Environmental, social, and governance (ESG) is a framework that holistically assesses the sustainability of a business or investment. Investment groups, business continuity planners, enterprise risk management personnel, and third-party risk management (TPRM) programs utilize ESG to manage sustainability risks.
When utilized in a TPRM context, personnel use ESG to evaluate specific risks, such as human rights, environmental concerns (i.e., carbon emissions or climate change), legal or compliance risks, and other supply chain disruptions.
Developing a robust ESG program allows your organization to manage ESG risks better and elevate its third-party risk management program. Keep reading to learn how to integrate ESG initiatives into your TPRM program, discover key ESG considerations, and improve your organization’s overall ESG performance.
What is the ESG Framework?
The ESG framework takes a comprehensive approach to sustainability and extends beyond just environmental issues. The framework is composed of three key pillars:
Viewing an investment or business through an ESG lens allows personnel to evaluate how the investment or business will manage risks that could emerge from dramatic shifts in environmental, social, and economic systems.
ESG methodology and viewpoints are the product of several other historical movements that focused on sustainability, including:
- EHS (Environment, Health, and Safety): 1980s movement in the United States that focused on reducing pollution and improving labor conditions
- Corporate Sustainability: 1990s evolution of EHS that focused on reducing environmental impacts (misuse and greenwashing became common)
- CSR (Corporate Social Responsibility): Early 2000s movement that focused on corporate philanthropy and employee volunteerism
ESG first appeared in a 2004 UN report. However, it wasn’t until the 2010s that the ESG framework that is popular today was born. Today, ESG focuses on preventative sustainability in all three areas: environment, social, and governance.
Challenges & Benefits of ESG Integration
ESG factors are consistently recognized as crucial metrics to evaluate third-party risk. Each group of factors interconnects with third-party risk in several ways. Here’s how:
- Environmental Factors: Climate change, natural disasters, and other environmental factors can directly impact a vendor’s operations. Organizations that don’t manage environmental factors correctly are at risk of resource scarcity, regulatory fines, or reputational harm.
- Social Factors: Human rights, modern slavery, labor practices, and other social factors can directly impact a vendor’s stability. Organizations that don’t manage their social responsibility appropriately are at risk of lawsuits, operational disruptions, and labor shortages.
- Governance Factors: Fraud, corruption, and other governance risks can impact an organization’s reputation and financial stability. Organizations that don’t address governance problems will likely suffer monetary fines and/or reputational attacks.
Integrating ESG initiatives into your TPRM program will help your organization further manage third-party risks. However, the integration process comes with its own set of challenges.
These are the most prominent challenges organizations face when implementing ESG:
- Obtaining reliable and accurate ESG data that covers their entire third-party ecosystem
- Developing ESG metrics that align with industry or region-specific regulations
- Developing criteria to evaluate subjective ESG factors throughout the vendor lifecycle
- Navigating ongoing regulatory and compliance updates
- Inserting ESG considerations into onboarding and due diligence efforts
- Balancing the expectations and priorities of key stakeholders
- Embedding ESG considerations into core decision-making
Integrating ESG into an organization’s Vendor Risk Management program will result in many benefits despite being challenging.
These are the most impactful benefits organizations will gain from ESG implementation:
- Enhanced Vendor Risk Management
- Improved financial performance
- Reputation and brand enhancement
- Heightened risk intelligence
- Increased competitiveness
- Streamlined vendor procurement
- Regulatory resilience
- Long-term operational sustainability
- Strong stakeholder and customer trust
8 Steps To Integrate ESG Into Your TPRM Program
Integrating ESG considerations into your existing TPRM program will require completing several essential steps to ensure comprehensive implementation. Follow these steps to start implementing ESG initiatives into your program today:
- Assess current procedures and TPRM policies
- Identify ESG factors relevant to your business
- Integrate highlighted factors into your vendor risk assessment process
- Enhance due diligence and onboarding procedures with ESG considerations
- Embed ESG initiatives into vendor contracts
- Develop systems to track and collect ESG data
- Develop an expectation of continual improvement
- Continually monitor and refine how your TPRM program addresses ESG initiatives
During the pre-assessment phase of ESG implementation, you and your team should evaluate your existing TPRM program, identifying strengths and areas for improvement. Look for places where your TPRM program already considers ESG risks and discuss how to build upon these moving forward.
While completing this step, talking with diverse stakeholders and departments is essential to ensure your program meets all organizational needs. The critical departments with ESG considerations are procurement, legal, marketing, and operations.
2. Identification of ESG Factors
Next, identify the ESG factors most important to your business, industry, or the type of third-party providers you rely on. Then, use the relevant factors you determine to create an ESG framework that outlines what criteria you will refine your TPRM program to address and evaluate.
At this time, you can also evaluate the importance of the ESG criteria you identified by comparing each to your organization’s risk profile and overall risk tolerance.
3. Integration of Relevant ESG Factors
After identifying ESG factors relevant to your operation, it’s time to integrate them into your vendor risk assessment process. Personnel should modify all current risk assessment procedures to evaluate identified ESG risks. To make vendor evaluation easier, your organization can develop a scoring methodology or KPIs to objectively measure the ESG performance of all new and existing third-party vendors.
4. Vendor Due Diligence & Onboarding Enhancement
Next, you must incorporate your ESG framework into your existing vendor due diligence and onboarding procedures. One way to enhance your organization’s due diligence and onboarding process is by creating an ESG security questionnaire that evaluates how aware vendors across your extended enterprise are of critical ESG risks and their performance in mitigating them.
The questions included in an ESG security questionnaire can vary from simple “yes” and “no” questions to open-ended questions that allow vendors to express their ESG awareness in their own words.
5. Contractual Agreements
In addition to creating an ESG security questionnaire, your organization can ensure ongoing vendor performance by implementing ESG requirements into your contractual agreements with vendors. When completing this step, make sure agreements use measurable KPIs and other metrics. Identify the ESG expectations and responsibilities your organization intends to place on its vendors.
6. ESG Data Tracking & Collection
Once your organization has identified and implemented critical ESG criteria into its existing procedures and policies, you’ll need to develop an ongoing system to collect and track ESG data. Your organization can leverage a vendor risk management solution, like UpGuard, to help gather and collect accurate vendor data.
With a Vendor Risk Management solution, your organization can utilize automation to streamline ongoing vendor data collection and track vendor ESG performance over time. UpGuard even provides 24/7 security notifications and updates that let users know when the security posture of one of their vendors has changed.
7. Continuous Improvement
Next, establish regular review procedures to ensure continuous improvement. Your TPRM program and ESG initiatives should change as industry best practices evolve and also continually address stakeholder and vendor feedback throughout their lifecycle.
Developing comprehensive ESG reporting mechanisms is a great way for your organization to communicate ESG performance to investors, the board, and critical stakeholders. These reports should highlight your organization’s commitment to sustainable practices and improve cross-department collaboration.
8. Ongoing Monitoring & Refinement
The final step in the ESG implementation process is to develop practices that support ongoing monitoring and refinement. At this stage in the process, you should encourage constant feedback from different departments, communicate ongoing ESG expectations, and provide an ESG roadmap that outlines critical KPIs, organizational goals, and future challenges.
Conducting periodic reviews and ESG assessments will be critical to ensuring your organization’s ESG initiatives continue to meet expectations and accurately assess the ESG performance of vendors.
How Can UpGuard Help With ESG & Third-Party Risk Management?
UpGuard’s cybersecurity toolkit has several risk management solutions organizations can utilize to improve their ESG risk hygiene and elevate their overall third-party risk management programs.
UpGuard Vendor Risk is an all-in-one Vendor Risk Management solution that helps users prevent cyber attacks and track the security posture of each vendor in their supply chain. UpGuard’s robust questionnaire library includes comprehensive vendor security questionnaires that evaluate critical vendor systems against industry-accepted data protection standards.
Organizations looking to improve their vendor due diligence protocols and develop robust ESG programs can use UpGuard Vendor Risk to identify and mitigate ESG and information security risks throughout the vendor lifecycle.
In addition to its comprehensive library of security questionnaires, UpGuard Vendor Risk also provides organizations access to several other powerful Vendor Risk Management (VRM) tools.
Notable features and use cases of UpGuard Vendor Risk include:
- Vendor Security Ratings: Instantly understand your vendor’s security posture
- Vendor Risk Assessments: Reduce the time it takes to assess new and existing vendors
- Vendor Tiering: Classify vendors based on their level of inherent cyber risk and your organization’s unique risk tolerance
- Compliance Reporting: Map vendor details against common compliance frameworks (NIST, ISO 27001, PCI, etc.) and initiatives
- Vendor Data Leak Detection: Prevent data leakage due to third-party breaches, phishing attempts, ransomware, endpoint vulnerabilities, and other cyber threats
- 24/7 Continuous Monitoring: Receive real-time updates when your vendor’s security ratings change
- Third-party integrations: Configure UpGuard within your existing security tools and web applications
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