/Environmental, Social and Governance (ESG) considerations

Environmental, Social and Governance (ESG) considerations

By Jeremiah Ndhlovu, CERM

The member institutions of the World Business Council for Sustainable Development (WBCSD) and the United Nations Environment Programme Finance Initiative (UNEP FI) believe that a company’s management of ESG factors, as well as a company’s leadership on sustainable development, are at the core of business today and therefore need to be considered by the capital markets. (Translating ESG into sustainable business value, Report from an international workshop series of the WBCSD and UNEP FI, March 2010)

Two of the previous risk advisory articles covered the timeless mining principles of corporate social responsibility (CSR) as well as Safety, Health and Environment (SHE). Before the audience forgets about the CSR and SHE discussions, it is worthwhile to discuss the Environment, Social and Governance (ESG) principle.

The key question is why bother discussing ESG when the CSR and SHE frameworks cover the ESG components. The mining sector is at an advantage as far as ESG is concerned as the CSR and SHE frameworks in the sector are generally advanced. ESG is not divorced from CSR and SHE, rather it presents an integrated and coordinated framework for assessing the impact of organisational sustainability and ethical practices on financial performance and operations. Conscious investors use or require use of the ESG criteria to screen potential investments or funding recipients. Currently, ESG metrics are not a mandatory reporting requirement in many jurisdictions, though many organisations are increasingly making disclosures in annual reports as part of sustainability reporting.

With more push for integrated reporting globally, establishing an ESG framework will contribute significantly towards the much needed non-financial information in integrated reporting.

There is no one exhaustive list of components to consider for each ESG factor. Organisations might find ways of measuring the components, but it is difficult to assign monetary value to most of the components. Components ordinarily considered under the different factors are as follows:

  1. Environmental

The main thrust is conservation of the natural environment and the key components considered are:

  • Climate change
  • Pollution
  • Biodiversity
  • Energy efficiency
  • Water resources
  1. Social

This factor considers welfare of people and relationships. Key components include:

  • Human rights
  • Diversity
  • Safety
  • Health
  • Gender and diversity
  • Community relations
  • Labour practices
  1. Governance

This factor considers the framework and standards of running an organisation. The components include:

  • Corporate governance
  • Ethics
  • Compliance
  • Executive compensation
  • Lobbying
  • Approach to taxation
  • Whistleblower schemes

Many organisations already have components covered under the aforementioned factors, though these are managed disparately. Similar to the principle of enterprise-wide risk management (ERM), many organisations ought to establish an ESG oversight framework to have a comprehensive assessment of how an organisation is fairing against leading practices.

Having a consolidated and integrated framework and/or checklist will assist in identifying areas where the organisation is lacking, to facilitate formulation and implementation of remedial action, and areas where the organisation has been performing well but omitting the same in sustainability reports, for updating of corporate reports to fully represent the organisation’s ESG practices.

ESG, therefore, is a key reporting matter that needs to be fully exploited to optimise non-financial reporting on organisations’ practices to interested stakeholders.

About the Author

Jeremiah Ndhlovu is a Certified Expert in Risk Management (CERM). He has acquired extensive risk management insights in the mining sector through outsource projects including enterprise risk management, combined assurance, process and controls standardisation, internal auditing and external auditing.

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