Written by Harriet Lee, EHS Compliance Consultant at iCOR
What is ESG, as a framework?
ESG stands for Environment, Social and Governance. These are three interconnected pillars which make up a framework for measuring and managing an organisation’s sustainability performance. There are standards for measuring and reporting, as well as ethical guidelines, such as the GRI (Global Reporting Initiative), the SASB (Sustainability Accounting Standards Board), and the TCFD (Task Force on Climate-related Financial Disclosures). Alongside these, organisations can pursue ESG-aligned certifications, accreditations, and ratings, including B Corp, EcoVadis, Constructionline (amongst others), to assess and validate ESG performance.
The Environmental pillar of ESG concerns how an organisation impacts and manages the environment, including resource use, waste management, carbon emissions, pollution, biodiversity, and climate resilience. Examples of Environmental ESG initiatives could include adopting renewable energy, introducing programmes to reduce waste, energy, and water use, adopting a sustainable procurement policy, or improving the local environment.
The Social pillar relates to how an organisation impacts people, including workers, customers, communities, and supply chains. It includes aspects such as workplace safety, fair pay, diversity and inclusion, community investment, workers’ rights, and customer welfare. Examples of Social ESG initiatives could include staff well-being programmes, fair pay policies, community fundraising, or introducing supplier standards.
The Governance pillar concerns how an organisation is run and how it makes decisions, with a focus on ethics, transparency, accountability, and legal compliance. It includes considerations such as the composition of executive officers and boards, executive pay, data protection, stakeholder engagement, and environmental, health & safety (EHS) legal compliance. Examples of Governance initiatives could include committing to clear policies, transparent reporting, and ethical decision-making frameworks, and ensuring legal compliance at all times.
In theory, organisations with strong ESG performance operate responsibly across all three pillars, meaning they minimise their environmental impact, treat people fairly, and uphold integrity, credibility, and compliance. As the three pillars are interdependent, it is important for organisations to recognise that a weakness in one pillar can harm or undermine the strength of the others, thereby incentivising strong commitments and actions across all three pillars.
Why invest in ESG?
Organisations invest in ESG for interconnected reasons, and together they create a strong business case.
The moral case
ESG has a moral case: we know that investing in people and the planet is the right thing to do. It can help businesses protect and safeguard the environment as well as the people affected by the business, such as workers, local communities, and people within the supply chain.
The risk management case
Investing in ESG has a risk management case: investing in people, skills, communities, and the environment reduces business risks, such as staff turnover, skills gaps, reputation and public perception, safety and environmental accidents and incidents, and resource security.
The financial case
There is a financial case for investing in ESG, where rigorous, verifiable ESG initiatives can help attract, win, and retain customers, reduce staff turnover, and improve their position for investment opportunities.
The reputational case
There is also the reputational case, which can impact the satisfaction of prospective and established customers, competitors, and staff alike.
What is ESG in practice?
In practice, many ESG initiatives tend to emphasise the Environmental and Social parts of ESG, with less focus on Governance. This is not surprising, as the Environmental and the Social elements of ESG are often more visible, more actionable, and easier to communicate. For example, activities such as fundraising, litter picking, or making changes to products or services to better align with protecting people and the planet are easier to show and share than a change to a policy or an update to a legal register.
Yet governance is the third pillar of ESG and must not be forgotten. Governance within ESG refers to the business’s behaviours, such as how decisions are made, how policies are reviewed, and how information and data are reported. Within governance sits legal compliance, which, although placed within a voluntary framework, is absolutely mandatory. When the legal and governance foundation is weak, then all that visible Environmental and Social work becomes vulnerable.
What is the impact of legal compliance on ESG initiatives?
If legal compliance gaps show, the benefits of investing in ESG initiatives will quickly wick away. For example, if you as a business, have invested hours of time in local litter picks but it transpires that you are involved with an illegal waste site, the reputational and risk management benefits of investing in ESG have been severely undermined. Similarly, if you, as a business, have been fundraising for a social value cause, but it transpires that your workers are not adequately protected from harm at work, the risk management, financial, and reputational benefits of investing in ESG are again undermined.
This has very real impacts on the business, as well as on those who work for it and are affected by it. Workers, who themselves may have invested their working hours into the ESG initiative, may lose trust and loyalty in the business, leading to presenteeism or staff turnover.
Customers and stakeholders may become wary of the business and lose trust in their operations, values, and governance. This could lead to loss of investment and funding, or loss of work for the business.
Not only this, but prospective workers, stakeholders, and clients may be deterred from wanting to be associated with the business in future, as the legal breaches (which should be foundational to ESG) undermine the voluntary ESG work in place and risk the initiatives being read as greenwashing or a distraction from the non-compliance deeper in the business’s operations.
What should businesses do to get the most out of their investment into ESG?
The principle that distinguishes successful ESG initiatives from less successful ones is credibility. Large hits to a company’s reputation for being ethical and sustainable often stem from a misalignment between the work on reputation-building ESG initiatives and the work to ensure legal compliance. Building ESG initiatives credibly means investing in the legal foundations on which ESG sits, as well as in excellent environmental and social initiatives and actions.
To prospective clients, customers, and investors, the surfacing of a legal breach or a compliance gap can cast the impression that all of the voluntary Environmental and Social work was intended to distract from (or greenwash) deeper organisational issues; destroying the reputation, trust and credibility the organisation was seeking to build initially.
If you are looking into investing in ESG initiatives, or are building or reviewing the ESG work you are already doing, EHS professionals should consider their state of EHS legal compliance, and whether there is more they could be doing to reduce legal risk.
How can an organisation improve their legal compliance to strengthen its ESG initiatives?
Currently, organisations typically rely on manual EHS legal analysis, often in spreadsheets, to determine their legal register and compliance status. This can work, but it’s time-consuming, admin-heavy, and leaves room for legislation updates to be missed. When reviewing your system for legal compliance, you want to be able to answer the following questions:
- Are you confident you know all relevant legal obligations?
- Do you know, with confidence, whether you are compliant with those obligations at any given point in time?
- Are you confident that your system alerts you to any changes in your obligations and how they affect your compliance?
- Do you know what evidence you would need to show to prove compliance?
- Are you confident you could find that evidence quickly and easily?
These questions should guide your review and help you identify where you need to strengthen your compliance foundation, the base on which your Environmental and Social work stands.
About iCOR
This article was written by the iCOR team. iCOR is an EHS legal compliance solution that replaces spreadsheet-based approaches to managing legal registers and compliance. Organisations complete iCOR’s audit questionnaire, and iCOR builds and maintains their legal register and compliance statements, including monthly updates to ensure that the register is always current. The solution provides real-time compliance tracking, integrated evidence management, and streamlined corrective action planning to help legal register managers reduce administrative burden and give teams confidence in compliance and in their ESG commitments.
About the author
Harriet Lee holds an LLB (Hons) in Law and is particularly interested in the legislation that protects people and the planet. She is an Environmental, Health & Safety Compliance Consultant at iCOR, an EHS legal compliance solution that helps organisations stay on top of their EHS legal obligations.
