What Processes do you Need to Master to Develop a Strong ESG Strategy?

It is no secret in our global economy that change is happening fast. With an influx of new regulations focused on accountability, transparency, and specificity, businesses are being held to a more stringent set of requirements for their Environmental, Social and Governance (ESG) activities. In the last year alone, President Biden released an Executive Order addressing climate-related financial risk disclosures, Congress released the Corporate Governance and Investor Protection Act and the SEC has already begun beefing up their ESG regulatory framework with the Climate and ESG Task Force.

In Europe, they have already started requiring public companies to report on their ESG activities with the Sustainable Finance Disclosure Regulations, which will have a big impact here in the U.S. All of these regulations are designed to create a more standardized set of requirements for ESG activity, and all public companies that operate in the U.S. and EU public markets are expected to comply.

ESG Regulation Enforcement

As we enter 2022 when a majority of these regulations will be enforced, businesses should begin planning their ESG strategies now. Those who wait too long will already be far behind the trend, risking sanctions, fines, and a serious loss of market share.

Now, that is the ‘stick’ but there’s equally as many ‘carrots’ in the ESG equation. ESG has been proven as an effective long-term strategy and businesses should embrace these initiatives as a competitive advantage. Strong ESG performance directly links to better top-line growth through favorable customer value-props. This provides better access to resources and partnerships, reduced energy consumption for lower costs, increased employee motivation and job satisfaction, and enhanced investment returns on long-term assets. BlackRock predicts that Exchange-Traded Funds (ETFs) with a sustainable focus will rise to $400 billion over the next decade. This prediction is not unfounded, as 19 out of 26 ESG ETFs outperformed the S&P 500 during the pandemic. ESG is here to stay; investors want it, consumers want it, public policy increasingly requires it, and the long-term success it can provide for your business is proven.

How Do You Implement an ESG Program?

The real question we all need to ask ourselves is “what should businesses be doing to design and implement an efficacious ESG program?” Creating an effective ESG Program is tricky, as consumers, and now regulators, have a knack for flushing out greenwashing. Even unicorn IPOs like Oatley and sustainability sweetheart, Allbirds have received some unwanted attention for allegations of shady accounting practices and misleading sustainability claims. For that reason, if your company wants to do it right, you’ll need to master these key processes first.

Stakeholder Identification

The International Integrated Reporting Framework defines a stakeholder as “those groups or individuals that can reasonably be expected to be significantly affected by an organization’s business activities, outputs or outcomes, or whose actions can reasonably be expected to significantly affect the ability of the organization to create value over time.”

Relevant stakeholder groups include, but are not limited to, shareholders, owners, employees, customers, trading partners or suppliers, NGOs, legislators, and local communities. Pinpointing the relevant stakeholder groups early on helps you identify key issues based on who is being affected and what initiatives you need to design to address these issues.

Identifying the relevant stakeholders is a critical first step because it allows you to better understand who impacts or is impacted by your business. Doing so effectively gives you the right frame of reference to work off of, ensuring that you are involving these stakeholders when making decisions. More importantly, you must engage these stakeholders to gather consensus on the issues that your ESG program needs to be addressing. You’ll engage them through interviews or surveys and ask them to rank which issues they deem important for the business to address. Getting a representative sample of your stakeholders will not only ensure that your materiality assessment is well-informed, but it is also an important metric to be tracking. Reporting on your stakeholder and employee engagement percentage is a great way to show that you have thoughtfully included these groups in your process and are being transparent.

Stakeholder Engagement Process

If you’ve never gone through the stakeholder engagement process, it's important to consult with an expert to ensure that you have identified all relevant groups and are framing your survey questions in the right way. There are a lot of nuances both with engaging these stakeholders and with analyzing the data, so speak with someone who has done this before to make for a smooth process. Additionally, distributing a survey to hundreds or thousands of employees, customers and suppliers can be incredibly time consuming. So it is extremely helpful to utilize a program that can manage the design, distribution and analysis of these surveys. For this reason, we’ve integrated our survey directly into our ESG Management Platform, so that it can be distributed, collected, and analyzed all in one place.

Materiality Assessments:

After you’ve successfully engaged your stakeholders, you will then use the results of the survey to determine the issues that are most material to the business. A material sustainability issue is an economic, environmental, or social issue by which a company has an impact on or may be impacted by. It may also be one that significantly influences the assessments and decisions of stakeholders, which is why it is so important to identify all relevant stakeholders.

You’ll want to superimpose the results of the survey on a materiality matrix. Using a materiality map creates a great visual, ensuring you only focus on issues placed in the top right of the map. Your ESG reports should include these materiality maps to show that you carried out your stakeholder engagement, have analyzed the data to determine the most material issues, and are actively working on addressing them. McKinsey points out that weak ESG propositions, either too vague or missing the mark on the most material issues, can lead to double-digit declines in market capitalization once the public catches wind. This is why it is so critical to not only select the most material issues, but also make sure that these efforts are well represented in your communications so that all stakeholders know you’re focused on the right things.

Establishing your ESG Working Groups:

A strong ESG program encourages collaboration to gather a wide variety of insights and perspectives on the material issues. Leaving it up to one sustainability officer isn’t practical or efficient and will lead to issues later down the line. Studies show that a strong ESG performance links to increased job satisfaction and the firm’s ability to attract and retain talent in the increasingly skeptical Millennial and Gen Z workforce. For this reason, we want employees to engage with initiatives they are passionate about.

Additionally, gathering all the data needed to baseline your ESG efforts can be immensely time-consuming, and actually carrying out these initiatives is even more of a commitment. That is why it’s beneficial to divide and conquer, establishing different sets of working groups who are given ownership over parts of the process.

Participation in the B-Team should be completely voluntary. Ask employees if they want to work on projects related to an issue they listed during the stakeholder engagement phase. Managing these working groups can be tricky, which is why our ESG Advisors utilize an Executive Charter that is in charge of maintaining the ESG program and guiding the working groups. Our team also has a set of tools that we use to cut the time it takes to gather and organize all the relevant data, which prevents your employees from spending too much time on the smaller, more tedious tasks. Minimal disruption from their day-to-day tasks while also giving them the appropriate time to work on projects they are passionate about is the name of the game here.

Utilizing a Third-Party Standard:

The majority of ESG regulations rely on Third-Party Standards to grade corporate ESG performance. These standards carry weight in the marketplace because they quantify and score your company’s performance in a tangible way that can be understood by the majority. Currently, these 12 ESG Reporting Frameworks are the most widely used, with another dozen or so smaller frameworks actively being developed.

Choosing a Third-party standard is also an effective way to establish the metrics and data points you will need to disclose in your ESG reports. Identifying a standard should be done early on so you can use it as a guide when baselining your ESG efforts. This will give you a better idea of what data is needed and which metrics you’ll be disclosing to the public. Our advisors utilize the SASB standards, as they are the most widely used standard in the market and offer sector-specific guidelines.

Proper reporting enhances your efforts both internally and externally. Externally, not only will you comply with the new ESG regulations, but you also give investors and stakeholders a proper representation of your efforts measured against an independent third-party. This information is verifiable and audited, which is important considering 43% of investors are more likely to trust an ESG performance when reported through numbers and data rather than qualitative descriptions.

Internally, these reports should inform your strategy decisions and ensure that your efforts are focused in the right areas. Using these standards to develop a baseline for your current impact allows you to highlight the areas you are performing well in, as well as those where you need to improve on. This makes the third-party standard an extremely valuable tool for aligning the company’s efforts and resource allocation.

Integrating ESG Into Your Brand

Transparency is the bread and butter of marketing your company’s ESG efforts. This can be a huge value-add in the eyes of consumers and investors, but only if done correctly. When setting and announcing ESG goals, be sure to provide insight on how you plan on reaching that goal. List processes put in place, partnerships established, and your current progress toward achieving that goal.

When creating your Annual Sustainability Report and sharing this information with the public, focus on the critical steps taken to reach that goal. More importantly, if you failed to reach that goal, explain why and outline how you will reach it next time. Honesty is essential here, because while we are trying to ‘wow’ the stakeholders, it's more important to paint a clear picture of your company’s efforts on this long and arduous journey. Consumers are much more likely to shun you for announcing audacious goals with no context than they are for explaining the challenges that inhibited progress, as long as you include the insights that explain how you’re going to do better in the future.

The disclosure requirements are a good push for the ESG movement, encouraging alignment and compliance. Still, as evident by the need for more information like what is listed here, businesses would truly benefit from instruction and guidance for implementation. These processes are tricky and vary between industries — even between companies in the same industry. If you’ve never done any of this before, it is imperative that you engage with experts before going down the rabbit hole that is ESG. Our Advisors have done this work for large multinational corporations in varying industries, which gives them the expertise and practice to ensure that your ESG program is effective and efficient. Additionally, because ESG requires an immense amount of data, software tools that optimize the collection, analysis and reporting of this data will save you time and money.

Our ESG program management platform is designed to house all your ESG information in one convenient dashboard. This platform not only lays the foundation for all the processes you need to go through, but it also contains data tools that will speed up the process along the way. We have seen so many companies spend too much time on developing these processes on their own, which often requires the use of a multitude of tools and advisors. We designed our program to alleviate that pain and provide you with everything you need in one location. We provide ‘ESG-as-a-Service’ so that our advisors can guide you, facilitating all the steps taken to organize and implement your ESG program, while using the data tools on the backend to speed up and smooth out the process.

Have questions about any of these processes, or about how Rho Impact can help you embark on this journey? Shoot us an email and one of our advisors will contact you for a complimentary consultation.