A new report has identified five areas where companies need to take action to navigate ESG compliance safely.
The Thomson Reuters Institute’s special report ESG under Strain said governments and companies are scrambling to balance “green ambitions with the new imperatives of energy security” as the Ukraine war exposed high dependency on a small number of oil and gas exports.
It also highlighted the number of firms that have been fined for greenwashing and how politics in the US has led to exclusions of companies supporting ESG policies from state pensions.
However, as the report pointed out: “The importance of the underlying principles of ESG has not diminished; indeed, the imperative for companies to earn their social license appears to be rising.”
The five areas where companies can improve their ESG approach are:
Data governance
Firms need to build an approach to data governance that encompasses aggregation, management, storage, security, retrieval and destruction, the report said.
“Many firms will need to make a significant investment in their data governance capabilities, to enable them to accurately and repeatedly respond to the growing number of ESG-related data requests.”
Emphasis was placed on ensuring data is “clearly articulated” in order to minimize the potential for customers to be unclear.
Skills
Amid a merry go-round of heads of ESG moving around asset managers, the report said firms should address any skills gaps urgently and warned: “It is unlikely that an untrained board or leadership team will find any sympathy with regulators.”
It highlighted regulators in the UK, US and Europe have all given their own boards specific ESG training.
“Given this, firms would be well-advised to invest in, and strengthen, in-house ESG skills to help better inform and manage the delivery of all ESG and related objectives,” the report added.
Lobbying
ESG Clarity has covered numerous calls for action throughout September aimed at governments and regulators as climate risk becomes increasingly apparent among investment managers.
Thomson Reuters said in the report firms need to “engage with regulators to ensure that ‘good’ regulations are developed” as “poorly designed regulations will not achieve the required aims and are expensive to fix.”
It reiterated the need for skilled resources to respond to consultations, and added “board engagement is essential to any lobbying strategy.”
Messaging
Firms must have a clear strategy when it comes to its external messaging on ESG with the report warning there are “increasingly high stakes for firms found to be greenwashing.”
It pointed to UK Advertising Standards Authority text that said advertisements that make environmental claims need to do so in a way that is “easy to understand.” The authority warned firms to not “over-claim” or “omit key information” and said: “Beware of making big, bold, absolute claims unless you are certain you can back them up.”
Reputational risk management
Drawing on the last point on messaging, the report said firms are “anxious to prove their green credentials” and are making “increasingly bold statements” as a result.
When it comes to net-zero targets or laying out climate transition plans, for example, firms are advised to also create accompanying contingency plans for reputational risk management should targets not be met or the plans are changed.
