that the measures it ultimately chooses to track, measure, and report are comparable, rigorous, and can be benchmarked against scientifically determined targets, amounts and rates.

In our next blog we review good operational, management, and governance practices pertaining to ESG disclosures.

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