Creating a Meaningful ESG Strategy
What is ESG?
Environmental, social and governance (ESG) strategies refer to an organization’s focus on achieving goals related to climate change, socio-economic causes, and corporate behaviour. While the pursuit of these goals may be driven by the organization, they are primarily a response to the public or consumers and subsequent government action.
Organizations have focused on ESG strategies for decades, starting in the 1950s with unions investing pensions in affordable housing, to the 1970s with the introduction of the Clean Air Act and Clean Water Act. In the 1980s companies started to divest from South Africa’s pro-apartheid government and in the 1990s the first sustainability index was introduced to report on companies with ESG Ratings. (The History of How Modern ESG Came to Be, 2021). The Sarbanes-Oxley Act passed in 2002 is one of the more notable steps to improve financial reporting and disclosure, which was in response to the accounting scandals in the early 2000s (Cornell Law School).
Why Do You Need an ESG Strategy?
Today, it is even more important, if not imperative that organizations identify and pursue ESG strategies. The primary force, the consumer, which initially inspired businesses to pursue ESG strategies decades ago, now has more power and influence. Consumers can access a global network to choose which goods & services to purchase, and they can influence the purchasing power of others through social media.
Based on the 2021 Forrester report, Empowered Consumers Call For Sustainability Transformation, consumers prefer brands that have a commitment towards environmental and community interests. The research states, over 30% of consumers focus on poverty and hunger and over 60% of consumers make purchases based on a company’s efforts toward energy efficiency. The shift in consumer preferences was also evident in Accenture’s 2021 Life Reimagined report which identified that preferences were “…powerful enough to drive brand switching and willingness to spend more.”, as consumers looked for brands that aligned with their values.
ESG-focused organizations are more attractive to investors considering the 68% increase in global sustainable investing since 2014, representing a $30 trillion market. Investors also believe that organizations with a proven ESG strategy are more effective at ensuring their longer-term success (McKinsey & Co., Five Ways that ESG creates value, 2021). Millennial investors have placed a priority on ESG-focused firms by “…contributing $51.1 billion to sustainable funds in 2020, compared to $5 billion five years ago” (NASDAQ, Millennials Are a Driving Factor in the Growth behind ESG Investments, 2021).
Internally, a strong focus on ESG objectives can benefit an organization by helping to attract and retain employees, particularly with the millennial generation who have placed a high value on environmental and social causes. Organizations can also realize revenue gains by attracting consumers who have decided to switch brands or are willing to spend more. Cost savings are also available by leveraging government rebates to reduce energy consumption (McKinsey & Co., Five Ways that ESG creates value, 2021).
How To Develop & Implement An ESG Strategy?
Two (2) guiding principles are necessary to develop and pursue an ESG strategy: 1) longevity; being able to fund and support the strategy over the long term and 2) transparency in reporting on the progress pursuing an ESG strategy. Adopting these principles often requires executive-level commitment and accountability to achieve ESG objectives. With the guiding principles in mind, completing the following five (5) stages will help develop and implement an ESG Strategy.
Conduct a ‘360-degree’ assessment of the organization to identify the environmental, social and governance areas of importance, based on input from the employees, consumers, suppliers, investors, and communities in which the organization operates and provides goods & services. This step provides alignment between the organization and the stakeholder(s).
Prioritize areas of importance and map interests to the short, medium, and long-term strategic objectives of the organization. Evaluate the funding, people, time, and other requirements required to address each area. Related risks, internal & external dependencies and necessary assumptions should also be identified. This step ensures the pursuit of the ESG goals is compatible with organizational strategy and resources.
Identify a subset of 3-5 initiatives representative of environmental, social and governance topics to be addressed within the year. Develop a plan to address each topic, ensuring to identify ‘quick wins’ and interim goals. The organization should have a high level of confidence that the goals can be accomplished in the first year. This step creates internal momentum and demonstrates progress toward achieving the goals.
Establish a reporting cadence to monitor progress towards the goals. Executive review of the reports should take place regularly to track progress and address any delays. If there are delays document the steps taken or any trade-off to bring the plan back on track. This step brings visibility to the progress & challenges of achieving the ESG goals.
Communicate the progress of achieving the ESG goals regularly to all stakeholders, in a simple and clear manner. Combine reporting on ESG goals with financial reporting to provide a balanced view of the organization’s overall performance. This step builds trust with stakeholders and demonstrates a commitment to the ESG objectives.
The pursuit of environmental, social and governance (ESG) goals is a ‘minimum requirement’ for conducting business. Achieving ESG goals creates goodwill with an organization’s stakeholders and can benefit its bottom-line and. Completing these 5 stages will help an organization develop an ESG strategy that is achievable based on organizational priorities and has meaning with its stakeholders.