What business leaders should consider in ESG governance
KPMG listed three things that must be considered.
The increase in environmental, social, and governance (ESG) scrutiny calls for a stronger corporate governance structure to mitigate potential risks, such as reputational damage, higher operating costs, and regulatory and legal risks, according to KPMG.
The report noted that producing a comprehensive strategy that reflects the company’s commitment to sustainability and social responsibility can significantly enhance its reputation and build greater trust amongst stakeholders.
With this, the boards should consider the following when setting up sustainability functions:
Effective cross-functional collaboration between departments
Boards should ensure cross-functional collaboration, such as sustainability, finance, strategy, risk management, IT, investor relations, legal, internal audit, and human resources, to strengthen the quality of reporting. This must be accompanied by clear roles and responsibilities in line with the company’s governance structure.
For example, finance teams can lend their expertise in modelling the future financial impacts that environmental changes can incur, whilst other support functions, such as human resources, would be most in tune with the social-related aspects of ESG data.
Data collection and reporting close process
To improve sustainability reporting, boards should consider equipping sustainability functions with tools to ensure that the data is accurate and up-to-date.
For example, the new sustainability reporting requirements can be difficult for companies to follow as they are required to report sustainability-related financial disclosures along with financial statements. This means they need accurate information on ESG factors. This data should meet the stringent regulatory standards required by investors so that they can trust the reports.
Internal assurance framework
Collaboration can help in preserving the integrity of sustainability-related disclosures. Working with departments tasked with this, such as internal audit or legal functions, is important in ensuring thorough oversight and a more holistic internal assurance framework.
In some cases, organisations can also consider seeking external auditors or consultants to provide an independent analysis of ESG data to enhance credibility and identify areas for improvement.
With the above considerations, determining the right key decision-makers for ESG in the organisation is also important.
The report highlighted that the first step in building a successful and robust ESG governance structure begins with examining how closely the business aligns with or diverges from sustainability strategies.
Following this assessment, decisions can be made on how the identified strengths and weaknesses will shape the company’s ESG approach and overall strategic direction.
To do so, organisations can develop a RACI (responsible, accountable, consulted, and informed) matrix. This involves revising the risk management framework and internal controls along the way to embed sustainability factors. Companies will also need to equip their boards with the necessary knowledge and expertise to engage meaningfully on ESG matters.
