Environmental, social, and governance (ESG) criteria are a set of operational requirements used by socially concerned investors to analyse possible investments. ESG is also the term used by companies to define those activities internally and promote them to the outside world.
A company’s ESG performance is monitored by prospective investors, employees, partners, journalists, and the general public. Whether driving for a ‘triple bottom line’, competing for the best talent, or simply positioning your company to survive long term, nailing your ESG strategy and delivering on it is crucial. So, it has moved firmly into the ‘must-have’ category for firms, as traditional investors themselves transform into ESG advocates and activist shareholders seeking change and board refreshment - even in the most un-sustainable industries.
What is ESG and how does it work?
ESG has three elements: environmental, social, and governance.
Environmental criteria take into account how a corporation behaves as a shepherd of the environment. Social criteria look at how the company maintains connections with its workforce, vendors, customers, and the communities in which it operates - what impact it has on people at each stage of its value or supply chain. Lastly, governance is concerned with the leadership of a corporation, executive remuneration, audits, internal controls, and shareholder rights.
It comes down to how you behave as a company, then optimising, improving, and, finally, evidencing that behaviour with good reporting
With so many variables involved, calculating and tracking a company's social and environmental impact, as well as assessing its governance over time, can be fairly complex. A handful of rating organisations, such as Standard & Poor's, Deloitte, MSCI, Sustainalytics, and RepRisk, aim to do this by employing predefined indexes and providing corporations with ESG evaluations and scores.
There are a number of companies offering assistance with this, from multinational juggernauts like SAP helping its huge variety of clients, to unicorn technology companies offering real-time supply chain transparency, like Interos, platforms offering the ability to assess and embed social value, like Social Value Portal, and reporting solutions like OneTrust ESG, which allow you to focus on driving the actual change.
Why should I do it? Forget buying in - there’s a legal reason to develop an ESG strategy
Policing ESG largely comes down to investors and the decisions they make being influenced by it. That said, lawmakers around the world are drawing up legislation, so this will become the norm.
The procedures, data, and importance assigned to certain aspects might range from one institution to another, resulting in considerable differences in ESG ratings and results.
Examples include the EU Regulation on sustainability-related disclosures in the financial sector, which took effect in March 2021. That forces financial market actors to disclose information about their sustainability strategy on their websites and elsewhere in the public eye. Laws on disclosure and reporting of ESG strategies are being proposed globally.
Where do I start to develop an ESG strategy?
It is critical that you make sure your ESG strategy is adapted precisely to your company, so there are three things to keep in mind when developing it
Keep up with regulatory compliance
Determine which new ESG-related regulations and reporting standards may be relevant to your company and plan ahead of time to assure compliance.
There are several frameworks you can use to develop your ESG strategy.
- The UN Sustainable Development Goals (SDGs) are a set of 17 aims created to pave the way for peace and prosperity for the planet and its people. They are a good benchmark for ideas on what your company can do.
- The SASB Standards highlight ESG issues that are more relevant to 77 particular industries. Consider the SASB Materiality Map as well, which is a tool for determining the financial materiality of ESG problems. This helps drive the process behind a triple bottom line of financial sustainability backed by positive impacts in ESG. It also gives you the tools to drive buy-in across your organisation and plan effectively
- The UN Guiding Principles on Business and Human Rights can also help companies prevent and respond to human rights violations in their business operations. By simply highlighting key areas, your firm can identify where to look closer and rapidly evidence both that it is and what it finds. If necessary, this can inform changes that mark a real change to your business.
Engage with prioritised stakeholders
Building and refining your ESG strategy should be directed by the stakeholders your company affects. Identifying who they are, how they are affected by your operations, and who you should prioritise, will inform your entire strategy.
Decide which stakeholders to prioritise by assessing each group's influence on the organisation from the outside in. If someone is getting a raw deal, which could be avoided, find out and make a plan to take action.
Build the roadmap and framework
Any ESG project will fail unless it is supported by a framework that lays out your company’s ambitions, goals, and milestones. Putting together a roadmap means there will be accountability for critical initiatives, and a captivating ESG framework provides stakeholders with a comprehensive view of your company's strengths and objectives.
A clear roadmap for implementation, explaining the targets, milestones to look out for, and rationale, will achieve buy-in from stakeholders (even aggrieved ones), employees, the public, and investors. It will unify your company for a positive reason. The benefits of that will bear out over time in the longevity of your business, the productivity of its staff, and the profits it generates.
Those are the benefits of an ESG strategy, and why investors demand it: it is wins across the board.