“Mother Nature is not waiting. We are at the verge of the abyss.” Leaders everywhere must take action - every country, every region, every city, every company and every industry.” UN Secretary General Antonio Guterres sent this stark warning to global leaders at the 2021 Leaders Summit on Climate, and one year later at COP 26, our countries, companies, and communities are still dangerously trailing on the fight against the climate crisis.
The Current ESG Landscape
Every day, there are headlines about this new industry coalition to fight climate change or a new standard being developed to increase the quality of ESG data transparency and reporting. With so many public commitments, from reducing their carbon emissions to enhancing Boardroom diversity to leveraging their business to engage societal challenges, how come more progress hasn’t been made? Why are commitments plentiful, but progress scarce? “You can look at a company’s website and see their sustainability report and it will look great,” says Alberto Carrillo Pineda, a founder of Science Based Targets initiative, a global effort to assess corporate action on climate change. “But then when you look at what is behind it, you’ll see there is not a lot of substance behind those commitments, or the commitments are not comprehensive enough.”
The substance, or the environmental, social, and governance (ESG) practices that achieve these audacious commitments, has clearly been lacking. But why? If corporations around the world recognize ESG issues - like climate change, employee welfare, and natural resource stewardship - present risks and opportunities to the business, why hasn’t greater progress been made? If corporate stakeholders were actively communicating their expectations for corporate America in 2021, with that intensity ramping up in 2022, how do we prioritize where and how to start? And how do we accelerate performance when our organizations, our stakeholders and society at large depend on it?
ESG Performance is Both an Art and a Science
The current approach to ESG typically looks like this. First, senior leaders, guided by an in-house or external ESG consultant, react to some reputational hit or new disclosure standard by whipping up some issues to focus on with vague goal commitments. Next comes a massive PR campaign geared on shouting these commitments from the rooftops and racing to get as much media attention as possible for this new valiant effort. Executives are psyched, a potential crisis has been diverted, and the Board of Directors can exhale a sigh of relief.
But when it comes to actual ESG performance - executing on that strategy in the real world - - implementation struggles, stakeholder skepticism returns, and employee engagement plunges. And what are you left with? Minimal results, minimal value, minimal impact. Even worse, you’re accused of greenwashing and your credibility goes out the window.
With the clock ticking and our global economy, and societal stability for that matter, depending on corporate ESG performance, why does this keep happening? It comes down to bridging the art and science of ESG performance.
When you hear the word artistry, what comes to mind? Is it a painter working on their next masterpiece? Or do you think of someone so highly skilled in their field that they make it look easy? And perhaps beautiful? The Webster dictionary defines artistry as “creative skill or ability.” The ability to create, or bring something into existence, is dependent on our ability to influence others. And who are the others in this case? The stakeholders, both internally and externally, that your business, and your ESG aspirations, depend on.
And what’s the most challenging thing about stakeholders? That they’re people! And what’s the challenging thing about people? We’re emotional, irrational, and typically difficult to get along with.
When thinking about ESG performance and influencing our stakeholders, we are ultimately talking about change. The changing of hearts, of minds, and of business models and operations. Our ability to engage, build consensus with, and collectively act on ESG issues alongside our stakeholders directly influences our ability to execute a commercially and socially impactful ESG strategy.
Given the explosive growth of ESG from the fringes of the business community to the mainstream, ESG responsibilities are increasingly becoming incorporated into traditional corporate functions. From enterprise risk management to marketing to operations, ESG issues are presenting increasing risks and opportunities to each functional area. And this integration of ESG responsibilities comes with pressures to be technically accurate, politically correct, and up to date on changes to the regulatory environment and stakeholder expectations. In short, there is a need for all functional leaders to understand the science behind environmental, social, and governance issues.
ESG PlanningBarriers to effective ESG strategic planning include a lack of clarity on how issues present risks, what issues to prioritize and why, and where to begin the process if you’re starting at square one. Effective and engaging planning requires both artistry and science:
- The Artistry: Engaging your stakeholders in the materiality process – the process of determining what issues to focus on and why – provides direct insight from your investors, customers, employees, suppliers, and local communities on what issues they want you to engage in and why. What’s more, you’ve cultivated the trust and generated the positive affect needed to get these stakeholders onboard to help you execute on your strategy. This is how you begin to influence the hearts, minds, and management changes needed to drive performance.
- The Science: Deciding what ESG issues to focus on and why also requires an understanding of how these issues present risks and opportunities to your business and supply chains. From natural resource scarcity to climate change business continuity to human capital management, understanding how these issues converge and influence your growth strategy, expansion plans, and future path all require an understanding of the environmental, social, and management sciences underlying these issues.
ESG TrackingESG integration, or the systematic approach to integrating your ESG strategy into the daily operations of the business, is both an art and a science. Common barriers to ESG tracking include ambiguity regarding roles and responsibilities, spotty data management systems, and minimal oversight of the implementation process. Tracking tasks, data, and outcomes requires both artistry and science:
- The Artistry: From implementing new processes and systems to assigning new roles and responsibilities, ESG performance is dependent on your ability to manage the complexity of the process across your organization, supply chains, and stakeholder groups. This requires hands-on management – of the process, the people, and the overall performance – and ensuring alignment, integration, and communication across the organization and its stakeholders.
- The Science: Setting your data baselines for each issue, measuring your carbon footprint, and supporting your suppliers in doing the same all require science-based methodologies. From determining how to scope the environmental impacts of your supply chains to building a scalable solution to reduce them, all interventions must be rooted in science and evidence-based methodologies.
ESG ReportingReporting on your ESG performance is labor intensive, time-consuming, and can feel like a box-checking exercise more than anything else. What’s worse, poor reporting can result in greenwashing accusations and litigation, the ‘cancellation’ of your brand from younger consumers, and a red flag from your most important investors and corporate customers. Reporting on both your commercial and societal impacts requires both artistry and science:
- The Artistry: Collecting performance information from across the organization –requires the persistent corralling of data, documentation, and departments. What’s more, your suppliers will need to be engaged, guided, and supported in addressing these needs accurately and in a timely fashion. Managing people, personalities, and priorities all requires artistry in process management.
- The Science: Navigating the global climate and ESG disclosure regulations requires an understanding of the physical and transition risks associated with climate change as well as the range of interventions one can deploy to mitigate them. From ensuring your reporting metrics are technically accurate to properly scoping the entirety of your value chain impacts, quality ESG reporting requires discerning duplications, externalities, and ensuring consistency and clarity in your performance, progress, and outcomes.