ESG Summit: Businesses that are adapting should look beyond what is financially material
During a session at Compliance Week's virtual ESG Summit, the vice president of internal audit and enterprise risk at aerospace company Lockheed Martin described how firms must build resilience as they prepare for future environmental, social, and governance issues.
Christopher Geiger simplified ESG into a wheel, indicating what to consider when considering difficulties in each sector.
Environmental, as one might imagine, included factors relating to climate change, such as carbon, energy, water, waste, and circularity. Social categories included diversity and inclusion, workplace safety, data privacy and protection, and customers and community. Governance stated that ethical corporate practices, board structure, disclosures and reporting, and CEO compensation were all part of governance.
While ESG is only three words, it encompasses many facets of how firms can operate more efficiently, ethically, and financially soundly.
“Sometimes you have to take out some of the buzzwords that cause people to lock in to certain thinking and open it up,” Geiger said. “One way to do that is to call it strategic nonfinancial materiality.”
It’s important to think of sustainability initiatives in terms of strategic nonfinancial materiality when it comes to what Geiger termed as the “tragedy of the commons.”
“When we come across something we can use with no associated cost, we historically 100 percent of the time overuse and mismanage it,” Geiger said. “If something is common, we manage to mess it up.”
According to Geiger, examples of this include the atmosphere, oceans, and low earth orbit.
According to Geiger, organisations can innovate their thinking by anticipating a problem and "band[ing] together with industry [or] with other people who use such commons."
The term "double materiality," which is typically connected with the European Union's Nonfinancial Reporting Directive, is one way to think about this, according to Geiger. Companies must evaluate their impact on society and the environment in addition to how sustainability issues affect the organization.
“In the U.S.,” Geiger said. “… I think we’re very well focused on financial materiality.”
Geiger also mentioned "dynamic materiality," a concept used by the World Economic Forum to encourage corporations to examine some elements year over year that may not be material now but may be in the future as the environment changes rapidly.
“These are dynamically material risks. You may still not know anything about them, but it is important to track them potentially as emerging risks,” he said. “So, innovate how you look at not just what’s a snapshot material now but what are those things that are likely to be material soon.”
In terms of social, Geiger suggested thinking about recent news items that have affected how we engage with employees as an example.
“They didn’t happen in a continuity,” he said. “One day you weren’t talking about it, the next day it was on the front page and didn’t go off. Those are dynamically material things that drastically change, and you should be able to look for them.”
According to Geiger, the Securities and Exchange Commission's proposed climate-related disclosure regulation follows a similar process, requiring corporations to "identify factors that aren't monetarily material but are risks nonetheless."
“This is new, and it’s going to affect the assurance functions,” including internal audit, enterprise risk management, and trade compliance, he said. “Assurance functions rely on governance and rules, and as we do this, we are going to expand that governance. When you do, you can expand assurance.”
Regarding internal audit, Geiger said, “Maybe we can apply more automation [and] more data analytics to those areas. There is going to be more governance and rigor applied. Maybe more of our creative aspects and our more human and complex audits can go to other places because if greenhouse gas emissions are going to be extremely rigorized, similar to financials, maybe that can be a robotic process automation.”
By fLEXI tEAM