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ESG goes mainstream – are you prepared?

Jan 12, 2022

The explosion of environmental, social and governance (ESG) advertising, news, podcasts, and commitments from institutions serves as evidence of stakeholders’ growing interest in corporate sustainability. Stakeholders have long been pushing for a sustainable approach to business, but interest has reached unprecedented levels.

In light of this demand for ESG initiatives and disclosures, companies no longer question the need to address these values. However, for some, implementation can seem daunting or confusing. Rather than being deterred, increasingly, companies are finding ways not only to reduce their ESG risks but also to flourish from the opportunities created by this demand.

Where to start

For every company, the approach is going to look different, but figuring out what is material to your firm can help to guide the process. The finance world has looked to materiality, or what would be important to its stakeholders, to guide finance decisions. And company stakeholders are now asking that environmental, social and governance impact be included within the decision-making of the uppermost levels of the corporate structure.

In determining where to begin with ESG initiatives, a company should evaluate what aspects of ESG are most impactful to its various stakeholders. It would be important for the company to review its core products and processes as well as determine their effect on the community, its employees, clients and investors. Based on the industry, market, location, and other features that make them unique, a company’s approach to ESG will be unique.

And just as materiality can change from year to year in finance, it’s important to understand that ESG materiality is dynamic and will need to be reviewed each year. For instance, the onset of the pandemic changed the needs of the workforce dramatically, which left companies scrambling to manage the health and distinctive needs of a remote workforce.

And this is not to say that ESG materiality is distinct from financial materiality. In fact, the correlation between the two is arguably a significant driver in the ESG enterprise. We see this firsthand from the trillions of dollars pouring into high performing ESG funds. We also see undesirable consequences when ESG values are neglected, including increased hiring and training costs to replace disgruntled workers who resign. A common complaint is a company’s lack of initiative related to the “s” factors in ESG, addressing such areas as pay rate, flexibility or equity.

A new era of sustainability compliance

Additional risk in the ESG arena comes from either a lack of ESG information or an abundance of inaccurate information. Once a company has incorporated ESG into its core strategy, it should review its public information and prepare disclosures to accurately represent its initiatives and increase its transparency. This transparency has become increasingly important as stakeholders try to decipher between greenwashing companies and those that are truly incorporating ESG values.

However, transparency is exactly what the Securities and Exchange Commission (SEC) has found to be lacking in so many companies. During recent SEC examinations (performed on investment advisers, registered investment companies and private funds engaged in ESG investing), the SEC staff observed that in many cases “practices were inconsistent with disclosures about ESG approaches.”

And the pressure for companies to become transparent continues to increase with the SEC’s newly designated enforcement task force created to focus on climate and other ESG issues. Moreover, additional regulation continues to develop. In the recent COP26 global climate summit in Glasgow, Scotland, the IFRS Foundation, a nonprofit international reporting standards organization, announced that it is creating a new International Sustainability Standards Board (ISSB) designed to develop a global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

Barry Melancon, president and CEO of the Association of International Certified Professional Accountants, lauded the new standards initiative. The creation of ISSB “marks a new, historical milestone in our journey to establish globally consistent sustainability reporting standards, signaling a new era in corporate reporting where the same level of rigor will be demanded for sustainability reporting as for financial information,” he said.

How Wipfli can help

Identifying your environmental, social and governance impact and developing strategies to help you prioritize and disclose ESG, is a priority for many financial service organizations. Wipfli advisors work with asset managers to assess and document your approach to position your firm as a leader in the ESG space.

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Author(s)

Sarah K. Williams, CPA
Manager
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