The Rise of ESG: Lessons Learned and Best Practices to Avoid Wokeness!

How Will Defense and Public Safety Contractors Navigate this Forthcoming Regulatory Landscape?

When most people think of ESG, they think of investing. Understandably so. ESG investing has been around for many years and only continues to grow in popularity or disdain depending on the political spectrum pointing fingers. ESG investing focuses on companies whose environmental, social, and governance values appear to be for the good of humankind but this is not always the case. In some instances, you have ESG policies that are thinly veiled attempts to radically transform corporations into social justice warriors. In some instances ESG is being used to promote the "woke" culture war to redefine gender, promote critical race theory, and cancel conservatives.

But ESG should be examined from a wider lens too – namely, from the perspective of defense and public safety companies themselves that “shall” operate under the three pillars of ESG. What does this mean for them? What issues fall under the ESG umbrella? And how will new regulatory rulemaking around ESG affect them?

Image source: United Nations

The following article is our attempt to stay out of the political arena of ESG and focus on the cold hard facts that it is here and has been for many years, well before it became a political football. We are digging into the aspects of ESG that nearly all companies can incorporate parts of to help support their contracting compliance with FAR, DFAR, CAS, and many other regulations both domestically and overseas like in the European Union “EU” where they just finalized the Corporate Sustainability Reporting Directive (CSRD) as outlined in the European Sustainability Reporting Standards (ESRS).

We can all play this political game and point fingers at who’s right or wrong or how dangerous certain regulations and laws are but the reality for many of our clients is that to win contracts at the federal, state, municipal, or even international level you must begin to develop and outline policies supporting environmental, social, and governance-related matters. Keep reading to learn more.

What Exactly is ESG?

Let’s start with the basics. An acronym that stands for Environmental, Social, and Governance.

The idea behind ESG is that it’s a corporate strategy or framework organizations can use to assess how they are impacting their communities, employees, customers, suppliers, and other stakeholders, in addition to the environment. In truth, ESG has become a catch-all term for any corporate investment that considers social and environmental responsibility.

In theory, when a company commits to upholding ESG standards, it agrees to act responsibly and ethically when it comes to:

• The environment and its preservation

• Humans and our interdependencies

• The way organizations are governed 

For example, a company that adopts ESG principles may very well take steps to:

• Reduce its carbon footprint

• Minimize how much waste and pollution it produces

• Work with only sustainable and reputable suppliers

• Implement stringent processes to protect its customer data

• Employ a workforce that is inclusive and diverse

Image source: U.S. Department of Energy (DOE)

What Issues Fall Under ESG?

The term ESG covers a wide number of issues in the environmental, social, and governance arenas, some of which are categorized below.

Environmental

The first part of ESG focuses on how a company protects the planet and its natural resources. This includes energy consumption and climate change, as well as:

• Greenhouse gas emissions

• Carbon emission reduction

• Biodiversity

• Deforestation

• Air and water pollution

• Water scarcity

• Waste management

Image source: Deutsche Bank AG

Social

The second part of ESG considers how an organization treats people, including its customers, employees, and the public. Some social issues include:

• Mental health

• Employee engagement

• Labor standards

• Community relations

• Diversity and gender inclusivity

• Customer satisfaction

• Health and safety

• Human rights

• Data protection and privacy

• Projects that help underserved communities (involvement in and funding)

Image source: World Economic Forum

Governance

The final part of ESG refers to how corporations maintain compliance, police/govern themselves, create internal system controls, and meet the needs of external stakeholders.

• Dialogue and transparency with regulators

• Executive compensation guidelines

• Board of Directors composition (structure and diversity)

• Venture partner compensation

• Political lobbying and contributions

• Bribery and corruption

• Tax strategies (internal controls and regulatory policies)

• Whistleblower programs

• Employee compensation

• Hiring and onboarding policies

Are There Any Negatives Associated With ESG?

The short answer is yes. While on the surface ESG might seem harmless – even beneficial, in reality, there are negatives associated with the current movement. Perhaps most egregious of all is the fact that many environmental, social, and governance responsibility advocates essentially force companies to take positions in the political arena on issues that may have nothing to do with their actual business activities. These hot-button political issues frequently include the use of fossil fuels, Second Amendment rights, and welfare policy. In many cases, these advocates don’t hesitate to use shareholder assets – other people’s money – to promote the various political causes they support.

A company shouldn’t be pressured into furthering someone else’s political agenda. So while the concept of ESG – to protect the planet and its inhabitants – is noble on the surface, it’s crucial to delve deeper to identify any ulterior motives and what’s really at stake.

What is Driving ESG’s Popularity?

Society as a whole is propelling ESG forward out of a collective concern for the planet and social harmony. Governments are carrying out ESG initiatives through their policies in response to rising temperatures, mass migrations due to climate change, and increasing food insecurity. Investors, meanwhile, are driving ESG on their part by expecting more accountability from corporations. Many millennial investors, particularly women, are holding the companies they invest in to higher ESG standards than in the past.

Investors are increasingly interested in companies that practice ESG because they have proven to be better performers and less volatile. Likewise, when a corporation undergoes a controversial ESG-related event, chances are good that its stock will be negatively impacted for up to two years. Ultimately, it pays for organizations to approach environmental, social, and governance issues proactively. There are ways to do this without venturing to deep into the political arena and choosing sides on hot button topics while still doing a proactive job of ensuring sustainable best practices, equal rights for workers, and implementing effective controls to protect the assets of your company and shareholders.

How Do ESG Regulations and Rules Impact Companies?

In the past and even more recently, ESG disclosures were made voluntarily by companies. However, as time passes, ESG is becoming more heavily regulated, and there are more significant implications for companies of all sizes depending on how they choose to collect, verify, and act upon this information.

In March 2022, the Securities and Exchange Commission (SEC) proposed new environmental, social, and governance disclosure requirements for companies. The most substantial overhaul to ESG reporting in 20 years, the SEC has indicated that public companies will be expected to enhance and standardize their climate-related disclosures. Additional climate risk disclosures (like, for example, the impact of severe weather events) will also be required.

Similarly, in Europe, the Corporate Sustainability Reporting Directive (CSRD) was adopted in November 2022, which will publish regular standardized reports on companies’ environmental and social impact activities from the fiscal year 2023 onwards. This mandate is anticipated to affect 50,000+ companies, including those with subsidiaries in Europe.

These proposed and adopted regulations represent a growing global push for more transparent and consistent ESG reporting standards by companies, who might turn to:

• Appointing sustainability officers to ensure they can deliver on ESG requirements

• Creating budgets to pay for new ESG policies

• Evaluating supply chain partners and the sustainability of their operations    

As it stands now, a company is better off voluntarily reporting environmental, social, and governance risks to investors and clients rather than turning a blind eye. This can include a broad swath of issues, such as its reliance on oil, gas, and coal, exposure to sea-level rise in coastal operations, human rights violations of the countries it operates, and lack of board diversity and CEO transparency. Although regulatory change is on the horizon, what currently matters is that companies disclose these potential future bottom-line risks, not that they necessarily do anything differently in the present.

What Roles Will a Sustainability Officer Play?

Let’s take a look at the many ways a sustainability officer or team will be able to assist companies in the future that are trying to manage an ever-changing regulatory landscape. 

Environmental Policies/Stewardship

Foreseeable issues might include:

• corporate climate policies

• energy use

• waste

• pollution

• natural resource conservation

• treatment of animals

A sustainability officer could evaluate any environmental risks a company might face and determine how it will manage them. Considerations might also include direct and indirect greenhouse gas emissions, toxic waste management, and environmental regulations compliance.

Social Responsibility

In this case, a sustainability officer or team would examine the company’s relationships with internal and external shareholders, vendors, and others. They might ask the questions:

• Does the company hold suppliers to its sustainability standards?

• Does it donate a percentage of its profits to the local community or encourage employees to perform volunteer work?

• Do workplace conditions reflect a high regard for employees’ health and safety?

• Does the company take unethical advantage of its customers?

Corporate Governance

Under this pillar of ESG, a sustainability officer would hold its client to certain standards that include:

• The use of accurate and transparent accounting methods

• The pursuit of integrity and diversity in selecting its leadership

• Accountability to shareholders

Companies that abide by ESG principles avoid conflicts of interest in their choice of board members and senior executives, don't use political contributions to obtain preferential treatment and engage in illegal conduct.

Companies Must Be Prepared for the Upcoming ESG Regulatory Onslaught

ESG ultimately presents a mixed bag of positives and negatives. No matter how one personally views the ESG movement, its impact on various entities across the board – from society as a whole to governments, corporations, small businesses, and investors – is being increasingly felt. As it’s more widely adopted and regulated, companies must respond in kind or risk being left behind. Fortunately, assistance will likely come in the form of sustainability officers and teams.

Ready to take your organization's ESG compliance to the next level? Contact IntelAlytic today to learn how we can help you navigate the complex regulatory landscape, develop policies and strategies that support your ESG goals, and stay ahead of the competition. Our team of experts is ready to help you achieve sustainable success and meet the growing demands of investors, customers, and regulators. Don't wait - get in touch with us today to learn more.

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