ESG: Sustainability Frameworks Are Growing Up
For years, corporate social responsibility (CSR) has been the emblem worn by companies aiming to create value beyond the bottom line. As consumers and investors increasingly look to spend their dollars on organizations that are socially and environmentally conscious, businesses have had to change their strategic approach to better match the world’s increasingly complex sustainability agenda.
ESG evolved from a need for a sustainability framework that allows companies to align their efforts within areas that have strategic relevance to their business. This allows for greater transparency, impacts and resilience – and directly ties into organizational performance and success.
What is ESG?
ESG is the term used to identify matters that are traditionally associated with CSR or sustainability but also have a material financial impact on the company. ESG stands for Environmental, Social and Governance – three broad areas that cover all the ways in which a company’s actions affect its overall value.
- Environmental encompasses how the company’s operations impact the natural environment, such as effects on emissions, waste, water and biodiversity.
- Social includes recruitment and people management policies, how a company treats its employees, impacts on local communities and other ways the company’s activities affect human welfare.
- Governance covers accountability, ethics, transparency, external relations and how leadership runs the business.
ESG is becoming the preferred framework largely due to the increased pressure from investors and regulators to set goals that make fiscal sense. Paying attention to ESG also helps reduce risk, by avoiding penalties and liability related to environment, safety and legal exposure.
Major asset managers such as BlackRock and State Street have declared their interest in companies with strong ESG metrics – some going so far as to require ESG disclosures. It’s clear that investment leaders are convinced that companies seeking to create long-term societal and environmental value in addition to positive financial returns provide higher overall value.
A company spreading its ESG story will also build a better reputation, especially with customers and potential employees who are increasingly looking for companies that take a stand on important issues and whose values align with their own.
How can a company get started?
While there is no standard, one-size-fits-all approach to developing an ESG program, there are four essential components needed to integrate an ESG framework.
- Executive buy-in. Developing an ESG framework is a lot of work, and organizational oversight matters. Successful integration of an ESG framework is often in line with the level of oversight – that is, the higher up the food chain that responsibility for ESG implementation is held, the more likely it will succeed. Demonstrated commitment from top leadership, including the C-suite and board of directors, will weave ESG priorities throughout the fabric of the company and show current and future employees, shareholders, customers, media and other stakeholders that the company is truly invested.
Key takeaway: Successfully integrating ESG requires full commitment from leadership.
- Materiality assessment. Before making any strategic moves, it’s important to truly understand what topics are strategically relevant – or “material” – to your company and stakeholders. Through a methodical approach, companies will learn what environmental, social and governance indicators are the most meaningful to disclose. From there they can determine what is already being tracked and measured, and where new metrics may be needed.
Materiality assessments should be given plenty of time for discernment and input. The assessment may include a landscape assessment, participatory research with a variety of stakeholders and facilitated meetings with key company representatives.
While a materiality assessment can be conducted in many ways, a typical process is as follows:
1) Identify all potentially relevant material topics. Leverage reporting frameworks such as GRI and SASB, as well as business analysis reports, internal data, customer and investor feedback. The goal is to create a long list of potential topics that you will later narrow down.
2) Refine the long list of topics you’ve collected in the first stage and group them into categories that align with the company’s strategy and terminology.
3) Explore each topic grouping in detail and gather information to understand its relevance, impact and importance to the business and internal/external stakeholders. Develop a scoring methodology to allow each topic to be assessed and prioritized.
4) Prioritize topics based on the strategic importance to the business, importance to stakeholders and the materiality or impact of each topic in the value chain.
5) Test and validate findings with key internal stakeholders, then follow up with external stakeholders to gather additional feedback. This is done through participatory research – surveys are the most common method. For your disclosures to truly represent the issues most relevant to your business strategy and stakeholders, it is important to incorporate a variety of perspectives and prioritize issues based on their relative degree of importance to everyone. Refine your topics and re-prioritize as needed.
6) Analyze the results of your assessment to identify the topics most material overall and by stakeholder group. A materiality map or matrix is the typical output at this stage, providing a visual representation of the priority, relevance and significance of each material topic. This matrix shines a spotlight on where to focus your ESG efforts.
- A materiality assessment reveals what is both strategically relevant to a company and important to stakeholders.
- Allow ample time to gather information and perspectives from all stakeholder groups during the materiality assessment.
- Goals and targets. Now that you know what’s important to both company success and your stakeholders, you can strategically develop goals and targets that will focus your efforts and improve the metrics related to your material topics. As part of your goal and target setting process, you’ll need to identify what metrics you plan to report on. Some metrics may already be tracked and analyzed, but it’s likely you’ll need to establish a baseline in some areas.
We always recommend that any goals and targets be as SMART as possible – Specific, Measurable, Attainable, Relevant and Timebound.
- Not smart: Improve energy efficiency.
- SMART: By 2025, reduce the average annual energy consumption of all our facilities by 15% over 2018 levels.
Key takeaway: Set SMART goals and targets to improve the areas important to both company success and stakeholder interest.
- Reporting. The final component of a solid ESG program is reporting. Telling your stakeholders what your goals and targets are and communicating your progress is the only way to stay fully accountable to those plans. You need to communicate clearly what you’re doing to improve – and when you fall short or run into challenges, say so. Being transparent about shortcomings builds trust and credibility. In general, people are suspicious of company reports that show nothing but wins.
While an annual report is traditional, companies are exploring other venues for reporting their ESG performance, such as short quarterly updates, sustainability landing pages or microsites, interactive digital reports and infographic dashboards that tell stories primarily through imagery.
- Transparent reporting is a critical element of an ESG program because it holds your company accountable to its goals.
- Reporting progress with honesty builds trust, credibility and brand loyalty.
- Choose a reporting vehicle that best supports your brand and makes the most of your data.
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The process of integrating ESG at your company may initially present challenges as you discover your company’s starting impact – and that’s okay. The point is to honestly assess your current impacts and work toward reducing those impacts, with the end goal of becoming more sustainable and resilient, reducing your risk and increasing the overall value of your business.
We can help.
With our engagement skills and ESG expertise, we help companies join the ESG movement and achieve greater value. If you’d like to learn more, reach out and let’s talk.