Examining ESG Risk Part 1: Adding 'D' for Data, Into ESG

Al, you’ve been speaking with many people across FTI Consulting and within client organizations about the state and future of ESG. From your perspective, why has ESG become so important to business success and risk management?

Regulators are watching, investors are scrutinizing and the market is reacting. Last month, the Department of Labor released a final rule that permitted fiduciaries to “consider climate change and other ESG factors whey they make investigation decisions and when they exercise shareholder rights.” This is a reversal of previous rules that prohibited such decision making and investor voting. It serves as just one example of how the market is responding to global concerns over climate change and ethics issues.

As someone recently stated at a conference, organizations are now expected to say what they mean and mean what they say when it comes to their stated efforts and follow through as a sustainable organization, focused on ESG. An organization’s commitment to ESG increasingly has ramifications across how investors, employees and regulators look at the company’s reputation, corporate governance, value and differentiation in the market. As the FTC’s Bureau of Consumer Protection director recently said, following a more than $5 million ESG-related fine in the retail sector, “False environmental claims harm both consumer and honest businesses, and companies that greenwash can expect to pay a price.”

So, ESG is not only a key element to how we look at a company’s standing — any clear shortcomings in areas that relate to ESG can result in significant risk. It remains challenging, though, for organizations to assess where they stand and know specifically what they need to do to improve their standing. Global ESG frameworks are starting to be standardized, through organizations including the GRI, ISSB, IFRS, TCFD and others. The fact that there are so many frameworks and ratings systems to track make it difficult for organizations to navigate which ones they should be mapping their efforts to.

So, how does data come into play against this backdrop? Can you explain why you believe data is a fundamental aspect of ESG progress and compliance?

Regardless of which framework or ratings model is being followed, ESG is a data story. The public and markets expect transparency. In other words, there is now an expectation that ESG is rooted in materiality, not only responsibility. Organizations that want to show that they say what they mean and mean what they say must leverage data to be more quantitative in measuring their performance across key ESG benchmarks, such as emissions, labor practices, supply chain transparency, executive pay and more.

Data can be leveraged to protect and enhance enterprise value by providing specific, transparent disclosures that communicate performance to the market and to regulators, while also offering insight to evaluate growth, progress and the risk profile. This includes taking a holistic and analytic view in how an organization is meeting legal requirements, using strategic research, conducting community engagement, embracing diversity, adhering to data privacy practices, addressing human rights impacts and so much more. Likewise, data informs a go-forward strategy to ensure that the business is aligned with the overall corporate ESG plans.

All those areas you mentioned also align to unique vectors of risk. Broadly speaking, what are some of the downsides if data isn’t addressed properly as part of ESG strategy?

This is critical. Organizations are under more pressure than ever before to meet certain standards and provide detailed disclosures about their business. Missteps can lead to a wide array of ramifications. For example, accusations of greenwashing, for which some companies have already faced hefty fines from regulators. Regulators around the globe are looking closely at this, and the SEC has already issued fines exceeding $1 million for false claims.

There will almost certainly be more enforcement and public scrutiny on this front in 2023 and beyond. In addition to regulatory penalties, greenwashing, emissions misstatements or failure to meet certain ESG disclosures could result in litigation, follow-on investigations, reputational damage and loss of business partnerships, customers and investors.

Who are you seeing as typically owning these issues within corporations, and is anyone really ahead of the game yet?

Ownership of ESG risk and action varies widely, depending on an organization’s internal leadership structure and level of ESG maturity. Chief legal officers, chief compliance officers and chief risk officers are often leading the charge, while some organizations may rely on vertical stakeholders, such as a supply chain or procurement leader, to push ESG in conducting diligence and meeting compliance. More sophisticated organizations often have an executive like a chief sustainability officer dedicated to ESG, diversity and/or corporate sustainability. This is often a multi-disciplinary approach with cross-functional input. It is also constantly evolving.

In Part 2 of this series, we will discuss in more detail the ways data comes into play in an ESG context and how technology helps align data to ESG objectives. In Part 3, we will share practical insights around how we can help clients tackle these issues.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.