ESG (Environmental, Social, and Governance) is your newest commitment towards your customers and stakeholders, the greater public, the global community and the environment, but what are they exactly? How can they benefit my business? How to improve my ESG performance? These and other questions will hopefully be clarified in the next few lines.
ESG BACKGROUND KNOWLEDGE
ESG is a set of company operations’ criteria within the umbrella of Environment, the Society and Governance that investors are increasingly using to screen potential investments.
- Environmental criteria considers company’s performance on the environmental sustainability.
- Social criteria assess the relationships with employees, suppliers, customers, but also important, the support and enhancement of its surrounding communities.
- Governance criteria analyses company’s leadership, transparency, internal controls, and policies.
An ESG Framework is a standardised platform that guides you on your ESG journey, allows you to methodologically measure financial and non-financial metrics such as sustainable and ethical attributes, assess your ESG performance and benchmark your organisation within your industry. The Global Reporting Initiative, GRESB, or the SASB are few examples of many agencies that are flourishing within different sectors. As any process that aims at being sustainable, it must be continuous, progressive and improved. That means that it should also follow a sort of continual improvement cycle, such as Plan-Do-Check-Act (PDCA) cycle.
The end goal is to manage your human and natural resources, assets and entrepreneurship in ways that maximise value for all your business stakeholders including the Environment, the Society and the Government. Your business reputation, financial value and other tangible and non-tangible benefits are in return of your excellence in ESG performance within your sector.
On the understanding that ESG is gaining momentum as you read these lines, the selection of opportunities that align with ESG criteria will secure current clients and customers and ensure resilience of your business in the short to medium term and attract new investors that will protect its operations and profitability in the long term.
Regardless of your ESG commitment to attract and retain investors, you also want show your commitment internally to your employees. One simple way of doing it is by implementing some simple, and yet effective changes inside the office such as less paper consumption, energy efficient office equipment and other sustainable online services.
THE 101 ESG GUIDE
Noticing the importance of correctness when defining and implementing an ESG strategy, we have structured a process to get you started in this ESG process.
STEP 1: PRELIMINARY RESEARCH
As you are reading these lines, you have already dived into the first step of your ESG journey, the preliminary research. Your curiosity on how to improve the ESG performance and the potential to influence your business success have led you to start your research. As we explained in the paragraphs above, investors and customers are increasingly using ESG criteria to make decisions. As an example, consumers are purchasing personal care products which demonstrates that no animal has suffered in the process, or consume fish that have been captured using sustainable wild-catching practices or responsible managed farms. Your first step will continue exploring your customers’ preferences and your competitors ESG practices; what kind of ESG criteria they use, what ESG interests do your current customers, stakeholders and preferred investors use to screen potential investments or to choose products or services. Once all the preliminary data has been collected you will likely be able to select an ESG Framework to guide you in the process, set performance metric and allow you to report your ESG performance. It is time to get started!
STEP 2: RISKS AND OPPORTUNITIES
You should first determine the relevant issues that affect the industry in which your company operates before identifying your company’s specific ESG risks and opportunities. Once you are ready to identify your organisation’s specific risks and opportunities, utilise methods such as ESG auditing processes, customers concerns and complains, labour conflict, upcoming regulation related to ESG, or applicable local normative. These and other techniques will allow you to recognize your business risks related to ESG and through This is a very broad high level assessment gear at identifying general topics where your ESG Strategy should focus, however, if you didn’t identify and appropriate ESG framework yet, this task should provide you clarify on which ESG framework would be suitable to your business. In essence, you need to identify your current ESG challenges, your financial targets, and rough time for implementation. However, when managing risks and opportunities, you should take into consideration the risk-appetite of your stakeholders as well.
Finally, we shall remind you to apply prioritization to selected risks and opportunities and understand which of those will give you higher returns in the short to medium term while planning for the long term commitments that will create longer-term value. In other words, understanding how does ESG create value for your organisation.
STEP 3: GOALS AND TARGETS
You will likely start this step of the process when you have completed or have a fairly good idea of the position of your company in relation to your competitors, habits and preferences of your customers, stakeholders and investors, and you understand the business ESG challenges.
One of the major handicaps is obtaining information that is relevant and useful to your business and when available, there is a typical inconsistency of ESG metrics. ESG reporting is voluntary for many companies although you can approach the Industry Associations, the Not-For-Profit industry and Environmental groups that gather and disclose data on ESG issues. Nevertheless, if your budget allows you to do so, you can obtain ESG data reaching to ESG data vendors.
As usual, your goals and targets must be SMART. It is important that you understand how much time and effort will it take to achieve them, the investment you will likely need to assign or even how positive is your employees’ interest on implementing new initiatives that involve changing “the way they do things”, your Corporate Culture. Changing the old deeply embedded ways take patience, perseverance and persuasion. Don’t try to sprint, this is not a race. Be sure of your commitments and what is your organisation capable of achieving.
Finally, think on how are you going to measure progress because that will define how to improve your ESG performance in the long-term. It is great to take all those promises on board but if you don’t have clear parameters to measure your progress against, you won’t be able to assess if the investment of time, effort and resources is worthy. In other words, you won’t be able to differentiate success from failure, and moreover, you won’t be able to showcase your good doings in front of your stakeholders, customers and potential investors.
As important as it is to act sustainably, it is to ensure that your good deeds are also sustainable in the long-run, and spending financial resources wisely or being capable of generating new financial resources are part of the sustainability wheel.
STEP 4: ASSING BUDGET AND RESOURCES
Although you might have been looking at financial resources when you were setting your goals, this step looks at assigning budget and resources in detail. The first consideration you should reflect on is your Return on Investment (ROI), which should not be limited to direct financial revenues and savings, but also to the investment capability of creating new business through potential investors, new customers, and even new products or services. As an example, a garage that disposes lubricant oils and tyres to the landfill, could decide to recycle these waste and generate a new business line selling these by-products to other industries. Obviously, the decision of reducing the waste generation needs some restructuration of the garage to allocate a fit-for-purpose space to store these new by-products, it will probably need some re-training of the staff, transportation arrangements, and it might need new specialised employees etc. All these requirements are translated into investment but when conducting your ROI analysis, savings or costs reductions shall also be included in the equation. Keeping up with the garage example, the decision of waste reduction will save landfill fees, and will potentially reduce council tax or other annual government charges. Other attributes that you might want to assess are your resource consumption, such as water, energy, and the like. If your business has got high electricity and energy consumption bills, the best way to identify potential opportunities for energy reduction is conducting Energy Audits. In that way you will understand your energy consumption patterns and target those patterns to improve and obtain profitable energy savings. Bringing back the garage example, as your garage consumes high amounts of electricity in mechanical equipment, you could think of investing in some sort of energy efficiency solutions. Your best bet in this case is to take the expertise of specialised services that will conduct an Energy Efficiency Assessment on your business and provide you with the best solutions for your budget. Whatever the ESG targets that you have selected, it is always worth checking possible social or green funding options if available for your industry and selected ESG initiatives.
Regardless of your strategy, it is always recommended to assign the tasks of launching, implementation follow-up and measurement of your ESG Policy to a Sustainability Team led by a Champion and a wide range of members from different departments. The team should also cover the executive, managerial and operational levels, and the Champion should be senior enough to be capable of making decision. Finally, The entire team might initially need some kind of training to get started as well.
Summarising, the initial budget including possible funding shall counterpart the identified outlays of additional assets, required modernisations and restructuration, dedicated and part time human resources and outsourcing services, and any additional materials and other consumables required to start your ESG journey. Once your ESG strategy is up and running, your ROI will need to accommodate the required ESG cashflow to ensure both, your business and your ESG Policy are sustainable in the long term. In essence, the way you measure your ROI will ultimately depend on your drivers, which should not only focus on Profit, but also on Planet and People.
STEP 5: DESIGN ESG ROAD MAP
At this point you have all the required information needed to officialise your ESG Policy which will also include a Statement of Commitment. This Step shall not be taken lightly as this represents your business image and reputation. Your Policy should address as a minimum, commitment to perform as per selected ESG regulatory standards, the applicable regulation related to your industry, the local normative of the place where your business operates, and any additional statutory requirements related to any activities. In addition to the mandatory requirements, those goals that you intended to accomplish above will also need to be translated into some kind of voluntary commitments. The Policy should also give a glimpse of the strategies that you intent to employ in order to attain those commitments and even some specific actions worth mentioning. It is very important to conduct this task in collaboration with the ESG Champion to ensure that it is fully supported and endorsed by the person who will have to turn all those commitments into reality. Finally, the following revision date is a requirement in any Policy that you must not forget. There are many types of Policy’s structure and templates in the net that you can chose from but, but regardless of how you structure your ESG Policy, you should always ensure to underpin those principles, values and philosophies that reflect your Company brand. Once you have finalised the Policy and has been checked by all concerned parties, including stakeholders and other shareholders it is time to make it public! Broadcast your intentions and start attacking interested investors and new customers.
In the meantime, your Sustainability Team should had started defining the ESG Strategy for the short, medium and long term in detail and developing the related Action Plans. The action plans should answer the W questions; those are the usual What’s, the Where’s and When’s, the Who’s, and the hoW’s. Those action plans will also bring light to what are the tools and techniques required, when and how to measure, reporting at different levels, any training that might be necessary and any quality controls and checkpoints that should be performed to ensure the ESG management is complying with standards.
Revisiting this step or parts of it when you are in a phase of improving your ESG Performance is always a good practice. Actions will probably arise from the monitoring and control program that you design within the Action Plan.
STEP 6: IMPLEMENTATION PHASE
The implementation process is where your business will make or break deal. It is quite easy to commit to many high standards and have good intentions to do so, but this phase will show you some ground truths about the Corporate Culture you have been nurturing over the years and either confirm your business as a good investment or put your feet back to the ground on previous unrealistic expectations.
This phase is the toughest and hardest of all phases so far. To achieve success you need to ensure that the designed action plan is implemented accordingly and track your progress against objectives and targets. Remember that your objectives and targets were SMART so if you managed to do so, you should not have major problems when comparing progress against objectives. Otherwise, you might need to hold some unscheduled review meetings at regular intervals to correct any lack of definition but also to decide on corrective actions if your progress is not going according to plan and you need to improve your ESG performance.
The implementation phase is fully managed by your Sustainability Team. However, different departments and individuals might need to own certain actions towards achieving the desired outcomes. Responsibilities and accountabilities will go beyond the roles and responsibilities of your Sustainability Team, as such the Director, chair, CEO or Business owner is ultimately accountable for achieving the goals set up in the ESG Policy but the ESG Champion is accountable for the success of the ESG Strategy.
Other tools and methods to check progress are inspections and audits, database software, or even voluntary certifications. In fact, sustainable voluntary certifications such as PEFC, GOTS, ENERGY STAR, BREEAM, or LEED to name a few, depending on the niche where your business is trading, are third party auditing systems that will evaluate your performance, provide you guidance and recommendations. Ultimately, obtaining the certification will unquestionably showcase the achievement of your commitments.
STEP 7: SHOWCASE YOUR PERFORMANCE
Showcasing your ESG performance correctly for your audience is as important as being a good performer. Decisions on the reporting format, periodicity, channels, disclosed information or the type of audience are just few considerations to bear in mind when reporting progress to internal and external stakeholders. Internal reporting will reinforce the will-power of your employees, your human capital, whereas external reporting holds and captures investment. Investing in the right tools, methods, channels and practices will decrease the time consumed in this tasks and increase your Sustainability team’s morale and finally your chances of ROI.
Your reports should be as current as possible, in real-time if it is possible. Use a multichannel marketing tactic including website promotions, press releases, email campaigns, or even partner with sustainable affiliate marketing websites like Pangea Green to spread the message of your achievements to a greater audience. Finally, you need to be able to put your performance progress into context. Choose platforms that can allow you to benchmark your performance against similar businesses, both in size and industry.
Bear in mind that the above described steps are just a guidance and you might find yourself handling 2 or 3 steps at the same time, or going back and forwards few times. It is normal and also will take place when going through cycles of improving your ESG performance which also aligns with the PDCA cycle of continual improvement. Don’t get discouraged and persevere. Over the time, ESG management will become fluent and your ESG performance will be improved.
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