As mentioned in the General Overview presented at the introduction of this series, the creation of environmental, social and governance (ESG) practices has become more than a mere market trend. Rather, appropriate ESG practices have become a requirement for doing business and effective ESG practices can provide a competitive advantage. As will be discussed throughout this series, business partners, customers, and consumers are increasingly focused on whether a company has exhibited a real and tangible commitment to implementing effective ESG practices. Building an ESG program goes far beyond public declarations and commitments about the implementation of a mere non-effective program. As a preliminary matter, before navigating the scope of policies and procedures, it is essential to address the key element for creating an effective ESG program: a company’s culture.
Establishing a corporate culture aligned with ESG principles is not a simple undertaking. It requires the adoption of various measures to, among other things, guarantee the well-being of employees, promote diversity at all levels of a company’s organization, provide transparency and integrity, address the conscientious use of resources, and mitigate the impact that a company may have on the environment. The foregoing measures can only occur through effective corporate governance.
Corporate culture and effective governance are interdependent and based on the same fundamental element, which is the concrete support of top management. A company’s culture and corporate governance require the full support of top management, which must be active in implementing and executing an effective ESG program. Management must be responsible for both communicating the necessary support of ESG culture as well as ensuring financial support and providing resources for creating effective ESG practices, adopting sustainability commitments, and promoting practices in favor of diversity, equality and inclusion in the company.
Each organization must understand its business reality and the context in which it operates to be able to identify which governance, social, and environmental actions are appropriate for it to undertake given its principles and values. For ESG practices to be effective within organizations, it is necessary for an organization to create goals for all employees, executives, and business partners by, among other actions, creating policies and procedures to allow for the stakeholders to achieve such goals.
An organization's ESG agenda must have both an internal and an external approach. Internally, an ESG agenda occurs through adopting policies and procedures, creating committees, conducting audits to monitor all processes, establishing internal controls, and other measures to be applied to all executives, employees, and business partners. Outside the organization, ESG agenda should be promoted through the inclusion of ESG principles and practices in an organization's vision and mission, the implementation of social and environmental impact practices, accountability (e.g., social and environmental impact reports), clear communication, transparency, responsibility, and even obtaining certifications from industry groups.
Before creating internal policies and procedures, it is fundamental that organizations conduct a risk assessment to understand the points that need to be addressed to ensure the formulation of practices that focus on the social, governance, and environmental aspects appropriate to the organization's business and industry. In addition, the introduction of periodic internal surveys (e.g., organizational climate surveys) is essential for a continuous assessment of the implementation of ESG practices into the corporate culture.
Another key point for diagnosing and communicating to business partners, customers, consumers, and public authorities, the effectiveness of an ESG program is attention to internal complaints about violations of obligations provided for in the ESG program. In addition to the existence of reporting channels that preserve confidentiality, allow for anonymous reporting, and minimize the risk of retaliation (through whistleblower protections), an organization must adopt measures to effectively investigate any reported violations. Prompt investigation and adoption of appropriate corrective measures (including appropriate disciplinary actions) is a key factor in implementing an effective ESG program.
In addition, in order to be effective, ESG practices and guidelines must involve all of an organization’s departments and business units through dialogue between such units and continuous monitoring, as well as being included as topics to be addressed in board and management meetings on an ongoing basis. The participation of organizational leaders in all matters involving the establishment, implementation and ongoing aspects of an organization’s ESG practices is extremely important. An effective ESG program should be dynamic in that it must be monitored and modified according to an organization’s internal needs, evolving social norms, and market demands.
Considering the complexity of navigating this new legislative, regulatory and particularly behavioral framework, in the next article in our series, we will address the positive governance, social and environmental agendas being implemented by organizations, with a focus on current and proposed regulations in Brazil. In addition, in November 2022, we will hold an event in partnership with Pinheiro Neto Advogados regarding the new carbon credit market regulation in Brazil. Details about the event will be made available in the coming weeks.
Authored by Isabel Costa Carvalho, David Tyler, Ana Laura Pongeluppi, Cintia Rosa, Mariana Matos and Lizandra Baptista.
