Practical Steps for Developing an ESG Strategy

Whether it is senior management evaluating the company’s ESG strategy, a customer assessing its vendors’ ESG profiles, or the need to comply with regulatory requirements such as the U.S. Securities and Exchange Commission or EU disclosure rules, the need for accurate, timely ESG information is increasingly important.

Accurate, timely and verifiable ESG data is critical to a company’s strategic needs. Unfortunately, ESG information is often treated as irrelevant noise and relegated to the least capable employee. This makes gathering and reporting on ESG inefficient and mistake-prone, and bad information can lead to bad decisions or other serious ramifications.

Below are practical steps every company should take to improve their ESG strategy and structure.

A sustainable business strategy creates value for the organization and its stakeholders while minimizing its negative environmental and societal impact. Businesses need to adopt sustainable strategies for several reasons, such as improving brand reputation, creating cost savings, and responding to investor requirements. A well-developed strategy will articulate a company’s ESG aspirations and needs and be evaluated on quality, timely, and consistent data.

Public companies’ investor relations firms are a great first step in developing an ESG strategy. IR firms typically help smaller public companies communicate effectively with their shareholders, potential investors, analysts, and other stakeholders. IR firms have the pulse of shareholders and the customer base and can play a significant role in creating a robust ESG strategy. An IR firm’s ESG strategy is generally centered on answering the question – What is important to the stakeholders that are important to the company? Their goal is to improve a company’s reputation with key stakeholders, which, by design, positively influences the stock price.

Areas overlooked by this approach to ESG strategies include identifying tax and other cost-saving strategies and addressing changes in regulatory reporting requirements. These areas are the non-glamorous and often underappreciated parts of an ESG strategy. The benefits of cost-saving strategies are apparent. Strategies responding to ESG reporting regulations are also significant since the information reported can affect stock prices. Regulatory ESG reporting is designed to make ESG reporting comparable across companies and industries. It is meant to give investors and the public actionable information when making an investment or purchasing decision. This means ESG laggards will be punished and leaders rewarded.

Finally, an ESG strategy must be more than reducing costs, meeting regulatory requirements, or improving a company’s reputation. It needs to be embedded in a company’s overall strategic mission. It should touch upon every significant corporate decision, from procurement to capital spending. By embedding ESG practices within an organization’s workflow, they are no longer ESG practices and transform into “best industry practices.”

After 2-3 years, percentage of corporations that generated significant value from ESG:

The importance of a solid corporate structure cannot be understated. Senior management must control messaging, establish policy, and identify ESG factors driving corporate value. The value of a company can be negatively affected when ESG messaging goes amuck, ESG risks are ignored, or opportunities are wasted. All situations are more likely to occur without strong governance. Below are some elements that should be incorporated into any ESG governance structure.

Committee Formation:It is best practice to form an ESG committee comprised of a cross-section of business heads. The business head can oversee their respective areas while coordinating activities with the entire group.

ESG Policy:An ESG policy establishes formal policies and procedures that are communicated to the entire company. A well-developed ESG policy will incorporate the company’s ESG strategic vision and formalize a chain of command, roles and responsibilities, scope, and internal/external reporting guidelines. Supplements can be established for specific reporting areas, such as communications, customer surveys, and regulatory compliance.

Internal controls are not confined to just accounting and financial reporting. ESG information is becoming equally important and requires an equally robust control structure.

Metrics: Conduct an ESG assessment to identify the company’s ESG data requirements. Once identified, determine where the data is located, how often it is needed, and who controls it. Also, determine if the software is required to convert company data into ESG data, such as converting energy usage into greenhouse gas emissions.

Workflow: Once metrics are established, an ESG flow chart and documentation detailing the collection, review, and reporting procedures should be created. In creating a workflow, consider what procedures and controls are required to make the entire workflow auditable by a CPA firm.

Automation: Identify areas where data collection can be automated. Automation improves data quality, reduces collection time, and strengthens internal controls. Automation also helps increase employee acceptance.

Today, various departments within public and private companies continuously receive requests for ESG information. B2B customers ask the customer service department for GHG (greenhouse gas) metrics and emission targets. Recruiters and prospective hires are requesting information on diversity initiatives from HR. And ESG rating companies are asking anyone who will respond to complete ESG surveys. As the volume and importance of ESG information increases, so should the control and oversight over ESG communications.

Internal Reporting: Communicating corporate values has been done by companies for many years. Today, it’s more important than ever to communicate values that are important and relevant to employees and recruits. Part of an ESG strategy should include identifying and communicating in a meaningful way socially responsible policies that support employees’ values. Done effectively, an internal ESG narrative backed by action can reduce turnover and make the company more attractive to recruits.

External Reporting: Regardless of the recipient, telling a consistent, accurate ESG story that aligns with an overall business strategy is paramount. Large customers may require environmental sustainability, which can form the basis of a company’s environmental strategy. Marketing ESG messaging can be controlled by the corporate strategy to prevent “Bud Light” branding mishaps. Everything said externally should be controlled and aligned with the company’s desired storyline. No information should be reported externally unless it is in line with the ESG policy.

Investor Reporting: An IR firm plays an integral part in attracting and retaining investors. By organizing and facilitating meetings, presentations, roadshows, conferences, and webinars with investors and analysts, an IR firm can help showcase a company’s social and environmental impact.

Undoubtedly, there is an increasing strategic business need for accurate, timely ESG information. That is why it’s more important than ever to integrate your ESG strategy with a robust organizational structure that creates strong governance, robust internal controls, and communications in line with the corporate strategy. As was said in the beginning, bad ESG information or messaging can lead to bad decisions, lost opportunities, or other serious ramifications.

This article was originally published by Joe Holman in NJBIZ on October 2, 2023.