Developing an ESG strategy is high up the to-do list for many businesses. The increasingly demonstrable benefits of prioritising environmental, social and governance factors to mitigate risk in an unpredictable world are proving a tempting carrot. At the same time, the material risks of ESG failures — from regulatory penalties, reputation damage and operational disruption to threats against the very existence of the business — constitute a solid stick to motivate organisations to act.
An effective ESG strategy will deliver robust policies that align with both commercial and ethical objectives. These will drive actions that generate opportunities for the business. They will also mitigate risks and address the threats emerging from global challenges such as climate change, inequality and a volatile economic situation.
Despite these powerful motivations, the scale and diversity of ESG factors affecting an organisation are considerable. Building an ESG strategy is an undertaking that involves the whole business — from strategic decision-making at the board level to day-to-day operations. For those embarking on ESG strategy development, particularly professionals in governance teams where ESG management and reporting responsibility is likely to rest, there are several key factors to consider. Let’s take a look.
Seven Tips for Developing an ESG Strategy
1) Find a common language and framework: ESG can mean different things to different stakeholders, depending on their perspective and priorities. The first step for an organisation is to agree on what it is and what it aims to achieve for the business. This gives conversations and initiatives a common lexicon and point of reference. Successfully setting this definition will require an understanding of the likely future pressures on the business to report on ESG metrics.
There is a growing consensus around ESG metrics and reporting frameworks, so defining ESG using terminology from the current leading framework contender, which is the World Economic Forum’s International Business Committee ESG metrics, can help to futureproof an ESG strategy.
2) Ensure the board speaks that language: An ESG strategy must have board sponsorship and active support to create a positive culture that drives an ESG agenda. In fact, as it is the third pillar of ESG, deciding to implement an ESG strategy should mean board engagement is a self-fulfilling prophecy. It should be a regular item on the board agenda, and directors should receive timely reports on performance and areas for discussion.
Governance teams should also provide directors with opportunities for ongoing education on ESG-related topics to ensure their knowledge remains current in a fast-moving field.
3) Determine the material ESG impacts of the company and its ecosystem: These include direct impacts and those of the wider corporate environment, including upstream in the supply chain and downstream through product use and disposal. Governance teams should also assess the positive impacts of CSR initiatives for inclusion in the overall framework.
Set relevant KPIs and targets over the short, medium and long term. These should be trackable to enable reporting and, ideally, targets should align with one or more of the United Nations’ Sustainable Development Goals (SDGs).
4) Recognise the interdependence between ESG and governance, risk and compliance programmes: The management of environmental, social and governance business impacts mitigates the risks each poses to the organisation. It should become part of the GRC programme undertaken by the business and supported by a sound management platform.
Zeke Ward, Founder of Compliance Company North Star, believes that the two are symbiotic: “To achieve good ESG, you need a good GRC programme. You’ve got to be having the foundations in place before you can get to solid environmental risk management, good management of human rights risks, and social risks. If you’re not collecting the data, and […] sharing it in the right way with the right people, and analysing what you have, then for me, that actually drives extra risk. So, the GRC platform you’re using [is] absolutely key in achieving good ESG governance.”
5) Establish a structure for internal monitoring and reporting: Related to the point above is the importance of establishing a process for collecting data and a structured reporting system that takes information from all the relevant parts of the business so a full picture of ESG performance can be gained. Tracking, analysis and reporting are crucial elements of an integrated ESG strategy and will require investment to ensure that they are equal to the considerable task at hand.
6) Recognise the role and value of internal and external data: ESG initiatives do not take place in a vacuum. There is a wealth of valuable data available to inform and drive corporate ESG strategies. Businesses should ensure they have access to relevant external data sources to help them benchmark key aspects of ESG performance.
For the governance pillar, this might include comparative data on board composition, effectiveness and executive compensation. The social sphere could monitor news cycles and identify emerging social issues and reputational risks. On the environmental side, monitoring evolving regulations and emerging climate issues are critical to helping companies identify future risks and opportunities to improve ESG performance.
7) Understand that implementing an ESG strategy requires investment: Successfully implementing an ESG strategy can lead to numerous benefits for the business, from commercial opportunities and reputational enhancement to cost-savings and lower risk exposure. However, there must be a budget allocated for the initial investment in people, process and technology to establish new operating methods, managing and reporting on ESG performance.
From a people perspective, there is a considerable communications piece to deliver at all levels of the organisation to ensure everyone understands why the business is taking a different approach and making changes. Buy-in from the business is critical to the programme’s success. Still, it comes with rewards, too, as employees who feel their work is a force for good are usually more engaged, productive and supportive of the business.
Processes will typically need to be changed or adapted to minimise impacts, and this may entail investment in alternative equipment, machinery or additional steps to reduce emissions or waste. Such changes usually deliver considerable benefits over the long term, but the initial investment is needed.
How ESG Technology Can Help
Investment in ESG-specific technology and access to external data is essential to collect information, monitor against targets, and report on a cadence that enables genuine insight without putting an impractical burden on governance teams. Tools such as Diligent’s ESG Solutions are designed to support organisations as they design and embed ESG strategies, offering external data, analytics and monitoring tools. They ensure that the right data gets to the right people at the right time to drive an effective programme that delivers benefits back to the business while meeting the moral obligation of all corporations to improve the world around them and limit and damage they might cause.
To learn how boards and governance teams can operationalise ESG within the enterprise, download our Operationalising ESG Checklist.Diligent’s ESG Solutions are designed to support boards and governance teams to achieve comprehensive oversight of ESG activities and provide the tools needed to monitor and report on progress and identify risks as part of integrated GRC.
As ESG performance becomes a core element of how key stakeholders evaluate organisations, ESG integration is the appropriate next step for businesses aiming to adapt to a corporate environment where sustainable value creation depends on it.
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