6 steps to developing a successful ESG strategy
Companies that may not have known what ESG stood for several years ago are now routinely implementing robust ESG strategies that establish how a business will operate to prioritize environmental, social and governance initiatives. An ESG strategy addresses a company’s impact on the environment, the communities where it operates and it’s broader societal and governance responsibilities.
ESG has now moved from an afterthought to a strategic imperative — and as a result, organizations are elevating their efforts. To help you create an ESG strategy or strengthen your existing one, this article will explain the following:
- What an ESG strategy is
- The benefits of ESG strategy
- How to develop an ESG strategy
- Additional resources about the importance of ESG strategies
What is an ESG strategy?
An ESG strategy outlines a business’s activities concerning ESG issues. While investors and shareholders want to make money, they also want to ensure companies positively impact the environment and communities in which they operate — a big reason why ESG-related assets are expected to reach $33.9 trillion by 2026.
Championing ESG issues can also benefit the board. ESG policies positively impact equity returns, and 76% of consumers will stop buying from companies that do not treat the environment, their employees or their community well. That is why a strong ESG strategy is vital to hit revenue targets and solidify the business’s competitive advantage.
The benefits of an ESG strategy
The benefits of setting an ESG strategy are numerous. You are improving the environment, taking responsibility for bettering the community where you’re based and committing to best practices in corporate governance and compliance.
— GShai Ganu, Managing Director, Willis Towers Watson
Operating in line with your ESG strategy should:
- Increase efficiency: Paying closer attention to compliance and governance means honing in on the operations that are both ESG-approved and effective, making business activities more efficient.
- Reduce waste: Prioritizing greater efficiency in your ESG strategy reduces waste over time, as does taking environmental impact seriously.
- Cut costs: Both more efficiency and more waste can reduce costs because businesses can cut anything that does not directly contribute to ESG and the products/activities that contribute to their bottom line.
- Meet regulatory requirements: Many regulatory bodies enforce ESG-related requirements, such as meeting greenhouse gas (GHG) emission limits. Implementing an ESG strategy helps businesses avoid the penalties and reputational damage accompanying poor ESG impacts.
- Build ties with your community: To create an ESG strategy, you will need to tap into your community. Businesses that engage with their community also engage with potential customers, suppliers and stakeholders — relationships that can help drive the business forward.
But it's not all plain sailing. There are also considerations to take on board when establishing an ESG strategy.
ESG strategy considerations
While an ESG strategy has many benefits, not just any strategy will work. Your plan must deliver value — something a recent PwC survey suggests is lacking from many organizations' ESG approaches. It cannot be created in isolation from your corporate goals or without regard to the commercial landscape.
Shai Ganu, Managing Director at Willis Towers Watson, states, “Don’t just look at what the market is doing — you need to think about what is happening with your strategy [on ESG and executive compensation].”
Your priorities should align with the following:
- Your business strategy
- Your sector's direction of travel
- Your stakeholders' priorities
Your ESG strategy also needs to consider external stimuli — the introduction of new regulations or legislation (such as the CSRD in the EU), for instance, or pressure on your industry from the media or investors.
6 critical steps to develop a successful ESG strategy
- Identify what ESG best practice looks like: Different sectors are at various stages of their ESG journeys and will have varying priorities. Businesses in the energy sector, for example, have typically focused on their environmental impacts. Best practice ESG strategy for your organization will be unique — but there are clear leaders when it comes to ESG implementation. Study their approaches, and you will take away some actionable tips for your own business. ESG strategy best practices for your organization will be unique — but there are clear leaders when it comes to ESG implementation. Study their approaches, and you will take away some actionable tips for your own business.
- Consult with your stakeholders: Stakeholders increasingly consider ESG risk scores when evaluating a company's activities. As a result, stakeholder intelligence company Alva believes that ‘In the future, ESG issues will define the approach to stakeholder engagement. Establish the stakeholder sentiment around your strategy; what do they value most? Where do they feel you are currently performing well — or poorly? Identifying stakeholder ESG priorities is an excellent way to determine your own.
- Choose a framework: There is no one best ESG strategy framework. After considering which ESG best practices work for your business and gathered stakeholder feedback, choosing a framework can help put your research into a more actionable format. Common frameworks include the global reporting initiative and the sustainability accounting standards board.
- Involve the right people: Operationalizing your ESG principles requires a team drawn from across your organization. Representation from a diverse cross-section of the business will give you multiple lenses to view your ESG performance and set objectives. It also provides a range of champions who can spread the ESG message within the business, from senior leadership to all levels and departments.
- Assemble the data and evidence you need: ESG is known to be more effective than its relative corporate social responsibility because it can be more clearly defined and measured. Setting an ESG strategy and then monitoring, reporting and communicating your achievements requires a disciplined and robust approach to data. You’ll want to ensure it enables you to visualize and report ESG performance across all your entities. Explore solutions that can deliver the actionable intelligence you need.
- Measure and refocus: ESG priorities will evolve. Sometimes, this is a result of new legislation or reporting requirements, such as those set by the Task Force on Climate-Related Financial Disclosures (TCFD), updates to the SEC disclosure requirements or European Council and Parliament (such as the EU Corporate Sustainability Reporting Directive). At others, it will reflect the shifting concerns of stakeholders. To remain relevant to those stakeholders, you must continually measure, evaluate and finesse your ESG strategy.
From creating your initial ESG strategy to establishing long-term success
Building an ESG strategy is not easy. While these six steps will put you on the right path, they are only the starting point for creating an ESG strategy that will bolster investor confidence and your bottom line.
Developing strong, effective ESG principles is a long-term effort that starts with the board. Read our ESG roadmap to learn about the ESG metrics, data and activities boards should prioritize to put their businesses on a path to ESG success.