By working across three phases leaders can put themselves on a path to building trust, reducing risk, and creating value from their ESG strategy and efforts.
Welcome to the world of ESG. Maybe your ESG journey started with a call from an investor, questions from the Board or CEO, or from a groundswell of interest from employees or other stakeholders. Whatever the reason, we’re glad you’re here.
These three letters, short for environmental, social, and governance, have taken center stage in a world in which challenges such as the COVID-19 pandemic, racial and social inequity, and the daily realities of climate change continue to redefine what it means to do “business as usual.”
Defining the component parts of ESG is relatively straightforward: climate change falls under the “E,” for example, diversity and inclusion under the “S,” risk management under the “G.” But what “doing ESG” means in practice, and above all how organizations can truly understand and benefit from this increased global focus on ESG, is a bit more complicated.
We believe that ESG is a lens for decision making through which organizations can build trust, reduce risk, and create value over the long-term—in ways that benefit their shareholders, employees, suppliers, and customers alike. We also believe that those who are slow to move will find themselves scrambling to stay relevant.
So, let’s get started.
GET READY: WHAT IS ESG AND Why DOES IT Matter?
The ESG landscape is vast and evolving rapidly, fueled by increasing expectations from investors, employees, consumers, and regulators, to name just a few. And while the specific ESG issues that matter most to a given company (in ESG parlance, those that are most material) can vary, a few ESG-related questions your stakeholders are likely to be asking of—and holding your organization accountable for—include, for example
- Environmental: How are you tackling climate change and using natural resources in ways that are ecologically sustainable?
- Social: How well are you fostering an inclusive and diverse workforce, protecting rights of workers across the supply chain, and strengthening your communities?
- Governance: How do you uphold your legal and ethical obligations and identify and manage critical risks over the long term?
Strong management of ESG issues can make a company more resilient and attractive to investors by, for one, mitigating risks. But in today’s “ESG has gone mainstream” world, risk reduction constitutes table stakes. Many companies, think Patagonia, or even BlackRock, are also capturing new market opportunities and building connection and reputation by taking a leadership role on issues that matter most to their stakeholders, be they investors, consumers, suppliers, or others, and in so doing, are playing an important role in shaping a more inclusive and sustainable economy and society.
And for executives who may be hoping that this “ESG stuff” will go away, it seems here to stay. Not only has ESG gone mainstream but evidence is also mounting that integration of ESG into decision-making is not just a feel-good exercise to motivate employees and consumers—done well, it also drives enterprise value and financial performance.
GET SET: WHAT IS WITH ALL THESE RATINGS AND RANKINGS, STANDARDS AND FRAMEWORKS?
While ESG as a lens to decision-making is here to stay, the expectations related to ESG are not staying still. They are expanding rapidly in both scale and scope.
When we started our firm 18 years ago, our first focus was on helping our clients navigate the new and emerging world of ESG frameworks. Over the past decade, from TCFD to SASB to GRI, MSCI to DJSI to EcoVadis, we have seen the number of ratings, rankings, and disclosure standards and frameworks multiply, confusing companies and investors alike.
ESG performance is not synonymous with performance on ratings and rankings, nor with adherence to disclosure standards and frameworks. But stakeholders, including providers of financial capital, hungry for information about organizations’ ESG performance, continue to incorporate these third-party comparisons and “stamps of approval” into their analyses and assessments, which in turn will continue to raise the stakes on companies to address and to perform better on them.
Understanding which are most critical to your stakeholders, for example TCFD for climate-related financial impacts, SASB for industry-specific reporting to investors, or GRI for framing and communicating broader social and environmental impacts of your business, will be critical. The landscape of ratings and standards is vast, but we’ve captured many of the most important ones for you. Organizations that focus on the few that matter can reap significant benefits, from increased reputation and brand equity to reduced cost of capital.
GO!: EMBARKING ON YOUR ESG PATH
So, how do you pull the pieces together and get started?
The operating environment for many companies can feel like managing change while the goalposts continue to shift. But given the pace of change, now is not the time to make the perfect the enemy of the good.
For nearly two decades, we have worked with dozens of organizations on their most important ESG issues, from those just starting (and wondering, “so, what does ESG stand for?”), to those who continue to seek new opportunities to embed ESG-focused decision-making into the fabric of their companies. Even amidst a rapidly evolving landscape of shifting terminology, regulatory requirements, and stakeholder expectations, we have seen three phases that make the difference in defining and pursuing ESG-related strategies that deliver value over the long-term: Assess, integrate, communicate (and reflect and repeat).
To determine where your organization wants to go, you need an honest appraisal of where you are. Assessing the organization’s landscape, including risks, opportunities, and goals, is the crucial first step in the ESG journey. This means
- Understanding your material ESG issues: Not all ESG-related issues are equally relevant to every company. Materiality can have multiple definitions but, as a process, focuses on defining which ESG issues truly matter to your organization’s stakeholders, both internal and external, and to your ability to create value for these stakeholders over the long term. Central to the materiality process is stakeholder engagement, a process of gathering insights and creating opportunities to deepen trust, build alliances, and identify new solutions to challenges. The internal engagement elements of this process in particular build a critical platform for the next phase: integration of ESG issues and priorities into the fabric of the organization. Like other ESG topics, materiality is an evolving concept, with terms like “double,” and “dynamic” rising to the fore, largely in response to new European regulations and emerging standards, which are also likely to have an impact on this side of the pond. Catch a glimpse of materiality past, present, and future here.
- Prioritizing your most relevant ESG ratings: With more than 600 ESG ratings being produced globally, it can be hard to know which scores are most important, including those that most influence your reputation or access to capital. And since each has its own methodology, it is confusing and time-consuming to understand—and improve—how your business is evaluated. However, standing still is not an option. We’ve highlighted a few of the most used ratings, including MSCI, DJSI, and CDP, and we have already helped clients from across sectors improve their performance across all of them. Our advice is to focus on the few that matter to your most important investors and customers and continue to work to improve the information, which is a major focus and goal of the “communicate” step (more on that, below).
- Sizing up your competition: Your peers aren’t standing still. Understanding your performance on material issues relative to that of peers can inform your starting point and build a strong catalyst for change within your organization. In the case of ESG, competition can be the rising tide that lifts all boats.
Only by integrating ESG considerations into business strategy, operations, and daily decision-making will companies begin to capture the promise of their ESG efforts—building trust, reducing risk, and creating value. Companies that successfully integrate ESG focus on
- Bringing the board and executive leadership on board, to ensure they understand how stakeholders expect them to engage on ESG issues.
- Capturing goals and targets to guide the organization’s near-, medium-, and long-term performance on ESG issues.
- Building capabilities and, where necessary, mindsets of functional area leaders and managers to reduce risk, improve operational performance, and achieve results aligned with your goals and targets.
Integration requires a plan for addressing each of the material issues in a way that responds to stakeholder expectations, and that underpins and advances corporate strategy. It is the blueprint of sorts that builds the bridge between where your organization is and where it wants to be.
Your stakeholders want and expect to hear about your ESG efforts. But if you don’t own your narrative, someone else will. ESG communications seek to connect, inspire, and inform, while weaving an authentic narrative about how your organization is creating long-term value. A few critical activities include
- Building an authentic brand and narrative that outlines what the company stands for and how it will deliver against this vision.
- Reporting on your ESG efforts in line with global standards such as GRI, SASB, and TCFD, providing stakeholders with a transparent, balanced, and authentic view of your ESG achievements and challenges, which then establishes the core platform for all other disclosures and evaluation by rating organizations. Demand for assurance on ESG-related reporting is also increasing and, for example, will be required for many EU companies in the coming years.
- But, staying focused on what stakeholders want to know. While the expectations of reporting seem to proliferate daily, the volume of information in your report needn’t follow suit. The key to getting a bigger return on your sustainability report is to focus on those stakeholders you defined as important and decide what data and stories are most relevant to each—and what channels are most effective for reaching them.
- Advocating for change on priority issues, communicating the company’s positions and commitments, and shaping the debate with peers, policymakers, and other important audiences on topics of importance to you and your stakeholders.
The importance of truly integrating ESG into decision-making to build trust, reduce risk, and create value is clear. By following these three phases leaders can put themselves on a path to delivering for all stakeholders and ultimately to shaping a more inclusive economy and society.
To talk about your journey and how we might be able to support you, contact Victor Melendez, Managing Director & Chief Growth Officer.
- For example, S&P Global Ratings. “The ESG Advantage: Exploring Links to Corporate Financial Performance.” April 2018. McKinsey Quarterly. “Five ways that ESG creates value.” November 2019.
- For companies subject to the Corporate Sustainability Reporting Directive. See “Frequently Asked Questions on the CSRD,” 21 April 2021