Risk Trends in 2024 and Beyond: Environmental, Social, and Governance (ESG)

Are you getting the balance right?

In 2023, the International Sustainability Standards Board (ISSB) issued two new standards related to sustainability disclosure and reporting (IFRS S1 & S2). This year also saw new Canadian legislation (Bill S-211) related to organizations’ responsibility to mitigate the use of forced labour and child labour in their supply chains. These measures are only the beginning of what is likely to be an onslaught of ESG-related regulation and legislation in the years to come.

It is imperative that organizations not only be proactive in aligning with these standards but also anticipate the environmental, social, and governance requirements around the corner. It’s clear that ESG is not a passing trend, nor is it likely to be a partisan issue that waxes and wanes with the election cycle. Electors want to see businesses take more accountability for the impacts of their business decisions. Governments are responding by drafting laws with sharper teeth, and many organizations are at risk of being caught unprepared.

Most of the focus to date has been on the environment and, to a lesser extent, social issues such as the above-mentioned problem of indentured servitude and human trafficking. In time, we will see more and more focus on the social and governance elements of ESG.

Organizations have an opportunity to get ahead of the conversation. Equity, diversity, and inclusion (EDI) is one area of focus that organizations will want to be paying attention to in the year ahead (social) — especially as it relates to representation on boards and senior leadership positions (governance). It’s also foreseeable that transparency around corporate donations, sustainability reporting, and executive compensation will continue to gain traction as a new area of focus for the ISSB.

At the same time, it would be ill-advised to lose focus on the environmental pillar, considering the record-breaking heat this summer and the unprecedented number of wildfires. If anything, pressure will only increase for organizations to quantify, report, and curtail their greenhouse gas emissions.

Key questions to ask

• Has your organization set realistic and defendable ESG targets that are respectable in relation to peers in your industry?
• Have you assessed the impact of inaction or insufficient progress in driving ESG-related changes?
• Are you confident you can trust the integrity of the data used to calculate your ESG metrics?
• Are any of your targets going to be difficult or even impossible to achieve? If yes, you must determine if you want to continue with this target.
• Do you know how your employees or external stakeholders view the ESG targets of your company? Are they content or disappointed? Is there a risk that this could harm the culture or perception of your organization?

Red Flags

• Lack of climate change mitigation, environment, and biodiversity strategies and detailed plans
• Weak governance architecture around emergency and incident preparedness
• Increased reports of harassment or discrimination, unwanted turnover, challenges in hiring, low/declining engagement scores
• Lack of rigorous EDI strategy (linked to corporate strategy) or failure to deliver on the strategy
• Links with suppliers or contractors involved in human rights abuses, lack of supply chain transparency
• Increased health and safety violations
• Lack of community engagement, lawsuits, public protests, negative media coverage
• Material increase in whistleblower tips (i.e., corruption and bribery)
• Lack of clarity around responsibility for fraud prevention

Internal Audit Project Opportunities

Environmental

Social

Governance