Setting clear goals is the start point for any successful program or strategy. This step is as relevant for environmental, social and governance (ESG) strategies as elsewhere.
For corporates, governments, regulators and investors, ESG and the related topic of corporate social responsibility (CSR) may mean slightly different things. Although the aims of greater sustainability, improved social justice and more ethical business practices are common across all, the ways that ESG manifests itself, the goals set, and the measures of success may differ.
As an organization, how can you set challenging ESG goals that deliver value to you and your stakeholders?
Why Set ESG Goals?
- There are numerous compelling reasons for setting ESG goals. Goals are necessary for success in any arena; having clear and actionable objectives helps you operationalize your ESG principles. Making your ESG aims concrete and measurable ensures that they are integrated into your broader strategy, becoming the default way you operate, not a bolt-on afterthought. Measurement is identified as one of the five critical steps for success in an ESG strategy ' setting achievable yet challenging goals is a core aspect of this.
- There is increasing regulatory pressure and expectation that companies will report on their ESG performance. Reporting frameworks like that created by the Task Force for Climate-related Financial Disclosures (TCFD) are fast becoming the expectation, rather than the exception for corporate metrics on ESG.
- Equally, ESG performance is becoming a competitive issue. With ESG matters increasingly in the spotlight, sustainability, ethics and a business's ability to govern them are becoming priorities for investors and customers. 59% of US consumers say a company's purpose and values play an important role in purchasing decisions. The ability to evidence strong ESG credentials positions you strongly against your peers.
- Investors increasingly prioritize ESG. Shareholder activism and institutional investor focus on sustainable, ethical investments incentivize corporates to raise their ESG game. The same Millennials that value ESG as consumers reach positions of influence in business and inform the decisions made by asset managers and corporate investors. Investors' increasing prevalence of ESG scores and ratings is accelerating the need for transparency in ESG performance.
- Among employees, as well as customers and investors, ESG can be the differentiator. For instance, 44% of Millennials and 49% of Gen-Zs claim to have made choices about the type of work they are prepared to do or organizations they'd work for based on personal ethics. Attracting today's workforce demands a proactive stance on ESG issues.
How Do You Set Goals for ESG?
Although social and environmental performance has historically been challenging to measure — one reason companies have moved away from quantifying broad-brush CSR towards measuring the more targeted ESG — there are encouraging trends towards greater consistency and useful frameworks.
Today, a number of external reporting standards exist, for instance:
- The Global Reporting Initiative (GRI) standards, which cover the full range of ESG-related issues and are designed to drive organizational transparency on issues from anti-corruption to bio-diversity.
- The Sustainability Accounting Standards Board (SASB) has 77 standards, which focus on financially-material sustainability information.
- The World Economic Forum's Measuring Stakeholder Capitalism metrics, which aim to bring a degree of consistency to ESG reporting.
What Should Your ESG Goals Look Like?
Your organization's ESG goals will vary dependent on several criteria; your sector, your current areas of focus — perhaps those areas where you aren't performing so well — and any external imperatives, like regional or industry-specific regulatory requirements.
As a corporate, your ESG goals need to align with those of your investors and stakeholders, customers and employees. Additionally, they must align with the goals of your regulators, vendors, suppliers and other partners.
For corporates, focusing on environmental, social and governance issues should mitigate risks and enable opportunity by reducing waste, cost and the chance of regulatory breaches and attracting investment and custom.
Your Goals Might Cover
- Your supply chain — is it sustainable? Does it have measures in place to avoid modern-day slavery?
- Environmental factors, like pollution, waste, energy usage. Are you doing all you can to run an efficient operation.
- Employment practices; does your approach to executive compensation meet stakeholder expectations? How are your labor relations? Are you an inclusive and diverse organization?
- Your approach to overall business ethics. How do you compare on corporate integrity; does your organization operate at the highest standards?
- The regulatory requirements you need to comply with; any regulations or legislation you are subject to provide a good motivator for ESG improvement. Mitigating ESG risk helps to ensure you don't face any unwanted penalties.
Setting ESG Goals and Preparing for ESG Disclosure Requirements
Setting ESG goals may seem challenging, but it's an essential step in driving a successful, actionable ESG program. And in a world where ESG disclosures are increasingly becoming expected, and ESG ratings increasingly relied on by asset managers and other investors, being clear on ESG performance isn't an option; it's essential.