Environmental, social, and governance (ESG) strategies refer to an organization’s focus on achieving goals related to climate change, socio-economic causes, and corporate behaviour. While pursuit of these goals may be driven by the organization, they are primarily a response to the public and subsequent government action.
According to Kayla Barnes’ A History of How Modern ESG Came to Be, organizations have focused on ESG strategies for decades, from the 1950s, with unions investing pensions in affordable housing, to the 1970s, with the introduction of the Clean Air and Clean Water Acts in the U.S. In the 1980s, companies started to divest from South Africa’s pro-apartheid government. The 1990s saw the first sustainability index that reported on companies with ESG ratings. In America, the Sarbanes-Oxley Act, which passed in 2002, is one of the more notable steps to improving financial reporting and disclosure, which was in response to the accounting scandals in the early 2000s (Cornell Law School, Sarbanes-Oxley Act, 2021).
Why Do You Need an ESG Strategy?
Today, it is even more important, if not imperative, that organizations identify and pursue ESG strategies. The primary force — the consumer — who initially inspired businesses to pursue ESG strategies decades ago, now has more power and influence. Consumers can access a global network to choose which goods and services to purchase, and they can influence the purchasing power of others through social media.
Based on the 2021 Forrester report, Empowered Consumers Call for Sustainability Transformation, consumers lean more towards brands with strong environmental and community interests. The research states that over 30 per cent of consumers focus on poverty and hunger, and over 60 per cent of consumers make purchases based on a company’s efforts towards energy efficiency. The shift in consumer preferences was also evident in Accenture’s 2021 Life Reimagined report, identifying preferences as “powerful enough to drive brand switching and willingness to spend more.” Therefore, consumers look for brands that reflect their values.
ESG-focused organizations are also more attractive to investors, considering the 68 per cent increase in global sustainable investing since 2014, representing a $30 trillion market. Investors also believe that organizations with a proven ESG strategy are more effective at ensuring their longer-term success (McKinsey Quarterly, Five Ways that ESG Creates Value, 2021). Millennial investors have placed a priority on ESG-focused firms by “contributing $51.1 billion to sustainable funds in 2020, compared to $5 billion five years ago” (NASDAQ, Millennials Are a Driving Factor in the Growth behind ESG Investments, 2021).
Internally, a strong focus on ESG objectives can benefit an organization by helping to attract and retain employees, particularly with the millennial generation that places a high value on environmental and social causes. Organizations can also realize revenue gains by attracting consumers who have decided to switch brands or are willing to spend more. Costs savings are also available by leveraging government rebates to reduce energy consumption (McKinsey Quarterly, Five Ways that ESG Creates Value, 2021).
How to Develop and Implement an ESG Strategy
Two guiding principles are necessary to develop and pursue an ESG strategy. The first principle is longevity — being able to fund and support the strategy over the long term. The second is transparency in reporting on the progress of pursuing an ESG strategy. Adopting these principles often requires executive-level commitment and accountability to achieve ESG objectives. With the guiding principles in mind, the following five stages will help develop and implement an ESG strategy.
1. Conduct a 360-degree assessment of the organization to identify the environmental, social, and governance areas of importance, based on input from the employees, consumers, suppliers, investors, and communities in which the organization operates. This step helps align the organization and its stakeholder(s).
2. Prioritize areas of importance and map interests to the short-, medium-, and long-term strategic objectives of the organization. Evaluate the needed funding, time, and other requirements to address each area. Related risks, internal and external dependencies, and necessary assumptions should also be identified (Expert Program Management, RAID: Risks, Assumptions, Issues, and Dependencies, 2018). This step ensures that the pursuit of the ESG goals are compatible with organizational strategy and resources.
3. Identify three to five initiatives representative of environmental, social, and governance topics to be addressed within the year. Develop a plan that addresses each topic and identifies quick-wins and interim goals. The organization should be highly confident in its goals being accomplished within the first year. This helps build internal momentum and demonstrates progress towards achieving the goals.
4. Establish a reporting cadence to monitor progress towards the goals. An executive review of the reports should take place regularly to track progress and address any delays. If there are delays, document the steps taken or any trade-off to bring the plan back on track. This step brings visibility to the progress and challenges to achieving ESG goals.
5. Communicate the progress of achieving ESG goals regularly to all stakeholders in a simple and clear manner. Combine reporting on ESG goals with financial reporting to provide a balanced view of the organization’s overall performance. This step builds trust with stakeholders and demonstrates commitment to ESG objectives.
The pursuit of environmental, social, and governance goals is a minimum requirement for conducting business. Achieving ESG goals creates goodwill with an organization’s stakeholders. Completing these five stages will help an organization develop an ESG strategy that is achievable — based on organizational priorities — and has meaning to its stakeholders.
Nigel Taklalsingh | Contributing Writer