To create success beyond the next quarter and into the next generation, you must consider all ESG (Environmental, Social, and Governance) factors. ESG aims to understand how those risks influence your company’s future financial performance, which also impacts employees’ morale and the business’s longevity. The significance of these factors differs based on your industry. Still, a thorough analysis can deliver a goldmine of information, lending credibility and fortitude to your decision-making process while fostering sustainable growth. We talked with Anna Barrera, Aria Glasgow, and Katie Hill, all part of the ESG Advisory Solutions Group at AON, for their insight on the best practices for ESG.
The Importance of an ESG Strategy for Your Company
ESG represents a set of standards for a company’s operations that focus on environmental, social, and governance issues. ESG criteria measure how well a company manages its resources and provides value to society. Topics ESG comprises include:
- Environmental protection: reducing the environmental impact of operations and responsibilities to future generations
- Social responsibility: promoting diversity, providing safe working conditions, and addressing stakeholder needs
- Governance: building a trustworthy leadership team with ethical practices and transparent disclosure.
Each industry can also have specific material risks. For example:
- The Oil and Gas industry is facing increasing pressure to reduce emissions and adhere to climate change policies
- Consumer product manufacturers must consistently monitor the safety of their products, operations, and supply chain for consumers and workers
- Banking organizations need to ensure that they are adhering to regulations around data privacy and consumer protection
- Law-practicing specialists need to ensure that they are protecting both their clients and their ﬁrms from legal risks
- Healthcare organizations must comply with regulations around patient data privacy and maintain patients’ safety in their care.
Know Your Stakeholders’ Expectations
ESG ratings offer benefits such as furthering ESG maturity, improving risk management practices, and making more informed investment decisions. However, there are drawbacks to relying solely on these rankings. You can easily get lost in the data and miss the bigger picture.
Knowing your stakeholders’ expectations—what data they want, how they judge that data against company performance, and what they are looking for from the company to ensure a profitable future—significantly impacts your messaging and the effects of those messages. Different stakeholders rely on various indices, ratings, and rankings to evaluate a company’s ESG performance. For example, insurance carriers and institutional investors may consider multiple ratings to determine insurance capacity or build portfolios. Are your stakeholders more interested in public perception or data integrity? Do they want to see a more meaningful commitment to global issues or a focus on climate impact?
Typically, this is what your stakeholders are looking for when it comes to your ESG performance:
- Engagement: How well your company communicates and collaborates with other stakeholders to understand their needs and expectations
- Performance: The ability of your organization to meet or exceed industry standards and regulations in areas such as sustainability, climate change, human rights, and worker safety
- Governance: The level of transparency and integrity present within your organization’s internal processes, operations, and financial reporting
- Strategy: The extent to which your company has incorporated ESG into its long-term business strategy, considering potential risks or opportunities.
Understanding that no single rating or score is a magic bullet is essential. Focus on a comprehensive approach considering your ESG strategy and risk management. Again, it’s about the big picture, not one particular data point.
About Your Company’s Disclosures
When striving to increase ESG scores, there is a potential trade-off between disclosing more information to improve the score and growing risks, such as cyber vulnerabilities. While investing in cyber disclosures may boost a company’s ESG rating, it could also expose additional risks to its cybersecurity strategy. Your audit committee should manage cyber risks and carefully assess these potential trade-offs.
As ESG-related disclosure frameworks evolve, some frameworks remain voluntary, but regulatory environments worldwide are shifting. Although some ESG disclosures are now mandatory, where there isn’t clear guidance, organizations must determine their best course of action to align with industry expectations and stakeholder demands.
3 Keys to Building a Successful ESG Strategy
When defining your ESG strategy, consider the pressures and risks you face from the market perspective and that of your investors, society, and regulators. Your industry, company size, and overall ESG maturity thus far should also inform your journey. To get you started, here are three keys to implementing a successful ESG strategy:
- Prioritizing and reporting on material risks is crucial. If your company has not conducted a materiality assessment yet, this is where you can start. Newer companies to the ESG scene often play defense, trying to address every ESG-related topic that makes the headlines. Just remember, a company’s mature outlook requires defining the handful of issues most important to their business, stakeholders, and shareholders, focusing intensely on those issues.
2. Ensure proper oversight and coordination between the board and management. Formalizing board responsibility is necessary. This involves ensuring that management has a deep understanding of potential and current ESG risks, tracking progress against targets by establishing metrics and KPIs, regularly updating the board on progress, and reporting externally on the state of that strategy.
3. Your company needs consistent and compelling messaging across all communication channels. With ESG disclosures becoming more standardized and regulated, your narrative is under more scrutiny now than ever. This is a fantastic opportunity to demonstrate your company’s ESG maturity; however, it also presents a potential area of liability, especially if your company overstates its position or presents contradictory information across different channels. Remember to remain transparent in your disclosures.
Private companies face ESG pressures as well, just from different directions. They might not be accountable for the same public reporting requirements, but they face competitive pressure around ESG performance from talent attraction and client perspectives. Private employers can use their strategy as a differentiator in a challenging marketplace.
The Future of Your Company’s ESG Success
The rise of the responsible investor movement is creating more awareness and pressure for companies to swing their ESG practices into high gear. Many companies are analyzing their supply chain ESG risks and impacts and looking at the cost of changes to fit the long-range picture. Larger companies require their suppliers to complete ESG-related questionnaires asking for detailed environmental and social policies and performance information. More private companies are now figuring out how to advance their ESG practices to remain a preferred vendor.
This has increased demand for transparency and disclosure, creating a need for more robust ESG data management systems that can better document performance and track progress over time. For now, by understanding these various parts of your approach to ESG, you can take proactive steps to ensure your organization is following relevant industry standards and regulations while positioning yourself as a leader in sustainability and social responsibility.