Looking for where to begin with your ESG strategy? In this article, we break down the key factors and share practical tips for how to get started.
Today, sustainable practices are highly valued by regulators, investors, consumers, and employees alike. Among several other benefits, research from IBM has shown that organisations with strong sustainability credentials are also 43% more likely to outperform their peers in terms of profitability.
On the other side, failure to meet ethical standards such as respecting human rights, eliminating discrimination, and reducing carbon footprint can lead to reputational and financial damage for an organisation.
In order to remain compliant and prepared for the future, an ever-growing number of organisations are creating ESG strategies – so, what exactly is an ESG strategy, and how should leaders go about developing one?
What is an ESG strategy?
ESG strategies provide an important set of guidelines, or framework, that a company puts in place to address environmental, social, and governance (ESG) factors in their operations and decision-making processes.
These factors cover a broad range of issues, such as the impact of the company’s activities on the environment, the well-being of employees and stakeholders, and the ethical and transparent management of the company.
The purpose of an ESG strategy is to ensure that the company has a plan for how it operates in a sustainable and responsible manner, considering not only financial performance but also the impact of its activities on society, the environment, and the impacts those activities have back on their business.
Why is an ESG strategy important?
Just like any other business strategy, having a clear plan is more likely to lead to successful implementation. Furthermore, embedding environmental, social, and governance (ESG) factors into business operations, can benefit all stakeholders involved, and uncover a broader array of opportunities available to them.
For example, a detailed ESG strategy:
- ✅ Provides stakeholders transparency and trust in your operations
- ✅ Offers you insights into improvement opportunities
- ✅ Provides another avenue to mitigate risks to your business
- ✅ Allows you to remain compliant with mandatory reporting requirements
Why have ESG strategies come about?
ESG strategies have come about for two main reasons. Firstly, having a strategy is essential to implementing change, especially across a large organisation. Many businesses that are looking to become more sustainable, either due to an ethical need, or to profit from some of the benefits that come along with it, put together plans to ensure they can actually achieve their goals.
But, the rise of ESG strategies can be more closely linked to the finance community. In the last few years, investors have begun choosing to invest in businesses with mature sustainability policies and practices. For some, this will be down to values, others believe sustainable businesses can bring a greater return on investment.
In the past, it was difficult for investors to glean a clear picture of how sustainable a business was, as many businesses did not report in detail on non-financial matters. However, the rise of ESG, ESG strategies, and ESG reporting has created a system in which investors can now clearly see the sustainability initiatives of an organisation and make more informed investment decisions.
Building on this, to drive investment into sustainably focused businesses, governments have steadily introduced regulations and standards that require businesses to clearly report on their ESG strategies. One of the most significant is the EU’s Corporate Sustainability Reporting Directive (CSRD), which not only provides the investment community with a comprehensive understanding of a company’s sustainability efforts, but also sets the stage for similar regulations worldwide.
What makes up an ESG strategy?
ESG stands for Environmental, Social, and Governance, and an ESG strategy is made up of rules and practices around these three areas.
The first category covers the environmental impact: how well the business conserves the natural world, and how they’re working to protect the future of the planet.
- carbon footprint
- energy efficiency
- waste disposal strategy
- natural resource preservation
- pollution levels
Governments are implementing strict environmental targets in light of the threat of the climate crisis, including reporting on the breakdown of a business’s emission scopes. This makes reporting on and tracking this category more critical than ever.
The second category covers the social impact: how well the business operates with (and within) the community.
- data security
- diversity and inclusion
- working conditions
- labour standards
- community donations
Companies may also report on the standing and social values of any suppliers they affiliate with.
The third category covers governance: the standards and policies used by the company’s leaders to operate it from the top.
- board member composition
- accounting transparency
- executive compensation
- stockholder voting rights
- any clandestine dealings or conflicts of interest
It also covers the general purpose of the organisation and what it stands for.
Examples of an ESG strategy
In this section, we’ll draw inspiration from Microsoft. In 2020, the tech giant committed to becoming carbon negative, water positive, and zero waste by 2030 all while protecting ecosystems.
But to achieve these goals, the company has put into action a number of strategies covering each area, for example:
- Reduce emissions across all operations (scope 1, 2, and 3)
- Invest $1 billion to accelerate technology development and deployment of new climate innovations
- Purchase carbon removal credits
- Reduce water-usage (including data centre cooling)
- Invest in water replenishment programs
- Harvest rain water
- Increasing reuse and recycling of servers and components
- Eliminating single-use plastic
- Make fully recyclable products and packaging
Protect and preserve ecosystems
- Invest in land protection projects
- Piloting solutions that are regenerative
By using this ESG strategy, Microsoft can have a straightforward and consistent plan of action to follow, taking into consideration all the different aspects of the company. This also explains to possible investors the direction the business will be going over the coming years.
How should you go about creating an ESG strategy?
Depending on the size of an organisation and ESG strategy may vary in complexity, but in general, a policy should cover a few main areas.
ESG – A step-by-step guide
1. Evaluate your company’s current ESG practices
First, perform an audit of your companies current performance across the environment, social, and governance areas. This could mean reviewing your:
- Greenhouse gas emissions
- Water usage
- Waste policy
- Health and safety
- Labour practices
- Board compensation
You can perform a ‘materiality’ impact assessment that identifies the factors that impact your business – for example, heavy use of oil and gas may have a material impact on your business due to volatile fuel prices.
2. Include stakeholder feedback
Your stakeholders know your business and may be able to offer you feedback on areas your ESG policy can cover. Suppliers may be working on similar sustainability goals, customers may expect certain behaviours from your brand, and employees might have an understanding of internal areas for improvement.
3. Set yourself goals & milestones
Set goals based on your assessment, these will give you a direction to focus your attention and should hold you accountable. They should also be aligned with your company’s mission, vision, and long-term strategy.
Give yourself plenty of opportunities to check in and benchmark yourself to see if you’re making incremental progress towards your ultimate goal by putting together a roadmap with interim goals.
4. Set a clear and concrete strategy
The next step is to put a plan of action in place to move from your current assessment, towards your companies long-term goal.
Examples include implementing energy-saving measures, such as using renewable energy sources or enhancing employee well-being and work-life balance through initiatives like flexible work hours, wellness programs, and mental health support.
If an ESG strategy acts as a blueprint to address sustainable factors in your operations and decision-making processes, they must be clear and measurable – build a concrete foundation.
Building your ESG strategy isn’t one-and-done, as time goes on, new avenues may open up for you to address aspects of your business that may not work in the way you’d hoped.
Don’t be afraid to ask for help
ESG has become a global activity and there are plenty of sources to help you build out your policy. The UN has its Sustainable Development Goals, that offer a good benchmark for ideas on what your company can do. And the SASB Standards highlight ESG issues that are more relevant to 77 particular industries.
Rating and reporting on ESG progress
When developing an ESG strategy, it may be necessary to provide external reports on your progress to consumers, investors, and other stakeholders. This requires its own dedicated process to guarantee the report’s effectiveness.
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You can track your individual performance and strive to improve over time. But when you want to communicate the success of your ESG strategy, you can rely on third-party ratings from organisations like S&P Global ESG, MSCI ESG Research, Sustainalytics, and EcoVadis.
Examples of ESG policies
As ESG has begun to take the world by storm, there are plenty of examples of companies working to improve the sustainability and ethical responsibility of their businesses, a few can be found below:
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