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What is an ESG strategy and how to create one?
8 min read
As a leader, you know that your organization’s future depends on making the right decisions that benefit both your company and its stakeholders. This is especially true with today's focus on environmental, social, and governance (ESG) issues. With the increasing importance of ESG, it's essential to have an effective and integrated strategy in place to ensure the success of your business.
In this blog, we'll discuss what ESG is and why it's important, as well as explain why it all hinges on having an effective ESG strategy.
What is ESG?
At its core, ESG is a set of criteria used to assess a company's performance in terms of sustainability, social responsibility, and business ethics. Integrating ESG into your corporate strategy delivers a holistic approach to decision-making that takes into account a company’s financial performance, social responsibility, and environmental stewardship. By incorporating ESG considerations into their operations, companies have greater control over their reputations, attract a wider range of investments, and better reflect the interests of their stakeholders.
ESG strategies are increasingly important for businesses, with more than 90 percent of S&P 500 companies now publishing ESG reports. Getting the creation and implementation of your ESG strategy wrong could be costly both financially and reputationally.
An ESG strategy is no longer a nice to have, it's a necessity
Investors regularly question C-level management on the issue and incorporate it into their analysis for a deeper understanding of the companies they invest in. Investors aside, some analysis shows that incorporating ESG into your business strategy can boost your bottom line over the long term through a combination of efficiency improvements, identifying opportunities, and mitigating risk.
All companies strive for profits, but today’s investors and shareholders want to see sustainable and inclusive growth accompanying those profits. CFOs and CEOs need to embrace ESG to meet customer and other stakeholder expectations.
Creating your ESG strategy: The importance of ESG materiality
Building your ESG strategy may appear daunting at first to non-ESG specialists, but in reality, it is similar to any other cross-functional team process within the company that develops business strategy. The key to developing your strategy is conducting a materiality assessment. The objective is to identify and evaluate your material ESG opportunities, risks, and performance from multiple perspectives, so you have all the necessary insight to be successful.
ESG materiality is the process of understanding what matters most to stakeholders, such as investors, customers, and employees. Companies must identify the key ESG issues for the business and prioritize them for action.
By understanding and prioritizing these ESG factors, a business can develop an effective ESG strategy that is tailored to its specific needs.
Datamaran’s ”Ultimate Guide to Materiality” explains how this familiar concept has developed from accounting, reporting, business, financial, legal, risk, and, more recently into ESG, sustainability, or non-financial issues.
The priority for any materiality assessment is to identify the primary stakeholders in the business. A simple “who, what, why” approach across the business will give a better understanding of the key ESG issues to prioritize. An internal stakeholder team composition might comprise:
- An executive representative
- Operating heads from internal stakeholder representatives e.g. finance, sales, operations, HR, etc.
- External stakeholder representation
Once engaged, stakeholders will be able to identify the ESG metrics that are important to their areas of the company. Critically, you should include employees, customers, suppliers, business partners, community members, investors, and regulators amongst others, in your materiality assessment and review your competitors on the same ESG issues you identify as key.
The materiality assessment will help you:
- Gauge the relative importance of ESG issues to all stakeholders
- Define your current ESG priorities
- Gain insight into how your company is positioned against competitors
- Highlight future reporting and actions
Establish a baseline
It’s difficult to demonstrate progress if you don’t know where you’re starting from. Your cross-functional team will be able to determine your current status and highlight key areas you may wish to focus on and then you can decide which reporting framework to utilize.
These are the critical standards and frameworks to consider:
- The European Financial Reporting Advisory Group (EFRAG)
- The U.S. Securities and Exchange Commission (SEC)
- Global Reporting Initiative (GRI) standards
- The Sustainability Accounting Standards Board (SASB)
- International Sustainability Standards Board (ISSB)
- Task Force on Climate-Related Financial Disclosures (TCFD)
- The Taskforce for Nature Related Financial Disclosures (TNFD)
Setting your ESG goals
Your goals may include maintaining good performance, improving weak areas, and optimizing efficiency or overall performance. Elements to consider when setting goals are:
- The context needed for these goals
- Assess performance - how to assess and reporting cadence
- Are the targets and timelines ambitious enough, or conversely, are they too ambitious?
- What needs to be done either directly or indirectly?
Consider your goal drivers and how they will evolve with your business strategy.
Your baseline may identify your starting point in terms of material risk but ESG regulations and legislation are constantly evolving, particularly if you operate across multiple geographies and jurisdictions. An automated data-driven solution that identifies current issues and helps to flag future risks provides critical inputs to your corporate strategy, risk management, disclosure, and engagement.
It’s also worth remembering your underlying objective of focusing on ESG - to operate as a more ethical or sustainable business. Companies that enter into this process with this mindset come across as more authentic.
Implementing your ESG strategy
A successful ESG strategy has a robust implementation framework that clearly articulates a company’s vision, and priorities, detailing who is responsible for what elements.
As with any other business strategy decisions, the ultimate responsibility for ESG rests with the C-suite. Executive roles and responsibilities typically align with those of other business strategies:
- CEO - setting the strategy and ensuring all stakeholder audiences are taken into account
- CFO - ensuring the ESG strategy is delivered and measurable targets are in place
- Chief risk officer or general council - understanding the regulatory, reputational, and financial ESG risks specific to your business and plotting ESG issues on the risk map or register
- Chief Sustainability Officer and cross-functional collaboration - typically an ESG specialist or team is the essential conduit through which initiatives are cascaded and valuable feedback on progress is collated
Whilst ultimate responsibility for ESG remains with the C-suite, it is up to the whole business to deliver on their specific areas.
There are increasing global regulations regarding mandatory corporate ESG data reporting.
Future-focused companies understand the importance of communicating ESG criteria in their business strategy and purpose. They are voluntarily providing their ESG data in annual reports and on their websites.
With ESG regulations and legislation evolving at speed a snapshot every 3 years is not enough to keep abreast of materiality issues. ESG audits were time-consuming and often required external consultants, however, with tech advances in AI that provide accurate data it is feasible to perform an in-house materiality audit annually.
Business has progressed from manual bookkeeping to automated reporting based on robust data which increased regular financial reporting at all levels. That evolution is now available for ESG reporting with the data and tools to deliver ESG materiality now available.
ESG data supports your business strategy
At the heart of ESG strategy is data; data that is used to identify material risks and opportunities for your business across environmental, social, and corporate governance issues.
Ensuring access to the most up-to-date data is critical in any aspect of business regardless of the sectors you operate in. Access to the most accurate and timely ESG data makes decision-making easier at both strategic and operational levels.
Developing an effective ESG strategy is essential for any business today. Companies must identify the key ESG issues that are material to their business and prioritize them for action. An ESG framework can help build long-term financial sustainability and deliver long-term value for your business and all its stakeholders.