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Top tags: Compliance  Governance  Board of Directors  Corporate Governance  IGCA  Rebranding  Risk  Risk Management 

The ‘S’ in ESG: Challenges and Initial Ideas for Establishing Metrics
Posted By Andres Mateo Jarrin Cuvi, The Association of Governance, Risk & Compliance, 09 November 2022

An ESG rating measures the exposure a company has to long term Environmental, Social and Governance risks. The idea was first introduced in a 1988 article by James S. Coleman as a way of investing for collective growth rather than for self-interest. The ‘S’ in ESG is the social component – all the ways in which a company interacts with their employees, the communities in which it operates, and the social issues that arise from its operation.

Regulation of ESG is expanding quite rapidly both in Europe and in the US, with new requirements for businesses to report on and prevent adverse impacts. The European Commission has adopted the Corporate Sustainability Due Diligence Directive (CSDDD), which, among other things, is a strong initiative in the EU’s human rights strategy. The Corporate Sustainability Reporting Directive (CSRD) will reinforce the EU’s Non-Financial Reporting Directive. Businesses now need to formally report the three elements of ESG alongside the finance aspects of their operation and should demonstrate how the business aligns its values with its bottom-line aim of making maximum profits. Upcoming legislation will formalise the need for companies to define, track and report on their ESG progress with regulatory consequences for failures in this area.

Social consciousness in investing and operating has been a topic of conversation for a good while now, and has been increasingly applied voluntarily by a great many companies who have perceived it either as the ‘right thing to do’ or, more cynically, as a means to attracting investment and gaining status. It is certainly true that socially conscious investors may use ESG data to determine which companies have risk factors that could affect the social climate. The ESG metric can further help them decide the companies to fund so they can feel good about their investments.     

The question that arises next is what criteria should be considered, reported on, and acted upon. Companies need to identify the ESG goals that will align with their mission and vision and also then seek to set benchmarks in the ongoing process of improvement. Because organisations vary widely, there cannot be any one single approach that will function for all. It is also important to note here that regulation of ESG reporting is not universal across all industries.

So, businesses must now seek out ESG metrics, but they face a number of challenges. Firstly, it is much easier to measure environmental sustainability than to deal with the social element. Data is more difficult to obtain and there is a lack of standardisation in the field. Standards need to be set, perhaps with units of impact being considered within areas such as employment or education. But this will entail the setting up of some form of evidence base to present such information to stakeholders, potential investors, and regulatory authorities. The need for some uniformity has led to the establishment of the International Sustainability Standards Board (ISSB) with a mandate to create ESG disclosure rules for companies. Its new sets of standards will certainly help in part to standardise this arena.  

In this short article, there follow five suggestions for what needs to be considered and the approaches to gathering and reporting information that may be adopted in your particular situation.

Buy in

There are a number of firms that operate locally and internationally and will conduct an ESG evaluation and ensure that your investments and record-keeping meet standards set in your jurisdiction. These independent companies create standard reports, which can form the basis for your ESG compliance process. They include:

Warning! It is crucially important to point out that simply handing over all responsibility in this way does leave an organisation at risk of failing to match the assessment and reporting to their own mission and values, and thereby missing out on the opportunity for valuable development.  

Limit your scope

Clearly a company must have a grasp on the risk factors that the social effects of their operations have. However, once these vital issues are ‘covered’, in terms of investment and development, it may be prudent to consider the advice offered by Nasdaq Contributor, Betsy Askins, to ‘identify three to five measurable ESG criteria that are material to your businesses and your constituencies, and are aligned with your corporate strategies’. You cannot record and report on everything.  

An opportunity for advance

Compliance can advance ESG and also other goals within the business, and in particular those linked to human resources. They may seek to improve company-wide diversity, equity, and inclusion efforts, or invest in mental health, safety or even removing wage gaps. Equally, they could focus on employees’ health and safety, the work environment, and the products a company produces. The key is, as was suggested in the previous point, that they can form a direct and invaluable link with corporate strategy.  

Qualitative and quantitative metrics

When collecting metrics, it is useful to gather and present information in both qualitative and quantitative forms. Words can be more valuable than numbers to inform about ESG impact. This might include a company’s strategies, processes and other defining characteristics which cannot be set out in numerical patterns. Of course, quantitative ESG metrics, in statistics and figures, can be inserted into a program to calculate patterns, percentages and other data that can inform company decisions, but it is important to recognise that both categories of metrics have their place.

Data management

Comprehensive data will make up a significant sector of the recording and reporting of social metrics, and for that reason it is useful to consider a few pointers to enhancing the value of this data. Firstly, organising the reporting clearly by sector can make it clearer when looking at a company in a specific industry or niche. Secondly, using sector benchmarking can be a valuable way of presenting the acceptable or expected ESG standards for a certain industry and thereby assist in making valid comparisons. Related to this point, it is important to also include scoring standards that explain how to rate ESG metrics against the sector benchmarks. Without these, the data is of little value to anyone. Thirdly, data must be traceable. This emphasises the need to collect sources and follow accepted reporting methods to verify and validate the data used for calculation. Finally, data needs to report in as near to real-time as possible. This will show how ESG metrics and factors are developing and may also ensure prompt intervention where urgent situations arise.

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Measuring the Effectiveness of Your Corporate Governance: What to Look For
Posted By Andres Mateo Jarrin Cuvi, The Association of Governance, Risk & Compliance, 03 November 2022

Writing for INSEAD, Dr. Yilmaz Argȕden talks of good governance as being ‘CRAFTED’ – a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency and Effectiveness that is Deployed throughout the organisation. It is reasonable to say that effective corporate governance should underpin every decision and action taken by the organisation. This means, therefore, that its effectiveness needs to be measured.

This is all good, at the level of an overview, but deciding what to measure is a much more challenging issue. Firstly, there are regulations which must be complied with. These are varied, forming a patchwork of ESG regulations which vary in different jurisdictions, and are constantly evolving with new legislation. Adherence here must be measured if corporate governance is to be effectively assessed. But, in addition to adherence, it is also important for organisations to determine what level of impact is being achieved, and whether its strategic objectives are being met. There is no one accepted way of measuring good governance, because all organisations are different in make-up and strategic direction. However, here we highlight some of the more important indicators of the effectiveness of corporate governance.  

Board effectiveness

The effectiveness of the board is very closely tied to the success of the organisation. Boards should consider, and indeed are required in some jurisdictions, to evaluate themselves as part of the compliance code of their market. This effectiveness can be assessed by looking at roles, productivity, competencies, communication and recruitment. Many companies choose to make use of technologies such as ‘Diligent Evaluations’ to streamline their board evaluations, improve board performance and also track how well the culture of the board is filtering down into the organisation as a whole.

Diversity in the board is also an important assessment point. However, this should not just be in terms of demographic characteristics but should also include an evaluation of the relevance of the experience of board members in tackling the main challenges the company is facing. 

Finally, it is important to note that the board’s effectiveness will be seriously compromised if information and reporting systems are not adequate. Ensuring that the right, clearly presented information reaches the board is crucial. Then, working to critically review, stress-test and fully understand assumptions made in this information will put the board in the best possible position to make fully considered choices.   

Compliance sanctions

In an ideal situation, an organisation will already be measuring the impact of its governance long before it reaches the point when it is sanctioned for non-compliance. However, it is fair to say that if it does fall foul of regulators, this can be a good way to bring issues of the governance process to the surface. Tracking any interactions with regulators, making internal and external stakeholders aware of requirements, and communicating deadlines and responsibilities effectively is a useful approach to improvement. Needless to say, if there are repeated infringements of regulations, then those in governance will need to undertake a more thorough and penetrative review of the whole workflow to identify the important causal issues.     

Staff turnover and talent attraction

When there is good governance, it is often evidenced by an organisational culture that people want to be part of. A clearly defined mission and vision, backed up with an understanding of how different roles will play a part in executing that strategy, typically lead to improved staff retention and may also improve talent attraction. Measures such as staff turnover, time to fill vacancies and application numbers for positions can be a useful measure of the impact of good governance. Additionally, high employee engagement, low absence metrics, community engagement and the removal of gender pay gaps and other barriers to diversity all speak of a healthy organisation with effective governance. 

Fluctuations in share price and investor/stakeholder interest

When poor governance is in evidence and there are issues with compliance, the company’s share price can be a very clear metric. Investor confidence is shaken, questions are asked and it becomes easy for stakeholders to feel that they have been mislead or let down.  When there is a reliable and ingrained level of good governance, with full and robust reporting and transparency, investor interest and trust are very likely to grow. However, it is worth adding one caveat here; it is important to view the whole market, alongside that of any individual company, and assess if other factors unrelated to governance are having a significant effect on share price.  

Risk management and mitigation

It is clear that good governance and secure risk management are closely aligned. Therefore, measuring and proactively applying risk management and mitigation are strong indicators of good practice in governance. By closely monitoring investments, reviewing market choices made and tracking operational practices, the impact of good governance can be inferred. Are processes and approaches deployed systematically, and is there evidence of benchmarking against the best in the industry? Further, is there an evidence trail of the continuous critical monitoring of results which then leads into improvements and development? It is worth particularly mentioning the need for IT governance to be strong. Training levels, regular inspection and review of the IT infrastructure, and a robust mitigation plan in place to deal with cybersecurity issues speaks strongly of good governance in this area.  

Output measures

It is vital that output measures should be evaluated, in addition to those of input. These will include not only financial performance, but also indicators such as customer, employee or other stakeholder satisfaction and brand image. Operational performance and financial measures are closely entwined and being able to assess the health of this relationship can make clear where the business is, what needs to change and how operational issues can be improved. Benchmarking the organisation’s output results against similar businesses in the market, and also against its past patterns will make this an even more robust measurement. 

Time will show

Continuous improvement, through some kind of Plan – Do – Check – Act process, should be embedded in the workings of the board and the governance of a business. The process of reviewing performance and investing in development and improvement is the important sense here – and that process is not just about the current bottom line. Businesses need to also focus on how results are obtained. It is possible to achieve some impressive results over a particular period, but leaders must ask if this has been the result of excessive risk-taking which may not be sustainable in the long run. It should also be clear that there is a time lag between decisions and their impacts. It is important that any evaluation of governance should consider the longer term outcomes as more valuable than short-term successes.  

Tags:  Board of Directors  Compliance  Corporate Governance  Governance  Risk Management 

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The Story of Our Rebranding!
Posted By Andres Mateo Jarrin Cuvi, The Association of Governance, Risk & Compliance, 11 April 2022

 

Since our inaugural days two years ago, our Association has sought to be one of the leading global advocates of Governance, Risk Management, and Compliance (GRC) for the financial services world and beyond.

 

From the get-go, our aspirations have always been international in nature, as demonstrated by our more than 600 members in close to 50 jurisdictions spanning Europe, the Americas, Middle East, Asia, and Africa.

 

Today, we take the next step in our GRC adventure, striving to bolster the impact best GRC practices have on organisations and individuals across the globe.

 

Introducing The Association of Governance, Risk & Compliance (AGRC).

 

This change in our name marks a new era for our Association, one that highlights our rapid international growth and adds necessary attention to the rising role of Risk Management in the operations of financial institutions and professional services firms everywhere. A role that regulators are increasingly noticing and even enforcing.

 

And it’s not just a change in name.

 

As our loyal member, you are part of this journey of growth and development. You are entitled to everything you have enjoyed before but also now so much more.

 

Your professional qualifications and certificates, now bearing the name of AGRC.

 

Your access to thought leadership and unique learning opportunities.

 

Your discounts to AGRC events, services, products, and more.

 

The myriad of opportunities to build your brand, market your services, and propel your business forward.

 

That feeling of belonging to an Association that builds bridges and supports some of your greatest professional passions.

 

More importantly, as part of this rebranding effort, you will have access to our new AGRC Member’s Portal.

 

One where you can build your own professional profile, advertise career opportunities, participate in working groups and events, contribute to AGRC’s knowledge base, exchange ideas with likeminded professionals, accumulate CPD credits, and plenty more.

 

Similarly, AGRC will be rolling out later this year new Certificates focusing on Corporate Governance, Risk Management, and Environment, Social and Governance (ESG), rounding out a comprehensive collection of qualifications that perfectly complement the roles, responsibilities, and interests of today’s GRC professional.

 

Whether you are part of the Board, a Senior Manager, or a crucial member of the Governance, Risk and Compliance functions, you are the driving force behind GRC in your organisation.

 

Take pride in your role as a skilled, knowledgeable, and responsible GRC professional who’s propelling your organisation forward, helping it set and fulfil ambitious goals, tackle those difficult days ahead, and carry out business in a transparent and ethical manner.

 

We hope you embark on this exciting new journey for our Association, one that hopes to contribute its grain of sand to the GRC world and champion the amazing work being carried out by each and every one of you in this growingly important and promising field.

Tags:  Compliance  Governance  IGCA  Rebranding  Risk 

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