1. Functions Working In Silos: While implementing ESG, you need to be careful about functions operating in silos. Siloed working means that there are fewer opportunities for creative solutions and joined-up strategic thinking, and functions may not prioritize the organization’s higher purpose and commitment to ESG. Imagine the procurement team rejecting vendors who follow modern slavery practices but the M&A team ignoring governance issues in a target company.
2. ESG Not Integrated With ERM: The risk of not having a response strategy to ESG issues can be catastrophic. Hence, incorporating ESG intelligence into your Enterprise Risk Management can strengthen your organization’s understanding of its full suite of ESG risks, build greater confidence and trust from the stakeholders and enhance overall business performance.
Ultimately the CSO and the CRO will need to work together to bring more rigour to the ESG implementation and also synergize resources.
3. Focus On E Mistaken As ESG: A lot of companies have been committing to climate action goals and calling this an ESG implementation. Also, most of the ESG discussions are around climate change. While implementing ESG, there needs to be equal weightage given to the social and governance issues.
4. Challenges In Making Sense Of Data To Drive ESG Goals: Many companies find it difficult to collect, collate and update detailed ESG data in their areas of operations. A study conducted by an analytics firm found that only 20% to 30% of data for key ESG KPIs was publicly available. Implementing ESG will also require enhancing the data management systems and infrastructure. The data also requires maintenance – updates to the data to ensure it stays relevant, which is a continuous process. It is important to align all business units to gather, monitor, and update ESG data.
5. Compliance Over Culture And Tone At The Top: “Risk culture” refines the concept of organizational culture to focus particularly on the collective ability to manage risks. Without a strong risk culture and a clear tone from the top, ESG implementation will just remain compliant. Risk culture significantly affects the capability to take strategic risk decisions and deliver on performance promises.
6. Difficulty In Finding Qualified ESG Champions: Today, the lack of skilled ESG professionals is a concern in the industry. While there is a growing demand for ESG services, the pool of qualified professionals is relatively small. This shortage could increase the cost as there is a significant dependency on external consultants.
7. Lack Of Transparency In Reporting And Greenwashing: A lot of companies have been using greenwashing as a marketing tactic to lure in environmentally conscious investors and customers. When businesses represent themselves as sustainable by providing false or misleading information about their practices, it reflects on the tone at the top and the poor governance in ESG implementation. There is also a need for a common language for discussing ESG performance, and a standard reporting framework would help to fill this gap.
8. Cost Thinking Over Investment Thinking: While the benefits of integrating these practices are clear to businesses, significant costs are involved and these may affect the speed and quality of ESG implementation. The most obvious cost is the investment required to change current operations. This includes anything from energy-efficiency upgrades to implementing new policies and procedures. There may be costs associated with training employees on new practices as well.
One of the more important responsibilities of the board is to assemble a management team that is committed to the business benefits of a well-defined ESG agenda. ESG is a business imperative, and the board plays a critical role in holding management accountable, advancing ESG, and balancing risks and opportunities – both in the short and long term.