The role of ESG policies in shaping sustainable businesses

Business Recorder

6 days ago

Sustainability and ESG once buzzwords, have evolved to being seriously considered by both corporates and policy makers. Many argue what is the difference between the two.
Technically speaking, the scope of sustainability is much broader and ESG can be taken to be a sub-set of sustainability. ESG stands for environment, social and governance, which essentially when combined covers a broad spectrum of areas within which a business operates. Generally, both these terms are concurrently used.
With growing awareness, value chains are inquiring about the ESG practices of their business partners making a strong business case for implementation. Considering the importance, regulators have appropriately acted by introducing regulations and mandatory compliance with respect to sustainability.
One of the key requirements for corporations is having a policy for sustainability and ESG. SECP is the primary regulator of companies in Pakistan. It has implemented numerous changes pertaining to sustainability in the regulatory framework, particularly in the Code of Corporate Governance for Listed Companies, 2019 (the Code), requiring a company's Board of Directors to establish and maintain an ESG policy.
As per PICG ESG survey carried out in 2023:
On a question 'Does your organization have a defined action plan related to the ESG strategy?
This makes a very strong case for the companies to have a board level ESG policy to steer and speed up ESG agenda.
Having a board level ESG policy is also important from a governance perspective as it brings ownership and clarity at the highest level, thereby making it easier to navigate the specific agenda across the organization to achieve the desired objectives.
The Code requires companies to have a policy addressing the following: 'Environmental, social and governance (ESG) including but not limited to health and safety aspects in business strategies that promote sustainability, corporate social responsibility initiatives and other philanthropic activities, donations, contributions to charities and other matters of social welfare'.
The sustainability agenda can be better achieved through a board level policy that covers the following elements:
Linking the mission and vision statement and values:
A company's mission and vision statement and set of values, act as the foundation on which the company exists and operates. Embedding sustainability into these core principles is crucial for integrating sustainable practices into all aspects of the business. To achieve this, companies should review and revise their existing mission and vision statements to include sustainability.
Risk management:
Companies have risk management programmes in place to identify, analyze, and estimate the criticality and impact of business risks, including performing scenario analysis for better impact estimation.
It is important that a company analyze the possible impact of ESG related risks that could have an impact on the company's future business, profits, cash flows and market positioning and devise an action plan accordingly.
Ethical culture:
An important role of the board is to ensure that ethical values and culture are promoted and practiced company wide. Areas such as transparency in business dealings, maintaining confidentiality of data, anti-bribery, anti-harassment and anti-sexual harassment etc.
The objective should be for all employees to be aware of and adhere to ethical values. These values should ideally be consolidated into a code of conduct that all employees sign, demonstrating their commitment to uphold them. From the ESG lens, this approach represents compliance with the social aspects. Ensuring this is adequately covered in the ESG policy will help adherence to social compliance requirements.
Whistle-blowing programme:
A whistle-blowing programme is a vital aspect of governance. It helps identify wrongdoings within the company and throughout the value chain. This programme encourages employees, business partners, vendors, and suppliers to report any wrongdoings they observe or experience, with the assurance of confidentiality. Additionally, it serves as a platform for reporting issues related to ESG matters.
Action plan, KPI and significant issues:
Management must inform the board of any significant matters related to company business or operations. Additionally, management should bring any material ESG issues to the board's attention, including the status and challenges with respect to ESG policy; updates on ESG KPIs and milestones set and achieved; non-compliance and penalties imposed due to non-compliance with any regulatory body concerning ESG and updates on CSR activities carried out.
There should be adequate coverage of this in the policy.
Finally, to ensure the governance of the ESG policy framework, it is essential that the company's board includes a diverse mix of members, such as independent and female directors, who possess the necessary competency, experience, and exposure to support and drive the company's ESG initiatives.
The ESG policy serves as a document which not only aligns a company's internal processes to ESG but also enables a company to communicate this externally to business partners, customers and investors. This will support any enquiries about ESG indicators, and the actions taken by the company to ensure related ESG KPI's are met. Furthermore, a robust ESG policy framework will support any future requirements for independently audited statements.
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