EconomyChallenges in implementing ESG

Challenges in implementing ESG

(Expansion) – The acronym ESG has become a recurring topic of conversation for managers and directors of companies of all sizes and in all industries. The ESG ( Environmental, Social and Governance ) movement involves managing companies with a greater focus on environmental, social and corporate governance risks, assessing the impact of their operations on the different interest groups ( stakeholders ).

This movement, which began years ago as a voluntary practice of some “advanced” companies in northern Europe, has been gaining strength globally to become a priority issue on the agenda of regulators in several countries, which have elevated some practices to a mandatory level. . Naturally, ESG has also encountered critics and opponents in business, academia, and politics (see ).

It is difficult to anticipate what the future of the ESG movement will be. However, it is unlikely that the standard of behavior required of companies will be more permissive and that the expectations of stakeholders will be lower in the future. Therefore, it is important that lagging companies accelerate the pace of their preparation.

Business management with an ESG perspective is not a simple process, nor is it adopted overnight. On the contrary, there are challenges that companies must overcome and below I mention some of the ones I hear most frequently:

Where to start and how to prioritize? ESG should be understood as a material or relevant risk management tool. Therefore, the starting point must be a materiality analysis that allows identifying and assessing the risks that the company must address, based on its sector, industry and context.

In any case, this analysis must consider the perspective of the main interest groups ( stakeholders ). From this exercise, the company must prioritize the risks and opportunities that will be covered by its ESG strategy and the plans and initiatives that derive from it. There are several methodologies to carry out this analysis and it is convenient to have the support of experts.

What frame of reference should we use? One of the main problems that companies and investors report is the multiplicity of reference frameworks, criteria and qualifications ( ratings ) that exist to measure, report and evaluate the ESG performance of a company.

The main players worldwide have made significant efforts to standardize and there are plausible advances, however, it is a pending task. My suggestion is to find out which are the most widely used and recognized frameworks in your industry, and go from there. Companies often follow a combination of criteria and frameworks.

Who should coordinate ESG efforts within the company ? As the body responsible for risk management, the board of directors must approve the ESG strategy and supervise its implementation. However, the coordination of transversal efforts must be delegated to a functional area and there is no universally valid recommendation.

The decision depends on several factors, such as the company’s sector and industry, its business model and philosophy, the region in which it operates, the type of risks to which it is exposed, among others. It is common for the environmental sustainability function to assume this responsibility, but in certain cases it is entrusted to the communication area, the corporate affairs area, or the legal and compliance area.

In any case, the legal and compliance team plays a critical role as strong corporate governance is the cornerstone of any ESG program (see ).

What should we do to stay up to date ? ESG is a discipline under construction and in constant movement. What is good practice in your industry today may be obsolete tomorrow.

The breadth of topics (eg emissions and waste management, anti-corruption and anti-money laundering measures, gender equality, compensation and working conditions, etc.) and the variety of sources (eg laws, regulations, best practices ), require constant attention. Therefore, it is important to have a solid team within the company (if the size of your business allows it) and qualified advisors.

And perhaps the most important, is the effort worth it ? The benefits of adopting an ESG strategy are frequently mentioned, such as greater resilience, better access to sources of financing, higher valuation and even better operating performance of your company.

However, it is naive to overlook the costs involved in designing and implementing an ESG strategy, as well as measuring and reporting performance and, especially, the eventual need to make decisions with a long-term perspective that, on certain occasions, have a negative impact. in the results of the quarter.

But precisely therein lies the crux : managing with an ESG perspective requires looking up and charting the course to create value in a sustainable manner.

Editor’s note: Pablo Jiménez Zorrilla is a partner at Von Wobeser y Sierra, SC Follow him on . The opinions published in this column belong exclusively to the author.

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