The rise of ESG investing, heightened regulatory environment, and public pressure for transparency combined with 600+ ESG ratings, multiple ESG frameworks, and standards, combined with disparate data sources and siloed workflows can make tackling ESG priorities daunting. Whether your organization is just getting started with an ESG strategy or if you are looking to evolve your existing strategy, the time is now. Here’s your step-by-step guide for developing a winning ESG strategy.
Why Creating an ESG Strategy is Critical
Not only is ESG a framework that financial institutions and investors have to report on, but it is also on the radar of employees, regulators, and everyone involved in the ecosystem.
Having an ESG strategy and an ESG data tracking and reporting structure has become critical for the future of businesses and organizations. “Global crises, such as climate change and the COVID-19 pandemic, have made everyone realize that we are not masters of our planet, but rather stewards of nature,” says Elizabeth Tutino, sustainability specialist advisor at Equilibrium.
ESG has become even more significant as companies take responsibility and find resources to accomplish positive climate action. An Edelman study shows that 95 percent of U.S. investors are interested in taking an activist approach to investing, and 74 percent indicate they would take aggressive activist measures.
Regulations are also driving the need for ESG strategy and reporting. The U.S. Securities and Exchange Commission just announced a new proposal on climate disclosure that mandates robust climate-related reporting. To comply with those upcoming obligatory disclosures, it’s easiest to have the foundations of ESG reporting in place, as well as stakeholder engagement, and a completed materiality assessment ahead of time. In the EU, ESG reporting is already mandatory, so there’s also momentum around building globally aligned standards.
Consumers and employees increasingly view ESG as a priority, with 76 percent of consumers saying they will stop buying from companies that treat the environment or its employees poorly, according to a PWC study. Employees are putting pressure on their employers to accomplish ESG goals as well — organizations with the highest employee satisfaction had ESG scores 14 percent higher than the global average, a study found.
Creating an ESG Strategy
If you’re ready to develop your ESG strategy, here are the steps to take to ensure you create an actionable ESG plan that has an impact.
Step 1: Take Stock of Existing ESG Initiatives
Start by meeting with and gathering insights and statistics from internal leaders and stakeholders with expertise in different ESG areas such as employer branding, waste management, investor relationships, and more. This helps set a baseline to understand current ESG policies and initiatives that may already be in place. This is also a good time to assess and inquire about the ESG interests of your investors and board to find out where their priorities lie. This step will make goal-setting more realistic and specific to your organization, its strengths, and the issues it cares about.
You’ll also want to analyze gaps or holes in current policies and initiatives to course-correct as relevant. Take time to understand the ESG landscape within your company and of companies that are a similar size, industry, or have similar values.
As you gather information, benchmark against competitors to see how other companies report, what kind of data they measure, and what is material to the industry. Consider using a benchmarking tool to save time and get your organization’s “score” against competitors in a variety of areas.
Step 2: Set Priorities Through a Materiality Assessment
There are a wide variety of topics and issues related to ESG. The almost default method of identifying ESG priorities is by conducting a materiality assessment, which helps your organization identify its issues that truly matter and determine what to report on. A materiality assessment allows you to identify, refine, and assess the potential ESG areas that your company could focus on. Your ESG strategy will be based on the results of this materiality assessment.
Start by reviewing all ESG issues and trends that affect your organization and industry, then prioritize which ones are more important to your company. Do this by methodically interviewing internal stakeholders and then moving on to external stakeholders for their perspective. These interviews allow you to outline which issues may affect your company the most and prioritize by importance.
Organizations should assess double materiality, Business for Social Responsibility points out — reporting on financially material topics as well as topics material to the economy, environment, and people. “We hear from our members that despite having completed a materiality assessment, they still get questions from stakeholders about other issues that may not be material to their business,” the article states. “By applying the concept of double materiality, a company will be able to clearly distinguish between inward and outward impacts.”
You can refer to current standards and frameworks for materiality guidance and topics, including the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board, and the UN’s Sustainable Development Goals. As you start mapping out your ESG priorities, consider taking a course in GRI reporting, suggests Maureen Kline, vice president of public affairs and sustainability in North America at Pirelli. “Even if you don’t end up using GRI, it focuses your attention on how to move from materiality into KPIs,” she says.
Step 3: Assemble Your ESG Committee
Next, assemble your ESG committee which will be responsible for creating and executing the ESG strategy. It’s important to put together a dedicated and accountable team or governance committee charged with overseeing ESG strategy, implementation, and measurement.
Apart from sustainability specialists, legal, risk, and compliance leaders, finance executives, corporate social responsibility professionals (CSR), and investor relations professionals should ideally be part of your ESG committee. The HR department should be involved with setting and implementing goals for employee wellbeing, training, and DEI — the “S” in ESG. Many organizations also include the marketing department in their ESG task force. The committee should be overseen by the company’s board of directors.
Keep in mind the ESG is still a relatively new function with an increasing demand for talent. Actively look for transferable skills in case you are hiring new members and proactively build an internal talent pool for ESG initiatives.
Step 4: Measurement & Reporting
Ongoing tracking and measurement of ESG goals are relevant now more than ever, as regulators and investors around the world increasingly push for ESG disclosure and reporting. Data collection can be challenging for sustainability professionals since many use manual data entry processes, different spreadsheets to track data, and processes that are time-consuming and confusing.
Using an ESG data management and reporting technology is one way to track performance more easily and to ensure your data is “investor-grade” and auditable, which will be more important in the future as ESG reporting becomes mandatory, Tutino says.
Decide which metrics and KPIs to report on and how often to create reports on your efforts. Climate data is especially important to measure right now with potential upcoming mandates to report on this information publicly, Tutino says. Identify who will track and confirm each KPI, and consider putting third-party auditing in place to make the KPIs more credible.
You should report on your goals annually to show performance and progress and ensure stakeholders are informed and on board with the strategy. Reporting on progress should also factor in any changes in ESG legislation or policies that will impact objectives and action plans. “The exercise of reporting itself is the driver of making progress within a company,” Kline says.
Step 5: Set Your ESG Goals
Once you have determined your company’s priorities and how you will measure success, finalize your ESG goals specific to your company. Beyond the results of your materiality assessment and internal ESG audit, factor in the interests of your investors and board. You should also assess the interests and focus of your industry and customers to see what people desire from a responsible company in your industry.
Assess your goals from a budget perspective and pick the “lower-hanging fruit” first, Tutino suggests. While you should set long-term goals for where you want to be decades in the future, you may not have the budget to accomplish those goals right away. As you accomplish these easier goals, you will get momentum and hopefully more budget to work toward great goals.
Base goals and objectives on current ESG status and where you want to be in the future. Questions that your ESG committee should ask while setting goals include:
- What are you currently doing right?
- What do you want to improve upon?
- What will be added to your current plan?
- What will be the challenges?
- What is your timeline?
- How does sustainability create value for your organization?
- Is there any background research needed to finalize goals?
Step 6: Set Your Budget
Setting your budget is critical to understanding your organization’s financial boundaries and opportunities for rolling out your ESG strategy. Start with an ROI analysis including financial, material, and long-term ROI. Consider factors such as attracting the right investors or customers and employee satisfaction.
You may need to hire a consultant or head of ESG to keep progress on track, so costs of additional employees should also be budgeted in. Consider the costs of environmental or related audits and of new technology you may need for new ESG initiatives and reporting on your progress.
Determine which projects to tackle to help you accomplish the goals your company has set. For example, if your goal is 100 percent renewable electricity by 2025, figure out how you will implement this — whether to allocate a budget for building solar panels or purchasing renewable energy. Price these things out and put together a budget. “You can list the projects you want to get done in the next five years, price them, spread them out, and allocate budget accordingly,” Kline says.
Step 7: Construct Your ESG Framework & Action Plan
With your goals and budget in place, create an ESG framework and action plan that pave the way for meeting those goals. Your action plan should be realistic and actionable based on your company’s current state and ESG goals. Your framework and plan should:
- Outline your company’s vision, the reasoning for your ESG goals, and guiding principles
- Include how you’ll manage ESG with corresponding targets
- Ensure reporting is included as it’s critical to measure progress
- Be actionable alongside other company policies and procedures
- Mention any necessary technology
As your action plan and goals evolve, it’s vital to keep track of ESG legislation and policy changes and how these can affect your strategy and goals. Future-proof your ESG reporting with Equilibrium, a next-gen, end-to-end ESG solution that goes beyond carbon accounting to help companies move past static spreadsheets and legacy solutions. Learn more about how Equilibrium and FiscalNote’s suite of solutions can help you stay ahead of ESG disclosure, sustainability reporting, and climate risk management.
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