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From corporate boards to social media, ESG is the thing of the day. Those who have been around the corporate management block will remember how ‘sustainability’ went from triple bottom line to corporate social responsibility (CSR), and now, in its final iteration, as environmental, social and governance (ESG). Companies from various sectors seek sustainability by developing and implementing ESG strategies.
But as the fervor of environmental, social and governance reporting increases, meaningful performance metrics fall behind.
Despite the growing importance of ESG on business and investor agendas, a high level of confusion continues to surround standard requirements, climate risk and climate opportunities. Based on my experience working with companies large and small on a wide range of strategic issues, companies tend to make the following key mistakes when addressing ESG issues.
1. Avoid the problem
It is a mistake to think that ESG is a passing phenomenon. Rather than a patchwork fad, ESG is the next iteration of a common thread: sustainability. Sustainability in the early 1990s and 2000s prompted the corporate world to consider social and environmental factors in line with traditional financial results. In practice, the triple bottom line has placed a disproportionate emphasis on environmental performance, risk management and efficiency orientation. Applied to business strategy, the triple bottom line was loosely defined and often lacked a systematic and actionable approach to KPIs.
The triple bottom line has come to represent the main theme of corporate social responsibility (CSR). With stakeholder capitalism taking hold, CSR has mainly focused on low-key initiatives, such as business engagement with nonprofits and stakeholder engagement, alongside other philanthropic efforts. . Focused on a company’s responsibility to stakeholders and the public, as well as its license to operate, CSR was a direction in holistic reputation management. Tending to focus on program activities and their results, as with the triple bottom line, CSR too often lacks key performance indicators.
With this in mind, the ESG is the next edition of this development. What changed ? Instead of being led internally by companies, investors started leading the conversation by demanding ESG performance measures as a precursor to investing. ESG focuses on all non-financial issues that impact a company’s performance, its impact on society and its impact on the environment. Expanding to include governance as a parameter, ESG emphasizes the separation of powers and duties, the way decisions are made in organizations, and other ethical considerations in the conduct of business. Governance is sometimes used as a way to assess the maturity level of leadership, simply in terms of good management. However, there is a real desire not only to measure but also to manage all these factors. And it’s not going to stop.
This version of corporate sustainability introduced risk management and value creation. By placing more emphasis on KPIs, ESG has placed fundamental importance on measuring, monitoring and reporting a company’s sustainability performance. Several voluntary reporting frameworks are currently conceptualizing ESG. A source of confusion and frustration, these are slowly moving towards harmonization. Investment professionals are now willing to pay a median premium of 10% for companies with a strong ESG track record compared to those without. Companies that voluntarily report their carbon emissions can save an average of $ 1.5 million each year in interest repayments due to the lower cost of capital.
Related: MFIs and ESG framework: fostering a foundation for sustainable development
2. Overwhelm and grab the straws
In ESG’s Wild West, this reaction is quite understandable. An alphabet soup of frameworks, standards and guidelines – UNPRI, SASB, PRI, SBTi, CDP, TCFD, SDGs, MSCI, GRI to name a few – can be overwhelming. The sense of urgency is reinforced by the accepted conviction that, like financial reporting, a dominant standard must also emerge for ESG reporting. For businesses, this can be very difficult to navigate.
As regulatory action on sustainability reporting appears imminent, pressure is mounting on businesses, standards and investors to subscribe to a single, cohesive framework. This can be seen in the recent G7 meeting seeking to demand TCFD disclosures or the Securities and Exchange Commission (SEC) considering implementation of ESG reporting regulations.
The lack of a common framework for comparing the ESG reporting performance of different companies is a critical issue for transparency. Inconsistencies in the guidance and normative actions given to companies mean that “ESG” varies considerably on a practical level: the performance data that is collected, presented and used to inform company strategy. It doesn’t help that more than half of the largest asset managers have developed their own ESG frameworks. Nonetheless, the need for rigorous, quantitative data on business performance continues to intensify in response to increasing pressure from investors, consumers and governments.
The instinctive response of companies is to respond frantically to every request from reporting entities or to simply freeze and do nothing. As a result, time and effort is spent extinguishing near-constant fires, while the smoke obscures any connection to the overall strategy and direction of the business. In this context, organizational silos proliferate.
This has a lasting impact on employee morale and consumer confidence. As they increasingly value corporate sustainability and ESG, these groups find themselves struck by erratic corporate efforts of which they are increasingly suspicious.
The reality on the ground is that many ESG issues are difficult to define and measure in a meaningful way, in particular the social elements. Different industries have different levels of risk and different expectations of them. The extent of the problems is still being defined.
Therefore, companies need to take ownership of their ESG story, which begins with a materiality assessment to develop an in-depth understanding of issues relevant to the company’s core mission and strategy, and what matters to its companies. customers, employees, investors and other stakeholders. As with many things, building an understanding of these issues early on, then creating internal programs and leading efforts on that basis, will save a tremendous amount of time, money, and effort down the line.
3. A bolted approach
Companies that treat ESG as something foreign to their organization face apathy, a permanent lack of resources and confusion in the face of ever-increasing expectations from stakeholders and regulators. ESG is an operating philosophy and must be integrated into the overall strategy of the company.
More and more people are expected to manage and show progress on ESG issues. Along with these rising expectations comes a growing concern about greenwashing. ESG is only as good as a business does. For those who wish to take ESG seriously, actions that ‘follow the path’ are likely to include the time and energy required to collect rigorous performance data based on the results of an internal performance assessment. materiality. Or, it can include ensuring data integrity, defining ESG-related KPIs and metrics, and linking executive compensation to the achievement of those results. Use the systems you have to develop a well-thought-out, fully integrated ESG strategy by connecting them to company-wide goals, metrics and priorities. Integrate your existing risk management system, your supply chain management function, and your supplier selection tools and procedures.
Related: ESG, SRI, and Impact Investing: What’s the Difference and What’s Best for Your Portfolio?
4. Thoughtless Marketing
Over the past year, business interest in ESG certification has skyrocketed. Any self-respecting business is now supposed to have a climate, sustainability and a declaration of diversity and inclusion, while many others have started to follow suit. However, the lack of concrete action and the prevalence of gossip are on the decline.
Sustainability statements are commonplace, identical and often unfounded, not supported by company strategy and action. The greenwashing trend is a wasted effort for companies faced with growing skepticism from customers and governments who are starting to demand sincerity.
5. Go too far
Optimizing ESG is a balancing act and relying too heavily on one metric will compromise the outcome. Just as a world built on one bottom line has led to social and environmental neglect, economic prosperity cannot be forgotten in the gold rush on ESG.
The bottom line is that ESG performance is not just a measure of the company’s engagement and performance in their communities. It is increasingly seen as an indicator not only for caring about others, but also for good management.
Related: 5 Big (And Common) Mistakes ESG Investors Make: Are You Making Them?