Whether you’re courting new investors, or meeting compliance obligations for environmental risk, programs like Environmental Sustainability and Governance (ESG) are a hot topic in corporate circles these days. ESG reports are being used for everything from monitoring carbon footprints to making investment decisions, so if you haven’t already developed an ESG strategy, the time to start is now.
For your ESG strategy to be truly successful though, it takes more than a few quick meetings with a working group and a corporate pledge mounted on the wall at the office reception. The success of your ESG strategy requires commitment and ongoing involvement from leadership, staff, suppliers, and more.
When starting out, many people will immediately go to the internet, searching for guidance documents and resources to help them build an effective ESG strategy. There are many ESG frameworks and standards available. These are often developed for specific industries or to meet the requirements of a particular governing body.
Others new to ESG programs will jump straight to data collection, focusing on quantifiable metrics before fully understanding why they are even undertaking ESG work in the first place.
Before you go down the rabbit hole of acronyms and data gathering, it’s important to understand the steps involved in developing a beneficial ESG strategy and ensuring its ongoing success. These are:
- Conduct Materiality Assessment
- Explore Relevant Frameworks
- Collect Data & Benchmark
- Set Targets & Goals
- Prepare Reports
- Update Reports & Monitor Success
Building your ESG strategy is an involved process, and skipping over steps will hurt the overall effectiveness of the program. Following the steps outlined above will assure you’ve developed a robust ESG strategy that will truly benefit your organization without wasting time and resources, and will ensure the ongoing success of targets and goals into the future.
Conduct Materiality Assessment
Building an ESG strategy can be complex and time consuming. You don’t want to waste time crunching numbers and setting targets that will ultimately be of no value to your organization or won’t help you meet your goals. Before you begin, you want to understand which elements of ESG are material to your organization.
Materiality is usually assessed by consulting both internal and external stakeholders. Internally, this could be corporate leadership, HR, finance, operations, or legal teams. Externally, this could be investors, lenders, suppliers, or customers. The data compiled from both needs to be weighed together to prioritize next steps.
Here is an example of a materiality matrix where external importance is plotted on the y axis and business impact is plotted on the x axis. This creates a visual representation to see where each element falls. It will become quickly evident which target has:
- Little overall external importance or business impact
- High external importance, but little impact on your business
- Low external importance but high business impact
- High external importance and business impact
This assessment of materiality will help you later identify where the time and effort required to quantify data and meet targets will provide the greatest payback. While it’s not necessary for every target to be equally impactful both internally and externally, defining materiality will help create a balanced set of targets, without wasting time and money on immaterial aspects that will have little to no payback.
Understanding materiality is a key element of an effective ESG strategy. It eliminates the low-hanging fruit that makes programs essentially a paper exercise with no real value to business operations, stakeholders, investors, and the community at large.
Explore Relevant Frameworks
If you google “ESG frameworks” you’ll find a veritable alphabet soup of documents, best practices, and methodologies. Knowing which one to work from can be a daunting and often overwhelming task, and recommendations can change from week to week as existing standards consolidate and new ones are introduced.
If you’re not sure where to start, you could consider an ESG framework such as:
- Global Reporting Initiative or GRI – this is the most well-known standard, used by 73% of the world’s 250 largest companies. GRI includes standards for environmental, economic and social reporting, as well as sector-specific standards
- International Sustainability Standards Board or ISSB – a relatively new standard following the consolidation of two older programs, the ISSB is designed specifically for companies building ESG strategies to meet the information needs of investors and capital markets
- CDP – if you’ve chosen to build an ESG strategy to help reduce your carbon footprint or manage environmental risks, CDP may be the right standard for you, since it focuses primarily on environmental impacts and considerations
- Science Based Targets Initiative or SBTi – this program is specifically for private sector organizations trying to meet Net Zero pledges. Companies setting Science Based Targets will have those targets published online through the SBTi website
- Global Real Estate Sustainability Benchmark or GRESB – Like the ISSB is designed to meet capital investment data needs, GRESB is designed specifically for real estate markets, including infrastructure funds and infrastructure assets
- Task-Force on Climate-Related Financial Disclosures – A relatively new organization from the Financial Stability Board, the TCFD is developing standards on disclosures to investors, lenders and insurance underwriters, with many of their recommendations driving disclosures to the American SEC
In addition to industry-specific standards, there are also standards developed for specific countries. For example, the 1000 largest companies in India must start reporting to the new BRSR program in 2023. Before compiling any data or setting a single target, make sure you know what the most appropriate and current ESG frameworks for your business are.
Collect Data & Benchmark
Before you begin data gathering, it’s important to set the boundaries of your ESG strategy and program. This will keep you from spending time and labor on aspects that are outside your control or will provide limited benefit later.
The boundaries of an ESG program and strategy will vary from one company to the next and can depend on the standard you work from and the goals you defined at the start. Boundaries might include:
- How far up and down the value chain you will collect data and report. This might be a geographic boundary, or exclude certain tiers of suppliers where you have no control over operational practices or risk management.
- Which products or services are included in your data gathering. In some frameworks and standards, allowances are made so that you only need to account for, say, the top three products, or processes that result in 90% or 95% of your total carbon emissions.
- Franchises, leased properties, or portfolio companies. While many of these are now included in reporting for Scope 3 carbon emissions, you want to avoid duplicate accounting. Determine if Scope 1 and 2 emissions will be rolled up into a central corporate report, or reported individually by separate entities.
If you’ve conscientiously followed the steps above, as well as completed your materiality assessment, then your ESG team will be in good shape when it comes to data gathering. Clear goals and well-defined boundaries mean they know where to prioritize their efforts. But this can still be a time-consuming and labor-intensive activity, since data will need to be gathered from across the organization as well as from suppliers and customers.
Capacity building, stakeholder communication, and having the right tools to facilitate data gathering are critical to the success of your ongoing ESG strategy. Clear leadership support needs to be communicated not just within the company but also outside so that the value of the undertaking is fully understood.
Using a cloud-based platform like FigBytes is one way to help streamline data gathering. It means information can be entered by the people who have it, such as purchasing teams, facilities and maintenance operations, and even suppliers. It can also be used to streamline data capture with APIs and IoT (or Internet-of-Things) integrations that already connect to your equipment.
Data gathering is a critical step for the foundation of your ESG strategy and should be done thoroughly and conscientiously. Without it, your targets will lack robustness, and you won’t have any meaningful way to track progress or benchmark yourself against competitors and other industry members.
Set Targets & Goals
The reasons your organization has decided to develop an ESG strategy will greatly impact your outcomes and should be clearly defined at the outset to avoid wasting time and resources.
ESG broadly covers aspects of business operations from carbon emissions and water stewardship to labor rights and diversity & inclusion to transparency in financial practices. Some of these may be of greater importance or need more urgent attention at your specific company. For example, you might be developing an ESG strategy with a specific goal of:
- Reducing your carbon footprint to meet Net Zero pledges by 2030 and beyond
- Improving labor conditions for workers in your global supply chain
- Showing ethical leadership and business operations to better attract new investment
Once you’ve defined which aspects are most material to your organization and determined your baseline data, it’s time to set targets and goals. These are often numerical and time-bound targets, and should be included in your public report. They may also need to be submitted to groups like the SBTi, who verifies the carbon emissions targets of all companies registered with their program.
Once data gathering is finished, you can complete your ESG assessment. Depending on which framework and standard your organization is following, there may be prescribed methodologies for key reporting areas like emissions estimates. These could be industry-specific, or follow publicly-available emission factors.
The ESG report typically follows a format, referring back to the chosen framework or standard. This allows for easy comparison and to ensure compliance for mandated standards and programs. There may be an expectation that you post your report–either in full or as a condensed version–publicly, or to submit it through a specific program’s portal.
The report will often need to include commentary on data quality, assumptions made, and where data gaps exist. The numbers generated as part of your ESG report are something that will need to be updated as part of annual reporting, and you will need to document where methodologies may change, either as better data becomes available or standards change.
Update Reports & Monitor Success
An ESG strategy isn’t a set-it-and-forget-it activity. It is an ongoing initiative. Reporting organizations, regulators, and investors may all require updated reports that track progress toward achieving targets. Just like the initial data gathering, updating your ESG reports will need input and collaboration across departments, offices, and throughout the value chain.
Reporting on the success of an ESG strategy is a multi-year process. It needs to survive employee promotion and turnover, be easy to incorporate new suppliers and customers, as well as adapt for evolving frameworks and methodologies.
In the old days, a program like this might have lived as a maze of spreadsheets and documents on a company server, with all the accompanying risks and roadblocks related to version control and human error when it comes to data entry.
Fortunately, there are modern solutions that do much of the behind-the-scenes work for you. Cloud-based platforms like FigBytes will keep your reporting up to date with current standards and calculation methodologies, streamline data collection and updates, and will provide customizable reports that can be shared with investors, corporate leadership, and the public.
Building an effective ESG strategy is no small undertaking, but the first step is to start. Whether you’re looking to reduce your environmental impacts, reduce risk, or bring in new investment, a solid ESG program will build a strong foundation for your business’s future.
If you’re not sure where to begin, reach out to FigBytes. One of our experts will be able to point you in the right direction. Our platform is designed to help you build a comprehensive ESG strategy, streamline data collection, document progress toward achieving your ESG goals, and engage stakeholders along the way.