WHY COMPANIES NEED AN ESG STRATEGY
Integrating ESG principles into a business strategy is now a must-do, not a should-do. If you don’t take a position on ESG factors, you’ll fall behind the competition. The financial markets’ recognition of the influence of ESG risk on financial performance is reflected in the rise in popularity of ESG investments and asset management.
Meanwhile, the growth of stakeholder capitalism is compelling businesses to consider the interests of stakeholders when it comes to long-term sustainability, environmental impact, and governance issues.
ESG criteria have become an important part of any risk management strategy. Measuring the impact of ESG factors on repetitional and operation risk helps place you in a better position to mitigate these risks.
Increasingly, compliance and legal risks also need to be managed, as ESG disclosures become mandatory and ESG regulation stricter. Businesses that lack an effective ESG strategy are vulnerable to ESG risks and they miss out on ESG opportunities.
Now you know why you need a strategy, let’s consider how you can develop one.
STEPS TO DEVELOPING AND IMPLEMENTING AN ESG STRATEGY
Building an ESG program can be challenging, considering all the potential topics that constitute “E,” “S,” and “G,” as well as the fact that ESG encompasses all functional areas of a company.
To ensure that your program will have the internal support it needs to succeed, it is recommended that you first focus on bringing together a team of cross-functional stakeholders who are capable of identifying and evaluating ESG opportunities, risks, and performance in your company from all required perspectives.
The steps you can follow to develop and implement an ESG strategy is given below.
- CONDUCT A MATERIALITY ASSESSMENT
Materiality assessment should be the basis of the ESG strategy. The purpose is to zero in on the most important ESG issues and opportunities that are most likely to impact your company’s business performance and also that of your stakeholders.
All ESG topics are essential, but they cannot all be given equal weight. Materiality assessments have progressed to consider not just business impact but also environmental and social impact. This concept is known as double materiality.
A materiality assessment can be scaled to provide the right level of insight that can help you get started with your planning, keeping in mind that the benefits of ESG topics vary by company, industry, and stakeholders.
Integrating a benchmarking exercise into your assessment is also a useful way of gathering information on the ESG maturity of your competitors, and analyzing industry opportunities, challenges, and leading practices in ESG.
You can learn about the steps for conducting a successful materiality assessment here.
- ASSESS CURRENT STATE (BASELINE)
After deciding on the ESG topics to prioritize, you need to evaluate existing policies, programs, engagements, and metrics in your company. One way to achieve this is to work directly with cross-functional stakeholders in your organization who have expertise in each ESG topic you’ve prioritized.
Assessing the current state of your company will help you know the relative maturity of ESG in your organization. You can better measure the level of fitness and ambition for ESG goals in your organization by getting a pulse on ESG.
- SET GOALS AND OBJECTIVES
Now that you have your baseline ESG stats, you can start thinking about how you may focus your efforts moving future. To better define strategic objectives, consider topic-focused working sessions with key stakeholders, starting with:
- Maintain: What are some things you’re already doing well that just need to be communicated or maintained?
- Improve: What are some areas you can improve on to better align with peers, meet the expectations of stakeholders, or demonstrate commitment to ESG?
- Optimize: Where can you sharpen your present efforts to become an ESG industry leader?
Setting goals is a natural next step to deciding on objectives. Goals help measure the impact of your activities, positioning your company well among peers, enhancing your company’s performance in essential areas, and integrating ESG practices into the business.
Additionally, public goals will help keep stakeholders informed and reinforce that you are serious with your ambitions. You can learn how to set challenging ESG goals that create value here.
- EXAMINE GAPS TO ACHIEVING FUTURE STATE
The steps above (steps 1, 2, and 3) are the initial wave of health screenings needed for you to have a successful ESG sprint. In addition to these steps, you need to be aware of all the potential problems your company might face when trying to achieve the new goals you’ve set.
It is recommended for you to conduct a brief gas analysis between where you are now and your goals or objectives to see what may be missing so you can plan and strategize accordingly for the future.
Based on where you are on the fitness scale, the gaps may be as large as needing you to form a sustainability council that will make key decisions going forward or as minor as needing to collect just one more metric.
An understanding of the gap between now and where you want to be in five years will help define your level of ambition before getting into minutia. Also, an understanding of the results you can achieve allows for better strategic guidance across the organization.
- BUILD A STRATEGIC ESG ROADMAP AND FRAMEWORK
A framework that outlines clearly where your organization’s purpose and vision meet your ESG priorities is required for an ESG program to be successful. A compelling ESG framework provides stakeholders with a clear picture of your goals and strengths, and developing a roadmap will ensure accountability for important actions.
This is a good moment to remind yourself of the level of ambition you identified previously and to put in place a reasonable approach you know you can commit to, usually in the form of a phased plan with measured steps along the way.
When developing a framework, think about how it will apply across your organization (by region, function, operation type, etc.) and how you’ll track progress to achieve your goals.
- CREATE ACTION PLANS AND EVALUATE KEY PERFORMANCE INDICATORS
The integration of ESG into business processes and practices is required to effectively implement an ESG program. You must plan programs to stay in shape throughout the year in order to be ready when the ESG spotlight shines on your organization. Some of the best practices you can implement are given below:
- Identify measurable and clear outcomes that describe what success looks like for you.
- To make it easier to track and trend critical metrics and performance, use centralized management systems or data software.
- Set a frequent communication and update schedule for key stakeholders to evaluate goals, compare best practices, and update data continuously. You can stay on track toward your goals by constantly assessing your plans and making any necessary adjustments.
While it’s important to have ESG monitoring at a corporate level, it’s even more important to recognize that real progress is made on the ground.
- REPORT PROGRESS
ESG reporting, like goal-setting, does not have a “one-size-fits-all” approach. The most crucial component of reporting, regardless of the frameworks, guidance, or standards utilized to tell your story, is communicating your information in a clear and compressive manner.
Before developing your report, you must first decide what you want it to accomplish. Ideally, your report should:
- Share ESG metrics and goals that are specific to your company.
- Communicate your ESG strategy to stakeholders as you demonstrate alignment to your business objectives.
- Highlight ESG programs and policies that are already in place.
- Evaluate your engagements and progress in key ESG areas.
In addition to deciding what you want to report, you must also consider how you want to report it. You want to present information concisely and clearly, ensuring that you report on topics that are most material to your company.
- UTILIZE LITH SOFTWARE TO MANAGE THE STEPS ABOVE
Your ESG information should be easily accessible to your stakeholders. To make this possible, you can make available a PDF report on your website and/or create a dedicated ESG landing page to demonstrate your commitments to timely and clear communications.
Additionally, you can utilize LITH software to have your ESG information integrated into the LITH blockchain. LITH has already begun to standardize data for ESG reporting and is now working on developing a platform that will make it easier for companies to track and report their sustainability information.
The goal of LITH is to revolutionize the model for ESG by creating a platform to meet the growing demand for integrity in commerce. You can learn more about LITH and how the project plans to bring ESG to the blockchain by checking out the project whitepaper.
WHAT BENEFITS CAN YOU EXPECT FROM YOUR ESG STRATEGY?
While ESG is about the impact of your business on society, those who invested in it, and the planet as a whole, it is important to also consider what you need ESG to do for you when developing an ESG strategy. You need to know what success is for you when it comes to ESG.
Success in relation to ESG will differ greatly between sectors and from company to company. It will depend in part on the business position on the ESG maturity curve. Some components of ESG have long been important considerations in certain sectors (like the oil and gas) , such as the extractive industries, but under different names.
Because of the nature of what they do and where they do it, mining companies may be considered surprisingly advanced in social and environmental areas. They have to obtain a social license before they can operate in certain environments, and they must win the acceptance of the communities in which they operate.
ESG factors must be accounted for because if the companies get their strategy wrong, they’ll no longer be able to work in and benefit from the places where raw materials are sourced.
For sectors that are not too far along the maturity curve, it’s important to think about what ESG means to you as an organization. Both commitment levels and achievements will be poor if there are no business rewards and only onerous requirements.
TO WRAP UP
Just as stakeholder capitalism is focused on creating value for all stakeholders and at the same time presenting the best path to the business’s long-term financial success, so an ESG strategy needs to also meet the priorities of the stakeholders while also contributing to the success of the company. Knowing this is vital to the design of your ESG strategy.