ESG Is Here to Stay – Creating a Winning Strategy for Your Company
We’re rapidly approaching the end of the days when companies could pay lip service to their commitment to environmental, social, and governance (ESG) principles, without backing up those claims with evidence and facts. And while a push is being made to standardize ESG policies, currently there’s no one “right” way. Instead, building your ESG policy in conjunction with your investors can make sure investor priorities on ESG are represented and tailored to your organization.
So how do you determine the right policies for your investors? It can be the worst of both worlds, in that ESG is both a hot topic and a moving target. There currently are so many different sets of standards, from the international Global Reporting Initiative to the U.S.-based Sustainability Accounting Standards Board, that it can feel like a herculean task. And while it may seem like a boilerplate process would simplify things, there’s no one-size-fits-all ESG program because every organization (as well as every PE fund and portfolio company) faces unique issues and risks.
Some companies are using their peers for guidance, or a “birds of a feather” approach. BlackRock developed its gold standard for ESG a few years ago, and there’s a trickle-down effect where emerging managers are aiming to match it. This can be helpful because there’s no way any company can follow the hundreds of recommendations found among the different sets of standards.
In addition, this could lead to various groups coming together to create a more uniform standard over the next few years and possibly result in a rise in third-party validation for ESG policies. Similar to how companies maintain audited financial statements, they’ll also likely maintain audited ESG programs. But until then, there’s a lot of room for interpretation and confusion. That’s why the focus right now should be on collaboration, not compliance.
The collaboration should focus on having comprehensive conversations with stakeholders—and the stakeholders who matter the most are the investors. Talk to them about their priorities and concerns around ESG and invite them into the process of crafting that policy. Collaboration with your investors can help ensure management and shareholders are aligned in the ESG program’s execution. These conversations also can help establish a target that mitigates the risk of moving with the headlines.
To help build your ESG program, you can take a four-phase approach: assess, design, implement, and monitor. And while you do need to assess the ESG concerns of your investors, executive leadership also needs to play a role in defining what success looks like, along with identifying the risks, opportunities, and key performance indicators when selecting a reporting framework.
As you begin to design your ESG program, you should develop your narrative and messaging, identifying data sources, ensuring reliability of that data, designing the ESG report, and developing a communication plan for all stakeholders, e.g., investors, customers, employees, regulators, and the media. Then it’s time to ensure the transparency of the reporting and look for tech solutions to facilitate reporting. Next, it’s time to implement the messaging and a communication plan.
The effort doesn’t end there. You need to monitor the program, measuring and refining the reporting and messaging with feedback from stakeholders. It requires constant dialogue to ensure the plan is working as it should. According to recent research, there’s a growing appetite for third-party assurances from independent accounting firms to validate the efforts, given the ambiguous nature of measuring ESG results.
If there’s any hard-and-fast rule, it’s that an ESG policy can’t be a document that gets written and then gathers dust. Investors will want to make sure that organizations are living up to the standards and practices they’ve developed. Investors are now applying similar scrutiny to ESG metrics as they do to financial metrics—scrutiny that managers need.
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