How to Effectively Establish ESG Strategy and Reporting
Defining ESG factors and impacts
[E] Environmental: responsibly mobilizing and conserving natural resources
[S] Social: considering people and cultivating relationships that are inclusive and equitable
[G] Governance: guiding sustainability, addressing risks, and complying with regulations
As the marketplace has evolved over the last few years, it has become increasingly important to successfully integrate sustainability and ESG priorities into organizational goals and business strategy in order to maximize an organization’s long-term value potential. Rapidly-evolving ESG standards, frameworks, risks, and opportunities should be understood in the context of each individual company’s circumstance. This may include its industry and employee composition, for example, whether a company is publicly held or backed by private equity.
Some leading organizations have already incorporated ESG into their long-term strategy to drive meaningful growth, while other companies are more recently considering how to best engage on ESG with numerous stakeholders: investors, boards, employees, supply chains, lenders, and customers. Certain companies may be impacted by the ESG policies and practices of larger companies that they serve as a vendor or supplier. In other cases, investors are driving home the importance of ESG to financial results. And some organizations are looking to leverage ESG progress to lower the cost of capital through vehicles like sustainability-linked loans. These market pressures will influence the different ways organizations engage with ESG until measures are standardized for comparability and widespread adoption.
ESG is entering its formative years as organizations seek to tackle everything from climate change to inclusive workplaces. In response, the frameworks and standards that companies have used to identify and evaluate their organizational goals and ESG priorities are consistently being revisited to address a rapidly changing sustainability landscape. Proactive organizations can take advantage of the current window to create new possibilities for stakeholders and steer the path forward as regulators map out the guiding principles of ESG. Options abound when looking at relevant frameworks across the globe, and businesses can start by considering the voluntary ESG reporting frameworks and standards, which are now being incorporated into regulatory requirements globally.
Examples of the most prevalent standards and frameworks include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-Related Financial Disclosures (TCFD), the World Economic Forum (WEF)‘s stakeholder capitalism metrics, and the Climate Disclosure Standards Board (CDSB). Many of the embedded concepts are being carried forward through regulations including:
- The US Security and Exchange Commission’s recent proposal for climate-related disclosures is based on the TCFD, affects public companies’ approaches to risks and controls and significantly impacts reporting requirements;
- The IFRS Foundation‘s newly formed International Sustainability Standards Board (ISSB) incorporates leadership, principles, and best practices from leading organizations such as the Value Reporting Foundation, SASB, GRI, WEF, CDSB, and TCFD, among others; and
- The European Union’s Corporate Sustainability Reporting Directive (CSRD) expands the scope of the region’s Non-Financial Reporting Directive to small- and medium-sized enterprises that are not listed in the EU – relevant now for US companies with a subsidiary in the EU that meet certain revenue thresholds.
Enacting ESG strategy and reporting
Implementing a sound approach to ESG and sustainability will require companies to understand the applicable standards, determine what aspects are material to their stakeholders, mobilize dedicated resources to spearhead these efforts, and more. As ESG factors and frameworks continue to unfold, some companies are positioned to lead the charge. Organizations that have embedded ESG into their long-term strategy already appear farthest down the road in addressing some of the regulatory reporting requirements on ESG. For entities in earlier stages of the ESG journey, here are four focal points for implementing an ESG program:
(1) Define key ESG priorities aligned to organizational strategy
As standards and frameworks continue to formalize, companies should look to discern which ESG matters are material and relevant to their business and industry. The process begins with talking to all stakeholders – boards, employees, vendors, regulators, standard setters, and sustainability practitioners. Peer benchmarking can also offer helpful information as competitors and trends will continue to shape this aspect of the marketplace.
Over recent years, ESG rating agencies have also begun to assess companies in line with the material topics and risks that are most relevant to their industry sector and business – examples include S&P Global, MSCI, and Refinitiv, among others. By taking these assessments into consideration, companies will be able to develop a strategic framework and roadmap for business transformation and reporting based on what is material to the business, its stakeholders, and the industry.
(2) Proactively design a strategic ESG roadmap
While regulations are a major factor, companies will be less effective when viewing ESG as merely a compliance exercise. As organizations invest in understanding these non-financial reporting methods, ESG must be embedded into each company’s strategy in a way that is relevant to its stakeholders.
Adding long-term value requires looking beyond guidelines (for example, the latest proposed updates on climate-related disclosures), as current regulatory measures typically reflect only baseline requirements. Instead, companies can enact a more visionary and differentiated approach by being process-minded and developing tailored policies that drive innovation and impact across the organization.
(3) Enable people, processes, and systems to build rigor around ESG programs
Once the ESG strategy and roadmap are set, the focus turns to enabling people, processes, and systems to embrace ESG as part of the organizational goals and culture.
To measure success, each company needs internal monitoring and reporting on ESG metrics to track progress against goals. Until recently, much of ESG reporting has occurred in functions independent of finance. As companies implement proactive strategies in preparation for impending reporting requirements, ESG reporting is embracing a similar approach to the governance, enterprise risk management, and internal controls over financial reporting. Organizations must consider what ESG data exists in disparate systems and teams across the organization and at third parties, since this data will likely be subject to the same rigor and scrutiny as financial data.
Overall, companies can leverage existing acumen from finance, accounting, and internal audit personnel when building their sustainability reporting processes. Often, a best practice is to integrate sustainability teams, processes, and systems with the finance function in order to establish sustainability reporting processes that result in investor-grade, auditable ESG data.
(4) Establish ESG leadership
The need for ESG reporting is fast approaching and will likely call for all companies to assign responsibility for ESG matters to a dedicated person or group. A focused ESG committee comprised of impacted, cross-functional groups will ensure a complete set of impacts and information is included in a company’s ESG decision-making and reporting process. Given the complexity of the data and reporting, organizations should also consider appointing employees as champions of ESG and sustainability in order to ensure appropriate executive oversight.
Establishing cross-functional leadership groups and appointing ESG champions may be the first-wave priority for some organizations just starting on their ESG journey
Recognizing the growing importance of ESG is an organization’s first vital step on this strategic and essential path. As regulatory requirements are still evolving, most companies have an opportunity to research frameworks and standards, hire the right personnel, or engage with the right external parties to initiate change. In doing so, organizations can shape a competitive advantage. Beginning now will give companies time to strategically construct the most relevant way forward.