Last week I had the opportunity to speak on a panel at the “ESG Think Tank” [ESG Think Tank | American Conference Institute] held in Washington, D.C. with an audience of sustainability and white collar practitioners. The Environmental, Social, and Governance (ESG) movement is getting much attention these days, primarily due to the demands from the global investment and consumer communities for more responsible business practices. More recently, in the U.S., U.K., and Europe, there have been many proposals and mandates from government regulators for greater requirements on corporations to integrate and measure their sustainability footprint. As a result, our clients are in need of not only proactive advice for the “how to” of ESG, but also the guidance to mitigate their risk of reacting to regulatory fall-out.
My two-person panel included a senior practitioner of ESG from a biotechnology company and our focus was on how to integrate ESG into business using data and metrics for measurable results. While many companies have been publishing sustainability reports for several years, many are considered “light” marketing materials – pretty, colorful, and glossy documents without data or evidence to back up the ESG commentary. Our discussion centered around nine key aspects of how to use data to build priority ESG metrics tailored to a company’s strategic and tactical goals.
- Understand the organization’s strategic goals in order to develop supporting and prioritized ESG goals.
- Understand the data environment including data sources, systems, and owners.
- Find and engage business ownership for ESG in order to develop goals, identify risks, and create tailored “metrics to results” platforms.
- Use existing tools and reports for measuring and reporting on ESG metrics, including internal audits and quality assessments.
- Evaluate and understand how ESG standards (e.g. GRI, SASB, TCFD) and key performance indicators (“KPIs”) can be integrated into the organization’s metrics framework.
- Use ESG standards to identify the areas of ESG material to the organization and tied to metrics ( i.e. per industry-specific standards).
- Tie risk action plans to strategic goals to emphasize the opportunities for mitigating risk and measuring outcomes.
- Consider scores from rating agencies when developing metrics, but don’t solely rely on them as they are inconsistent and unregulated.
- Understand all ESG-related standards and regulations that may affect your organization, including those that are coming into force (e.g. IFRS Sustainability Disclosure Standards and U.S. Securities and Exchange Commission ESG disclosures) and being updated (e.g. Modern Slavery Act, SFDR, EU Taxonomy regulation), and identify and document related risks.
While our nine key aspects are straightforward, the expectations and opportunities around ESG are grey as business, economic, political, legal, and regulatory guidance and standards are still evolving. What is clear is that the ESG movement has been effectually driven by investor and consumer interests. As a result, the approach by companies has to be less technical. Checking the proverbial regulatory and legal checkboxes will not satisfy the investment community when it comes to ESG. Instead, taking an authentic and evidence-based approach is key to success. Further, the approach should be customized to the organization’s identity and clearly reflect the criticality of building impact and economic value in the community, environment, and society in order for concerned stakeholders to recognize an organization’s potential for successful integration.
In August 2019, 181 CEO’s signed the Business Roundtable’s Statement on the Purpose of a Corporation, committing to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders. There has been discussion that this pledge dilutes the focus of creating value for the shareholder, but it’s important to note that the Business Roundtable indicated the creation of this stakeholder value should be in addition to long-term shareholder value. Rather than taking a purely economic approach to creating value (i.e. launching a product with high demand to capture immediate profits but with little social and ethical responsibility), setting a long-term horizon should guide goals to build responsible stakeholder value for a company.
To close, we summarized:
- Invest in data assessment and rationalization. Conduct a global data assessment to develop a solid foundation for reporting and uncover hidden areas related to ESG that can be used to create additional and report value-driven metrics. For example, while many companies have taken a more targeted approach to incorporating diversity in their employee and supplier bases, the ability to measure the outreach and results can support social KPIs and further provide information to gauge compliance with human capital regulations.
- Take a thoughtful approach to identifying and prioritizing authentic ESG goals and link to an organization’s strategy. ESG initiatives should support strategic goals in a measured and transparent manner. Do not “boil the ocean” by implementing all the generic metrics published by the multiple ESG organizations; rather, be intentional and authentic with the metrics that are meaningful to the company and its stakeholders now and into the future. Doing so will organically build impact and economic value to satisfy shareholders, investors and consumers, enrich employees and suppliers, and contribute to a more economically thriving community and sustainable world.