With the heightened awareness of members of the public and stakeholders in varied industries, there is a great need for governance designates to have an understanding of the Environmental, Social and Governance (ESG) ecosystem.
As with any ecosystem, that of ESG aspects comprises a plethora of actors as well as processes that are instrumental to its smooth functioning. As organisations strive to balance profit with purpose, the ESG ecosystem stands as a multifaceted network of participants collaborating to ensure responsible and sustainable business practices. The shift towards a triple bottom line perspective, that goes beyond solely profit, and considers people, planet as well as profit, is globally evident. We will proceed to examine these actors and delve into their roles and joint responsibilities in inducing effective corporate governance.
Central to the overall ESG ecosystem are Framework Developers. This constituency comprises organisations that are responsible for establishing the principles and the guidelines that inform ESG reporting as well as integration. Organisations such as the Global Reporting Initiative (GRI) as well as the Sustainability Accounting Standards Board (SASB) fall in this category.
Framework Developers set the tone for a wide range of organisations to establish their ESG strategies. Their standardised frameworks enable organisations to make comparisons with competitors and to assess their overall ESG performance. In essence, they ensure that sustainability and responsibility are inculcated and embedded within the organisation’s operations.
Data Providers are ESG ecosystem participants of note too. We are all aware of how crucial data is, including both its inherent and manifest value when it comes to decision-making in diverse scenarios. Data Providers collate, aggregate and disseminate vital ESG information. They provide instrumental insights with respect to organisations and how they fair from environmental, governance and social perspectives.
They also integrate a plethora of metrics into ESG aspects which better position organisations to fulfil their strategic objectives. In order for stakeholders and investors to make informed decisions regarding people, planet and profit, timely, comprehensive and high quality data is of overly essential.
Standard Setters are ESG ecosystem constituents that work closely with Framework Developers in refining as well as adopting ESG reporting standards. Organisations such as the International Sustainability Standards Board (ISSB) play a major role in ensuring that set standards maintain their relevance and effectiveness.
Furthermore, institutions such as the International Integrated Reporting Council (IIRC) have the crucial responsibility of shaping overall ESG reporting procedures. This is crucial to the corporate governance theme of disclosure by organisations and the alignment thereof with global best practices, consequently enhancing transparency and accountability.
Assurers exist within the ESG ecosystem to independently verify and validate the ESG information that different organisations avail to stakeholders. They serve as auditors who ascertain the completeness and accuracy of disclosures pertaining to ESG aspects. They also play a pivotal role in identifying discrepancies and ensuring the reliability of ESG data.
Voting and Engagement Actors are another significant subset of the ESG ecosystem. These are investors, investor coalitions as well as proxy advisory firms which advocate for sustainable business practices in varied organisations. They are akin to interest groups that lobby for the inclusion of important ESG factors in organisational decision-making.
This may include, for example, pushing towards an avoidance of vice investing or disbursement of capital into products labelled ‘harmful’ such as cigarettes and alcohol. Organisations can then be held accountable for commitments made regarding ESG aspects.
Having considered these ESG ecosystem participants, it is crucial for us to remember their significance as well as the importance of the ecosystem from a corporate governance perspective. The ecosystem assists greatly in the enhancement of transparency. As organisations comply with the set standardised reporting procedures and as their disclosed information is verified, stakeholders can be more confident that the ESG information they have provided is both accurate and comprehensive. Organisational performance can then be assessed, specifically with respect to social responsibility, environmental impact as well as governance practices.
With regard to mitigation of risk, it must be remembered that ESG factors are very much related to organisational risks. There is potential for organisations to face reputational risk, statutory penalties and operational mishaps if they disregard ESG aspects. The ecosystem assists in the identification and mitigation of a wide range of risks, better positioning the organisation from a sustainability perspective.
The actors within the ecosystem facilitate discourse and engagement between organisations and their respective stakeholders. The ecosystem yields benefits from a stakeholder engagement stance as its collaborative approach allows organisational comprehension of stakeholder concerns as well as expectations and enables prompt and robust responses thereto.
Furthermore, as regards long-term value creation, the integration of ESG principles into day-to-day activities encourages the adoption of sustainable and responsible business practices that are aligned with set financial and strategic objectives. This undoubtedly creates long-term value for the organisation’s stakeholders and the broader community.
The above considerations remain central to effective corporate governance as well as sustainable organisational and economic success.
The views and opinions expressed in this article are those of the author, Dumisani F. Ntini – Governance and Strategy Practitioner. Purchase ‘The Corporate Governance Companion’ today and unlock the secrets of effective corporate governance. Contact info@governancegroup.org.
