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Navigating the ESG Crossroads: Why It’s Time to Take ESG to the Next Level — and How to Get There
The concept of corporate sustainability initiatives is not new. Companies have long been questioned about environmental commitments and social justice concerns. However, there’s little doubt that environmental, social, and governance (ESG) issues are playing much more of a strategic role in today’s corporate landscape.
From M&A decisions to capital access, the collective corporate voice is clear:
- ESG initiatives matter.
- Their importance will only increase over time.
Even with all the demands coming from all stakeholders, corporations must understand that greenwashing — giving a mere impression of environmentally sound policies — is no longer the way to go. Yes, ESG programs can be helpful for everything from public perception to value creation, but all efforts should be strategically aligned.
Unfortunately, that’s difficult to do when no one can even agree on a definition of ESG, and stakeholders and lawmakers have varied and shifting opinions on expectations, priorities, language, activities, and disclosure. The answer to this conundrum is to develop a strategic roadmap to successful ESG initiatives that all corporations can follow. As the concept matures, so must the corporate approach.
How ESG Has Changed in Recent Years
Although there may be some disagreement around what ESG means, there are also a few undeniable trends coming to light regarding where it’s headed in the future:
- The world has made a shift from corporate social responsibility to ESG initiatives that are inextricably linked to long-term value creation and financial performance
- Regulatory agencies are beginning to increase their demands on the frequency and accuracy of ESG disclosures
- Many individuals and organizations are pushing for a universal baseline for sustainability frameworks and standards
- Anti-ESG efforts by state governments are demanding companies provide concrete evidence of how ESG initiatives create value for companies and stakeholders
All of these changes in sentiment and policy point to one destination: the need for maturity in the ESG space. As best practices begin to materialize, companies will need to do the work to establish well-defined programs with solid internal controls and a concrete process for evaluating and advancing. This is the future of ESG and the way forward for business leaders trying their best to keep up with ever-evolving demands.
An Eight-Point Roadmap to More Mature ESG Initiatives
If ESG programs have to mature, what model can they use to do so? Any attempt at creating better initiatives must start with input from the board and end with the opportunity to evaluate the work and decide how to move forward. The following eight-point model does just that.
Board Oversight
At its core, ESG is a board issue. Boards must commit to ESG oversight, evaluating and amending committee charters to include ESG responsibilities.
Individual committees should be reviewing ESG-related topics as a part of ongoing agendas. For example, a compensation committee should tackle any human capital or DEI initiatives. Ultimately, the board should incorporate these considerations into discussions about strategic alignment and resource allocation.
Priority Assessment
The board should take time to identify relevant ESG issues through peer benchmarking, investor and customer input, and relevant standards and frameworks. Evaluate the programs that are already in place and how well they align with identified priority issues.
Once priorities are set, integrate them into the overall company strategy and come up with a plan to identify and mitigate any ESG-related enterprise risks they create.
Management, Strategy & Workstreams
Here, you’ll get buy-in from senior leadership and create an ESG steering committee. The job of this cross-functional team will be to identify the programs to which the company should allocate resources and to create company-wide ESG buy-in.
This step is also where you’ll establish a Sustainability or ESG Office spearheaded by a Chief ESG Officer. You’ll also create subject-specific ESG working groups to advance workstreams. Additionally, appoint a full-time ESG Senior Manager to make strategy recommendations to the board and oversee their implementation.
Goals & Metrics
Identify the metrics that are most useful to your ESG efforts by evaluating those used by existing ESG frameworks and learning more about what peers and competitors are doing. Set achievable and measurable goals and decide whether to publicly disclose them. Track progress and determine a process for internal and external reporting.
Finally, integrate ESG accountability measures by deciding whether to tie ESG goal achievement to compensation and how to incorporate external validation of ESG goals and efforts. Accountability also means having the board oversee progress and establish interim goals if necessary.
Data Collection & Controls
Your team should identify and equip data owners who will collect and create processes and timelines to validate data. Those tasked with this responsibility should consider using an enterprise reporting tool to aggregate, audit, and validate company-wide data, and all relevant employees should be trained on its use. Integrate this data into the existing control environment and conduct regular reviews of data control effectiveness.
Reporting and Disclosure
Ensure your initial report addresses topics brought forth by stakeholders and aligns with corporate strategy, culture, and long-term value creation. Review all reports for potential legal or data issues and decide how to publicize them. Develop a regular process for ESG disclosure and integrate it into existing disclosure control structures. To satisfy external stakeholders, consider the addition of a data hub with public access.
Evaluating & Updating
The last step in this model is to have the board evaluate the effectiveness of the current ESG program as a whole. They will then send that assessment down the pipeline, with management responsible for conveying information to teams and overseeing action plans for improvement.
The board should also identify any potential changes based on stakeholder feedback and priority assessment and decide how to incorporate those changes to advance the ESG program in the future.
Well-Aligned ESG Initiatives Are the Way Forward
Even as ESG expectations from lawmakers, the general public, and corporate stakeholders seem to be in disarray, it is undeniable that corporations need a more mature and strategically aligned approach to their ESG programs. Establishing what that maturity looks like can be challenging.
However, if companies stick to approaches that establish board oversight, include priority assessment, set measurable and achievable goals, and provide program evaluation and advancement, they’ll be in a much better position to meet growing ESG demands and expectations as the world moves into a new era of corporate responsibility.
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