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With the rise of ESG investing and greater public pressure on all organisations to be transparent about their environmental, social and governance policies, it has become imperative for businesses to create an ESG strategy. But rather than a knee-jerk reaction to external influence, it should be built on a foundation of stakeholders’ preferences balanced against business priorities
Integrating environmental, social and governance (ESG) principles into your business strategy is no longer a should-do, but a must-do. Failing to take a position on ESG factors will leave you trailing the competition. The growth in popularity of ESG investments and asset management reflects the financial markets’ recognition of the impact of ESG risk on financial performance. Meanwhile, the rise of stakeholder capitalism is forcing businesses to consider stakeholders’ interests when it comes to long-term sustainability, governance issues and wider environmental impact.
ESG criteria have become a key part of any risk management strategy. By measuring the impact of ESG factors on operational and reputational risk, you are better placed to mitigate them. Increasingly, legal and compliance risks also need to be managed, as ESG regulation becomes stricter and ESG disclosures mandatory. Without an effective strategy, businesses leave themselves open to ESG risks, and also to missing ESG opportunities.
Having recognised the need for a strategy, the challenge lies in formulating it.
The ESG acronym encompasses an almost infinitely broad range of elements, including every aspect of environmental impact, sustainability, corporate governance, community outreach, employee welfare and reward, supply chain management, and the social contract between a business and the wider world.
Everything from parental leave to eradicating modern slavery, executive pay to net zero targets, falls within the scope of ESG.
With ESG comprising so many elements, the ESG strategy must be specifically tailored to your business. A bespoke solution requires the consideration of three key factors:
Analysis of the gap between these three considerations will allow your business to determine which of the myriad constituents of ESG should be focused on.
The ideal outcome is to dial up your activity on essential issues, and, recognising that you can’t lead in every area, at least remain level with the competition in less vital areas.
In order to build an ESG strategy along these lines, your business needs to be able to surface relevant issues and measure its ESG performance. ESG is a notoriously fast-paced arena, with new battle lines constantly drawn by competitor moves and changing societal pressures and expectations.
Refining an ESG strategy, therefore, in not limited to an annual review, but is an ongoing activity, plotting the shifts in the landscape that impact the business. By building effective measurement into the planning process, it becomes possible to formulate considered responses, rather than leaping aboard the nearest bandwagon.
Even in the ever-evolving world of ESG, a measured strategic response will achieve the most sustainable results. Each issue should be viewed through the lens of your business’s overall strategy, and the prism of the three steps above. What do you stand for as an organisation; what do your stakeholders feel about the issue; and which of your stakeholder groups need to be prioritised? This is the bigger picture, and avoids the business lurching from one populist pronouncement to another. ESG measurement alerts you to emerging issues, and helps you surface considerations relevant to your business.
While ESG is about the impact that your business has on those invested in it, as well as society and the planet as a whole, when building an ESG strategy you should also consider what you need it to do for you. What does success look like for you in relation to ESG?
The answer to this will vary significantly from company to company and between sectors. It will depend in part on where the business sits on the ESG maturity curve. In certain sectors, for example the extractive industries, some components of ESG have been essential considerations for a long time, albeit under different names.
Mining companies could be considered surprisingly advanced in environmental and social areas due to the nature of what they do and where they do it. They have had to earn social licence to operate in fragile environments, and win the acceptance of the communities they operate in. ESG factors have to be accounted for because if they get their strategy wrong, they will no longer have the ability to work in and profit from the places where raw materials are found.
For sectors less far along the maturity curve, reflection is needed around what ESG means to you as an organisation. If there are no business benefits, and only onerous requirements, both commitment levels and outcomes will be poor.
Having taken all of these factors into consideration when establishing the core principles of your business’s ESG strategy, there are a number of frameworks on which it should be based:
Just as stakeholder capitalism is based on creating value for all stakeholders, while also presenting the best route to the long-term financial success of the business, so an ESG strategy needs to both meet the priorities of your stakeholders, and also contribute to the success of the company. Recognising this is crucial to the design of your ESG strategy.
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