In this article, Compass Executives discuss the complexity of the regulation and reporting around Environmental, Social and Governance (ESG). 

The Environmental, Social and Governance (ESG) universe is complex but incredibly rewarding to those of us that work in the people and culture space, supporting businesses to build impactful leadership teams and inclusive cultures. ESG, its set of standards measuring a business’ impact on society and how transparent and accountable it is, proves to act as a structure for good business and a key driver in value creation.

The future of ESG

ESG may still be considered a buzzword, but it really is shaping the people and culture agenda, and will become more critical as businesses face greater scrutiny on their obligations to their employees and the communities they serve.

Reflecting on this and thinking about how regulation and corporate objectives will shape the activities of portfolio operating companies and their Chief Human Resource Officers (CHROs), to ensure ESG is core to operational improvements and is impactful in its outcomes, considering societal impact and relationships with employees.

Impactful CHROs and people leaders are taking the initiative and already undertaking the work, understanding that ESG regulations and reporting are not a pointless external imposition. For these leaders it is influencing how they think about their businesses, how they operate them and how they measure them. These individuals don’t necessarily need a ‘social impact focus’ to their business model to have a genuine, self-imposed desire to create frameworks that improve operational performance, track metrics that provide meaningful results and sharpen conversations internally around the benefits of ‘doing good’, and linking this to financial upsides.

Forward thinking CHROs are looking upstream and understand having a blind spot in the development and embedding of ESG strategies may turn out to be devastating to their businesses. Successful people leaders understand that ESG is core to strategic thinking and must not be separated from DEIB. Diversity, Equity, Inclusion and Belonging are all critical pillars to ESG.

The Social aspect of ESG

The Social or ’S’ in ESG has been an integral part of the DNA of many CHROs’ strategies and incorporated in processes, policies and culture drivers for a considerable time, without perhaps being formalised as the ’S’. They understand it’s imperative to get the ’S’ aspects to ESG really working for employees.

Organisations that can articulate their values and have communicated these to employees, that conduct inclusive recruitment processes with diversity friendly assessments, those that regularly conduct staff engagement surveys and collate feedback that senior leaders can act on, all do well when addressing the ’S’.

The Governance aspect of ESG

The Governance or ‘G’ in ESG gathers momentum against the backdrop of disclosure requirements and the adaptation of the Corporate Sustainability Reporting Directive (CSRD) to publish regular standardised reports on social impact activities.

Data is key

CHROs understand the opportunity governance and robust data mining and data analytics provide, to measure outcomes, measure risk and look forward and create plans on how to deal with the information gathered (we all know, once you start measuring you see things you did not before). People teams are using analytics and data to make cultural improvements and improvements to processes. Data is key to creating a picture of a business and can be used in turn to shape a great culture, identify where to mitigate risk and identify where interventions are needed.

But what do you do when data metrics highlight results that can be jarring and unearth uncomfortable truths? If we look to reporting on organisations’ board diversity, the statistics on gender and ethnicity diversity or pay gaps show considerable work still needs to be done to achieve equity. The data collected by organisations must be acted on, with metrics tracked and used to create frameworks for improvements to inclusion and building inclusive cultures, these are proven to be strategic drivers for business growth and the right thing to do for society.

It’s reassuring to see PE funds embedding ESG considerations into due diligence and tracking metrics in their portfolio companies alongside working with portfolio companies on their individual ESG roadmaps. This is not limited to social impact investment funds but across the private markets. The opportunities and insights into how investors and service providers are collaborating is an topic I look forward to discussing soon.

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