By analyzing the recent past of the Governance, Risk Management and Compliance (GRC) area, it is possible to identify that companies directed a greater focus on financial or operational risks and controls, while compliance risks and strategic risks involved, at most, the topic environment – especially in companies whose segments were related to natural resources, such as agribusiness or energy. In addition to being little discussed, this topic was monitored only by the responsible technical areas, without much visibility or periodic reporting to senior executive management.
As we can see in the current scenario of the domestic and global markets, this is a behavior that can be considered outdated. We are beginning to notice movements that fail to treat sustainability as just environmental or social projects sponsored by companies so that it becomes connected to business strategy. Currently, to carry out an effective risk mapping it is necessary to consider the ESG risks, that is, those related to environmental, social and governance aspects, and how this information impacts the organization's economic and financial performance. Once this mapping is done, it is possible to monitor them and report them to the boards and the market as best practices.
This movement indicates that organizations need to be profitable, but sustainably by preserving not only their continuity as a profitable business, but also the health and stability of the ecosystem and community in which they operate.
Furthermore, it is of paramount importance to be aware of the demands of the main stakeholders that are driving this issue. On the one hand there are financial institutions and regulatory bodies demanding greater structure and transparency in communication regarding ESG aspects, mitigation, and adaptation actions adopted. On the other side there are consumers who are increasingly more informed and interested in companies focused on sustainability and that have "aware products," which means an increase in the awareness of the general public for problems related to sustainability, consequently reflecting on the performance of this company in the market and in the interest of shareholders.
Once company leaders have social and environmental responsibility, that is, the awareness that all economic activities generate some social and environmental impact, it is also necessary to understand how to eliminate or minimize these impacts without reducing the financial result.
Among the main challenges of implementing ESG in organizations are related to issues such as:
Currently, there is no single standard, with clear and regulated criteria of what would be the best ESG practices. The performance within the ESG context is plural and diverse, which increases the complexity in the comparability of the effectiveness of these measures. In the social part, for example, some companies engage with social projects in their communities, others seek to develop them through education and qualification. Some publicly defend the banner of diversity, others set goals to ensure gender equity.
Are there many ways to develop practices, but which is the best or most effective? The answer to this question lies in the analysis of the type of business considering its materiality (relevant topics), the system in which it operates, the correlated audiences and which ESG aspects are important in this context. And, based on this understanding, identify the impacts and associated risks, define best practices and ESG criteria to be integrated, monitored and communicated.
There are still many difficulties on how to use the main global standards and frameworks of ESG metrics to measure the value creation of companies and how to carry out sustainability reporting effectively. In the area of ESG investments and sustainable finance, the demand for pragmatism and clarity with regard to ESG criteria and their connection to value creation is gaining increasing prominence.
The various organizations and institutions engaged and active in the ESG theme, as well as important leaders in the world economic scenario, have been making important efforts in this direction. The European Union plans, by the end of this year, to finalize a Regulation with clear and objective metrics to be used by companies, which will be important for investors and regulatory bodies to have a reference. Here in Brazil, the trend is for the market to follow what will be adopted in Europe, but certainly some adaptations will be necessary.
Companies still need to find a balance on the cost-benefit ratio. Even if there is an investment at first, it is essential to have a long-term vision. For example, when a company decides to produce with less waste of materials or natural resources, it may be guaranteeing its continuity by maintaining its own raw material. The same applies to cases of innovation with significant changes in raw material and/or process. What appears to be a high investment in the short term, it may become a decision with greater sustainability, durability or more competitive in the future. In addition, financial institutions are already showing a greater willingness to reduce the cost of capital and change the allocation of money to businesses with more conscious and responsible productive ways in the long term.
All these changes brought about by greater attention to ESG aspects and their direct influences on the conduct of GRC functions add to the current context of a pandemic that has not only accelerated the process of awareness and incorporation of the sustainability agenda in business, but will also be a watershed with regard to the posture of institutions.
With Covid-19 it was possible to check that we live in a systemic and integrated world. A health crisis was capable of causing abrupt changes in all sectors, in society, in governments and in our civilization, as it triggered changes in the behavior of individuals and in the ways of working. The pandemic aroused a strong feeling of uncertainty and brought to light the importance of the interdependence and interconnection between economic activities, society, and nature.
In a context of showing vulnerabilities and uncertainties, investors are looking for safer, more resilient and sustainable options, which is why ESG practices have become an important competitive advantage in decision-making. After all, no investor wants to associate their brand with activities that negatively impact and put their reputation or finances at risk.
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