Environmental, Social and Corporate Governance (ESG) criteria are a set of standards for business operations. Now more than ever, socially conscious investors and regulators alike are evaluating organizations based on this criteria by evaluating their environmental friendliness, DEI initiatives, leadership transparency and more. Given its heightened focus and the increase in global sustainable investment as well as the sensitivity involved and the sheer breadth and depth of the topics it covers, ESG requires a risk-based approach to business strategy.
In this blog post, we’ll talk about how to develop an ESG strategy: why is an ESG strategy so important? What are the benefits of a strong ESG strategy? How do you measure ESG performance and impact? Keep reading to find out.
Why You Should Consider ESG Factors?
Having an ESG strategy is important for a number of reasons, but let’s dive into 3 ESG factors why prioritizing ESG initiatives is so critical today:
- The See-Through Economy. At LogicManager, we use the term “See-Through Economy” to describe the shift occurring in the business world towards transparency and accountability brought on by new technology and the prevalence of social media. Today, if you make a mistake as a business, it can be instantly shared with the world. PR will eventually become ineffective as reputations will need to be earned through genuinely good governance. This trend will only grow stronger over the years as technology - unsurprisingly - is still advancing rapidly to consistently offer newer, faster, sleeker devices and platforms for more and more users to rely on for more and more of their daily needs. If you thought your reputation could be ruined swiftly now, just wait.
- Growing concerns over climate change. A booklet recently published by KPMG recently stated that climate change and environmental risks are considered by global CEOs to be the number one factor. They also pointed out that in order to meet the goal of limiting the global temperature increase to 1.5°C, $90tn of investment is needed by 2030. This demand is a strong contributing factor to the reason businesses are being held more accountable than ever for their ESG status (namely their “E” criteria).
- Investors care about it. Research shows that nearly half of all millennial millionaires make their investments based on social factors. And this statistic will likely grow as the years go on, as there is a natural propensity amongst millennials to invest responsibly (twice as much as older generations). More key stakeholders in leadership positions today also care greatly about non-financial value creation. In fact, 81% of millennials want to learn more about responsible investing.
What are the Benefits of a Strong ESG Strategy?
Financial Performance & Operational Benefits
A recent study conducted by the University of Oxford and Arabesque Asset Management examined 200 organizations to determine how sustainable corporate practices have impacted their return on investment. What they found was that the operational and stock price performance of companies may be positively influenced by good sustainability and ESG practices. It was found that 88% of companies with strong ESG priorities saw a better financial performance, and the stock price performance of 80% of companies was positively influenced by good sustainability practices. It also lowered the cost of capital of 90% of companies, and “companies with strong sustainability scores showed better operational performance and were less of an investment risk.” (John Hancock Investment Management).
Protection from Negligence
It also prevents negligence. Having a formalized process for ESG means you’re tracking your activities that show good governance. Let’s say a negative risk event occurs and leads to someone suing your business for negligence. As long as you’ve been tracking factors such as your implementation of policies, standardization of procedures, compliance with best-practice frameworks or regulations, you can’t be found guilty of negligence. This saves you the hours and dollars you might’ve wasted on a legal defense team.
Serving the Greater Good
These financial, operational and risk management benefits are only representative of one side of the coin when it comes to the benefits of having a strong ESG strategy. What you also must account for is the greater good you’re supporting through fostering environmentally-friendly sustainablity programs, diverse and equitable workforces and transparent leadership teams. We could argue on a more dramatic scale that ESG literally helps save the planet, drive business performance and make our population happier.
How to Develop an ESG Strategy
Taking a risk-based approach is critical when developing your ESG strategy. Not only does it help you prove that you’re doing what you’re saying you’re doing, but it helps you prioritize your work so that you’re not wasting hours shifting focus between dozens of different ESG standards (that are constantly changing, by the way). Using Enterprise Risk Management (ERM) software to fuel your program helps you build what we call an “ESG Bowtie.”
Developing an ESG Strategy: Step 1
On the left side of the bow is where you gather your information. What data can your team that tracks carbon emissions provide you with? What can your HR department tell you about recent turnover rates? With ERM software, you can collect this ESG data from disparate sources through automatic information requests that gather into one centralized view.
Developing an ESG Strategy: Step 2
This leads us to the center of the bowtie, where LogicManager aggregates and centralizes your various data inputs into an information repository so that you have a single source of truth. This also provides you with a full audit trail so you’ll always know exactly when information was updated and by whom. Additionally, this audit trail lets you compare year over year, so you can see if, for example, your sustainable energy usage is trending up or down.
Developing an ESG Strategy: Step 3
Once you’ve collected and centralized the information, it’s time to redistribute it through the right end of the bowtie. This serves as proof that your ESG program is up and running. ESG reporting requests may be driven by numerous frameworks (such as CDP, GRI or others) that guide what type of information you should be reporting on. While there is plenty of overlap in the information different parties require, they will typically ask for it in slightly different ways. LogicManager’s reporting engine can generate reports and dashboards that display the information in any necessary manner.
How to Measure ESG Initiatives
There are still frameworks and best-practice standards being developed to issue a “gold standard” for measuring ESG performance. However, there are ways to benchmark your program to see where you’re succeeding and where you’re falling behind.
The Risk Maturity Model (RMM)
Using 25 success factors and 71 competency drivers, the RMM will uncover areas of improvement within your ERM program to get you closer to qualifying for an ESG disclosure. Then, use your results to prioritize and draw a roadmap to achieving an adequacy level that you can put in your 10K and 10Q disclosures.
Generate sustainability reports on an ongoing basis to back up your ESG statements. Before you know it, you’ve eliminated your compliance and regulator exam risks by having sound reports that support the strength of your ESG program. Use KPIs and KRIs to represent your data.
Use an ESG Checklist
Don’t reinvent the wheel; see how your organization stacks up against predetermined ESG best practices. We compiled a list of due diligence activities and traits that any organization with a strong ESG program should have. You can download your free copy here.
Measuring the Impact of your ESG Strategy Through Enterprise Risk Management
Measuring the impact of your ESG impact can be a bit muddy. A measure of “success” can distract from important insights into the processes and systems that generated those results. According to a recent Harvard Business Review analysis, companies must:
- Zoom in to develop insights on core business processes
- Zoom out to gain broader perspective on issues
- Place value on people’s willingness to learn and improve
LogicManager ensures that you’re measuring through all 3 lenses. Our intricate risk-based taxonomy allows you to drill in to specific people, processes or policies to uncover root cause, while also providing a bird’s eye view of all departments and their upstream and downstream dependencies. There’s flexibility in how you evaluate criteria, meaning you have the ability to implement any core business value into your scoring methodology.
See how LogicManager’s robust ERM platform can transform your ESG program today. We recommend starting with a free demo of our ESG solution package, which provides the content and tools you need to successfully develop an ESG strategy. Click here to learn more, or hit the button below to skip right to a demo.