How to Implement an ESG Strategy
Investors, customers and governmental agencies look toward environmental, social and governance (ESG) sustainability practices in businesses they patronize. Regardless of the requirements to have sustainable practices, all businesses should seek ways to improve their operations to become more responsible stewards of their human and natural resources. A company that uses sustainable business practices is environmentally responsible, protects employee wellbeing and has transparent operations.
What are ESG Standards?
ESG standards adhere to a variety of certifications, which a business can attain to prove compliance. These include several certifications under all three categories of sustainability — environmental, social and governance.
Environmental sustainability reflects a company that uses resources efficiently and minimizes waste. Ways an organization can demonstrate this form of sustainability is through action plans that may outline some of the following environmental initiatives:
Reducing greenhouse gas emissions
Using renewable energy
Implementing waste management policies to reduce excessive waste
Increasing recycling and reducing the use of single-use products
Using water efficiently
Choosing green products
Working with environmentally conscious suppliers throughout the supply chain
Supporting climate action, environmental laws or government sustainability initiatives
Not all organizations can include the above environmental sustainability initiatives in their operations. However, they should have evidence of working toward environmental responsibility as a company.
Social sustainability includes a larger scope than only the care employers deliver to their workers. This ever-changing area includes issues that address the business environment and conditions for workers, such as:
Diversification and inclusion in the workforce and in training.
Human resources objectives, such as protecting whistleblowers and creating pay equity.
Employees’ pay, benefits and leave policies that ensure fair compensation and a livable wage.
Because social sustainability is such as quickly changing field, what organizations include in their strategies will be highly specific to their fields and resources.
Corporate governance includes both how the company regulates itself in general operations and specifically in adhering to ESG compliance. For example, is the organization’s team in charge of verifying ESG disclosures part of the standard disclosure team or another group within the company? The disclosures under corporate governance may include the following:
Composition of the board
Oversight that the board has into operations, such as cybersecurity, enterprise risk management and corporate policies
Any company that develops an ESG strategy should be open about sharing its sustainability practices with the public. Backing up those claims with proof through training and certification adds credence to the claims from a third party verifying the practices adhere to ESG regulations.
Steps to Create an ESG Strategy
An organization that seeks to become a sustainable business requires a careful plan to create and implement an ESG strategy.
1. Establish Goals
Sustainability has multiple definitions depending on the organization and its practices. The first step in creating an ESG framework is determining the goals based on the company’s definition of ESG sustainability for itself. Additionally, planners need to gauge interest in working toward those goals and how feasible they are.
For instance, some companies may prefer to be on the cutting edge of ESG sustainability, taking initiative in political action, social justice and corporate responsibility. Other organizations may select methods that have proven returns, such as reducing waste and becoming a greener business.
Other considerations to keep in mind when creating goals include answers to the following questions:
What areas of sustainability need improvement?
What does success look like for the ESG framework?
What are competitors doing to create sustainable business practices?
What goals do the investors or stakeholders in the company have?
How long does the company have to meet its goals?
Goals should include legal requirements for the industry and location and optional sustainability aims. The planning team must understand basic regulatory guidelines for sustainability before setting goals that could change the organization’s aims. Guidelines that could shape an organization's goals may include the following:
Sustainability Accounting Standards Board (SASB) Sustainability Goals for Specific Industries
United Nations (UN) Sustainable Development Goals
This goal-setting step of the process should not be done too quickly. It will determine the rest of the direction the organization takes in creating and implementing an ESG strategy.
2. Assess Opportunities for ESG Compliance
All organizations have opportunities to improve sustainability, but those differ based on the company and its operations. The best way to determine ways to improve sustainable operations is to start with an evaluation of the organization and where it can readily improve.
An energy audit of the organization’s structures quickly finds areas of wasted energy. Examining equipment efficiency can also identify waste in operations. Rectifying the areas of waste can cut operating costs, improve productivity and quickly provide a return on the investment in repairs or upgrades.
3. Create a Budget
Establishing a budget for meeting ESG goals will ensure the project remains financially possible. Budgeting plans should include considerations of cost, returns and savings.
The cost of implementing changes may include the creation of an ESG team, certification and training for specific ESG standards and upgrades to equipment. Changes to goals, timelines and returns may happen during the budget creation process.
Timelines for integrating the ESG framework into the company’s practice may change based on funding and employee availability. Additionally, calculating the length of time for a return on investment becomes part of the budgeting process to see how quickly the input produces results.
Returns on the investment into an ESG framework do not have to only include financial profits. Other metrics to determine gains include benefits for people and the planet. Keep these three — profits, planet and people — in mind when calculating returns on goals.
When finding funding for green initiatives, local governments may offer funding options or tax incentives. For example, Defra and the Environment Agency, are providing grants of up to £100,000 to environmental groups, local authorities, businesses and other organisations to help them develop green projects to a point where they can attract private investment in an effort to tackle climate change.
4. Build an ESG Framework and Roadmap
With goals and a budget in mind, the ESG planning team should establish a formalized ESG framework for the organization to follow. This framework will show investors the seriousness of the organization in working toward sustainability.
Voluntary sustainability initiatives within an organization typically include many environmental and social issues. However, some issues under these topics and in governance are compulsory. Meeting these guidelines should also be part of the framework used by the organization.
Providing proof of adherence to the framework may include certification under various ESG-related standards that require additional time and effort to obtain.
The roadmap is important for keeping the organization on track toward meeting its goals. It also needs to have realistic expectations for the organization to ensure meeting the set milestones occurs naturally with good guidance and continued forward momentum.
5. Gather a Sustainability Guidance Team
A sustainability guidance team will ensure the organization keeps on pace to meet the established ESG goals within its framework. Team members may come from the organization or a third party. This group’s aim is the continued pursual of the ESG framework set by the company.
To ensure representation of interested parties within the organization, the guidance team may include an investor representative, an executive, a sustainability-focused employee and a possible consultant from outside the company. This team will have the varied perspectives and connections needed to keep the organization moving forward with ESG goals.
6. Keep Tabs on Progress
Setting into motion the ESG framework is a significant step but not the last. Keeping track of progress toward goals is essential for keeping those at the organization motivated to continue improvements. Regular meetings with the guidance team can maintain checks on progress toward milestones and make adjustments to goals and the roadmap as needed.
7. Promote ESG Compliance
Keep investors, customers and the team updated on ESG compliance. Annual reports and obtaining certification to prove compliance with ESG-related standards can fulfill this step of the process.
Benefits and Importance of ESG
An ESG strategy provides companies that use it with multiple benefits for the present and future. Overall, using an ESG strategy is a good business practice, regardless of the requirements for the industry, location or business type. The benefits of ESG include:
Ensuring future legal compliance: Continued legislation to combat climate change may introduce bills that will make environmental issues within ESG legal obligations. The UK government recently issued PPN 06/21 – a procurement policy note that stipulates that businesses bidding for contracts over a certain amount must have a carbon reduction plan in place. This is to support their 2050 Net Zero goals, of which decarbonising the public sector is a strategic pillar. By integrating disclosure of ESG work, the future changes in requirements will make adapting easier.
Attracting investors: Investors pay more attention to factors outside the company’s bottom line when deciding whether to back the organization. Disclosure of ESG strategies can be a vital means of attracting more investors.
Promoting business changes to combat climate change: Changing operations to meet ESG standards can promote a healthier environment for the business and its surrounding community. Becoming a greener company reduces utility costs by needing less and can prevent fines for improper waste disposal or pollution production.
Enticing the best talent in the field: Top talent hires want to have their jobs properly compensated, which social issues of a robust ESG strategy cover. Additionally, they may want to invest their time and talent with a company that makes a difference in social and environmental issues. A clear ESG framework could encourage quality talent to apply to work at the organization.
Operating more efficiently: ESG policies improve efficiency, especially when emphasizing environmental issues. More efficient operation costs less while using less energy to get work done. The cost savings can be a financial incentive for additional ESG investing.
Related ESG Standards
ESG standards under ISO and other regulations include the following:
Businesses that Need to Comply with ESG Regulations
Legal ESG criteria apply to certain types of businesses. For instance, SEC registrants would need to disclose ESG policies under a proposed rule. Companies that don’t fall into this category may still want to invest in implementing ESG strategies to meet possible future requirements for private and government organizations.
Any business can benefit from having an ESG framework, and now is the time to learn more about this strategy to maintain pace with future policy changes.
Many questions about ESG and its benefits exist from companies, investors and workers. The following address the most common concerns about having an ESG strategy and ESG criteria.
1. Can an ESG Strategy Reduce Risks?
The main aim of an ESG strategy is risk reduction. Many of the practices for ESG strategy and risk management overlap, and having a strong framework that will assess and mitigate risk will fulfill many risk management tasks. Companies with ESG frameworks can avoid problems caused by problems stemming from ESG issues.
2. Can an Organization Save Money with an ESG Strategy?
While an ESG strategy will require an initial investment in the planning stages, it can save money over time. Cost savings come from more efficient operations, better employee retention and reduced waste.
3. Does an ESG Strategy Bring More Investors?
An ESG framework that shows sustainable operation is a draw for a majority of investors. For existing investors, better communication with an organization is standard with most ESG strategies. Companies that have ESG frameworks can thereby improve their investor relations through enhanced communication and meet their demands for increased sustainability in a variety of issues.
4. What is the Difference between CSR and ESG?
Corporate Social Responsibility (CSR) and ESG are similar but have enough differences to not use the terms interchangeably. The former is a driving factor behind a company’s internal operations. However, it does not use external certifications to prove that it meets specific expectations. ESG uses external assessments to determine compliance.
The biggest difference between CSR and ESG is the inclusion of governance issues in the latter. CSR mainly focuses on social and environmental concerns to improve how the organization impacts society. While investors may use either CSR or ESG to determine investments, ESG offers more information on the actions of the company to allow investors more data on the specific ways that the business addresses environmental, societal and governance issues.