ESG adoption on the rise and here to stay

The rise and rise of ESG

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The evolving world of achieving sound corporate governance has added a new chapter to its rich history in the form of ESG reporting.

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What is ESG?

ESG stands for Environmental, Social and Governance factors which ought to be considered by companies as part of their investment decision-making process. Put simply, companies now need to identify risk and opportunities relating to their investment decisions.

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ESG Integration

• In addition to the financial benefit derived from the investment, the investor focus would also be on the financial footprint the investment would have on environmental, social and governance aspects.

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ESG screening and exclusion

• Potential investments are screened based on positive and negative impacts that they create for the investing company.

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Thematic ESG investing

• Investments are to be made to follow a particular “theme” or ambition of the investing company. As an example, investing in Electric Vehicles (EVs) is on the rise and therefore an investor would prefer to invest in EVs rather than the conventional car manufacturers.  

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Impact Investing

• The ESG impact should be measurable.  

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Why ESG?

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The term ESG might only have been coined recently but the concept has been around for several years. In most cases, companies only had to disclose the extent of the environmental impact of their actions only if they were subjected to negative media press and/or being imposed a penalty (worst case scenarios).  

Previously, an oil spill which would require companies to disclose the extent and effort needed for the clean-up, restoration costs and any regulatory fines. This could be at best seen as a reactive measure.  

ESG is here to change this mindset and has introduced a proactive approach to satisfy stakeholder needs and to comply with regulatory requirements including those of the Securities Exchange Commissions (SEC).

The increasing scrutiny from information published by the US SEC emphasizes the importance of ESG, as it highlights the increases in the number of cases and penalties since 2008, with fines exceeding the $1 billion threshold.  

With a boom in asset wealth managers since the latest Wall Street crash in 2008, it should not come as a surprise that several Asset Managers have been flagged by the SEC. However, it is to be noted that the SEC has targeted many other industries and should act as a deterrent to any company.

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What does this mean for you?

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Disclosure requirements for ESG are on the near-term horizon with several organizations preparing for the impending move towards ESG disclosures. There has been a growing emphasis by major accounting and advisory firms (including the Big4) to aid and prepare companies for this transition.  

Research conducted by Deloitte over the past year has been shared with the public in the form of ESG executive survey Preparing for high-quality disclosures and The Sustainability Report released in March and December 2022, respectively.  

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Some of the Key Findings which were shared in the March 2022 report touched on the following matters:

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1. Companies need to assess data preparedness – Survey respondents have shown that data availability (access) and data quality (accuracy/completeness) still is their biggest challenge when it comes to ESG reporting.
2. Governance and organizational capacity are critical to ESG efforts – ESG implementation requires a dedicated effort from inside the organization to meet external stakeholder needs. This requires spreading the extra responsibilities to internal resources to senior management, audit committee, Board of Directors (BOD) etc., or setting up an ESG council or working group.
3. Assess the technological impact of measuring, disclosing and reporting ESG related matters
4. Maintaining independence and objectivity in reporting ESG metrics using third party consultants

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The above matters highlight some of the challenges that ESG reporting implementation would pose. As organizations warm up to the idea of ESG implementation, there will not be one cap fits all solution when it comes to adopting ESG reporting. Each company will have to evaluate its business operations, identify the needs of its internal/external stakeholders, and ensure that their reporting model is in line with the ESG reporting framework.

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How Solaris Can Help

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Solaris’ team of dedicated consultants have extensive expertise in working within various industries in the private and public realms. Our consultants, who are also business partners, have played instrumental roles in helping our clients with planning, transitioning and implementing adoption of new accounting standards and SEC filings. With ESG reporting, our goal is to provide our clients with a solution to meet their internal/external stakeholders reporting needs.  

Learn how we work closely with you to devise an ESG plan which would keep you a step ahead in your ESG journey.