In 2022, businesses were under intense scrutiny regarding environmental, social and governance (ESG) topics, regardless of their industry. Investors, customers, regulators and governments have invested significant time and resources into defining ESG requirements and evaluating performance.
Unsurprisingly, there has been some resistance in the business community toward ESG and the requirements it creates. There have been questions about its importance, the accuracy of ESG ratings and the perceived misuse of sustainability statements. Despite this uncertainty, three things have become abundantly clear: ESG is a competitive opportunity, such regulations have teeth and the ESG regulatory landscape is only going to grow from here.
The non-compliance costs associated with a variety of existing and forthcoming ESG regulations prove that businesses should take ESG seriously.
Take the Uyghur Forced Labor Prevention Act (UFLPA) for example. With its broad scope and sweeping focus, this one law is set to affect more than 50 percent of U.S. imports and over 11,000 companies. The cost of non-compliance is simple and severe — goods are prohibited entry at the border, threatening company contracts and brand reputation. It is not hyperbole to say that this one law could disrupt entire sectors while denying businesses the opportunity to sell in the U.S. market.
Regardless of whether you view ESG through a financial materiality lens (i.e., how these policies affect your business’s bottom line) or an environmental and social materiality lens (i.e., how your corporation affects the world), it’s clear that non-compliance penalties are severe and that it’s essential to create ESG milestones and goals now.
It’s not only investors driving ESG program creation. With more regulations cropping up every quarter, businesses need to treat this framework as the core compliance requirement that it is.
It’s not all doom and gloom, either — ESG is a competitive opportunity for businesses. Being able to demonstrate a mature and differentiated approach puts you ahead of the pack with respect to current requirements. It also positions you to successfully pivot when new regulations are created.
By hitting these three milestones, companies can set themselves up for ESG success in 2023.
Evaluate your sustainability budget: Understanding how much of a budget to set, and how to set it, is crucial. ESG programs are particularly tricky, as they cover a wide array of functions — sustainability, engineering, procurement, legal, IT and quality control, for example. There is also no “one-size-fits-all” approach. That’s why it’s important to evaluate whether your budget is sufficient to achieve your sustainability goals.
Allocating your sustainability budget appropriately will allow you to create a long-lasting, robust and effective program to address ESG requirements.
Dive into your supply chain: Various risks are buried deep in your supply chain. Take environmental risks — 90 percent of environmental risk lives in a manufacturer’s supply chain. The further upstream the supplier is, the less visibility a manufacturer has, making it even harder to identify and address these risks.
Therefore, creating a plan to collect, analyze and act on all necessary data is vital. This may be done either by building a program internally or by using a platform that can dive deep into your supply chain. You can’t solve a problem you don’t know exists, and with more regulations coming in 2023, actioning this data is vital.
Turn your suppliers into allies: Businesses need their suppliers to be partners in eradicating forced labor and other ESG harms from their products. Improper engagement can introduce friction in the supplier relationship and — worse — cause suppliers to hide and obscure problems. That’s why cultivating collaborative, open relationships with suppliers is a fundamental aspect of ESG compliance.
For example, supplier education and engagement are crucial for compliance with the German Supply Chain Due Diligence Act (SCDDA), conflict and responsible minerals regulations, the UFLPA and even product compliance regulations.
Put simply, better supplier engagement results in better outcomes, positioning you for success.
The time Is now: ESG is no longer in its nascent stage. Existing regulations and market expectations are already affecting businesses’ bottom lines and market access, among other things. This trend is not going away, nor is it slowing. If anything, it’s accelerating.
In the European Union alone, forthcoming legislation like the EU Corporate Sustainability Reporting Directive (CSRD) and the EU forced labor ban present organizations with new potential requirements that could affect market access, profits and more. They also offer businesses new opportunities to contribute to a better and more sustainable future for all.
Yes, there will be puzzles associated with ESG, but puzzles are meant to be solved. Businesses that proactively embrace these challenges and find solutions will be the ones that reap the greatest advantages.
Those that don’t can expect impacts to their market access, brand and bottom line.
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Image credit: Assent
Sarah provides direction to Fortune 500 companies on human rights due diligence and ESG strategies with a focus on supply chain impacts. She also leads Assent’s B-Corp Certified corporate sustainability program. Following the 2013 Rana Plaza collapse in Bangladesh, she supported the United Nations International Labour Organization’s work promoting labor rights reform in the garment industry. She has also worked for a range of rights-based non-governmental organizations (NGOs), including Plan International and the Canadian Network on Corporate Accountability. She is the current chair of the Slavery and Trafficking Risk Template Working Group of the Social Responsibility Alliance.