Today’s organisations are under increasing scrutiny to operate ethically and sustainably. Businesses which operate ethically are more likely to be successful in the long term which is, in part, because 79% of consumers agree that businesses have a wider social responsibility than simply making a profit.
As well as consumers, investors value ethical working practices highly with 73% agreeing that a company’s efforts to help improve society and the environment contribute positively to return on stockholder’s investments.
Employees are another vital group to consider when organisations scrutinise their working practices, being 14.5 times more likely to work for a company that publicly supports human rights, which also improves engagement for existing employees, helping to retain them.
As a solution to this problem, many organisations are creating an ESG Strategy (Environmental, Social, Governance) to ensure they are not just working ethically, but efficiently too.
This report on the importance of ESG for long-term shareholder value creation shows that companies with a healthier ESG performance experience a competitive advantage with more strategically sound decisions, and a better ability to allocate and attract capital, due to:
- Better reputation and public image
- Greater ability to retain and attract employees
- Improved customer loyalty
- Higher management quality
So, with all that said, what exactly is ESG Strategy and how does an organisation go about creating one? This article aims to help both private and public sector organisations who are looking to audit or improve the management of their supply chains, workforce and working practices to ensure they are compliant with rules and regulations, and are actively promoting ethical practices.
What is ESG Strategy?
An Environmental, Social and Governance (ESG) strategy is a set of principles, or framework, that a business uses to measure and improve its impact on environmental, social and governance factors within their operations and decision-making processes.
The three pillars of an ESG strategy are:
- Environmental: How well the business conserves natural resources and protects the planet.
- Social: How well the business operates within the community, including employee satisfaction, human rights, diversity and inclusion.
- Governance: How transparent and accountable the business is, including factors such as corporate governance, ethics and risk management.
The goal of an ESG strategy is to demonstrate that a business is operating in a sustainable and ethical manner. As a result an effective ESG strategy can significantly influence an organisation’s operations and decision-making process.
Components of an ESG Strategy
Under each of the three pillars of an ESG strategy there are several key elements that guide an organisation’s operations and decision-making process:
Environmental
Environmental impact is a critical component of ESG, encompassing a company’s efforts to minimise its negative effects on the planet. This includes:
- Climate change mitigation: Reducing greenhouse gas emissions and transitioning to renewable energy sources.
- Resource conservation: Efficient use of natural resources, such as water and materials.
- Pollution prevention: Minimising pollution and environmental impacts.
- Biodiversity protection: Preserving and restoring ecosystems and biodiversity.
Organisations should seek to address these environmental factors to contribute to a more sustainable future and mitigate the risks associated with climate change and resource depletion.
Social
Social impact refers to a company’s positive or negative influence on society. It encompasses a wide range of factors, including:
- Human rights: Respecting human rights throughout the supply chain and operations.
- Labour practices: Ensuring fair labour practices, including fair wages, safe working conditions and freedom from discrimination.
- Community engagement: Contributing to the well-being of local communities.
- Diversity and inclusion: Promoting diversity and inclusion in the workplace and leadership.
- Supply chain: Companies may also report on the standing and social values of any suppliers they affiliate with.
Addressing these social factors is crucial for organisations to demonstrate their commitment to ethical business practices and build strong relationships with stakeholders.
Governance
Governance refers to the systems, processes and structures that guide an organisation’s operations. It is a crucial component of ESG because it ensures that the company is managed ethically and responsibly. Key aspects of governance include:
- Corporate governance: Adhering to best practices in corporate governance, including ethical leadership, transparency and accountability.
- Risk management: Identifying and managing environmental, social and governance risks.
- Ethics and integrity: Upholding ethical standards and conducting business with integrity.
- Transparency and disclosure: Disclosing relevant ESG information to stakeholders.
Strong governance provides a solid foundation for an organisation’s ESG efforts and helps to build trust with stakeholders.
What are the benefits of an ESG strategy?
ESG initiatives can lead to improved financial performance. This can be achieved by implementing innovative sustainable practices that can result in cost savings, such as reducing energy consumption or waste and can also allow companies to attract new customers, suppliers and investors who share their values.
Organisations that implement an ESG strategy can mitigate risks, enhance reputation, and drive innovation. Addressing environmental and social issues helps avoid costly fines, lawsuits, and reputational damage.
Proactive engagement with global challenges like climate change and inequality can enhance brand value, attract customers, investors, and top talent. Building trust and transparency through ESG initiatives fosters differentiation, boosts competitiveness, and often leads to innovative solutions that improve efficiency and reduce costs.
Furthermore, an ESG strategy can help organisations achieve external validation. By aligning with standards such as ISO 14001 (Environmental Management System) and ISO 50001 (Energy Management System), companies can demonstrate their commitment to sustainability and gain recognition from independent bodies. This can enhance their reputation and credibility in the marketplace.
How to create an ESG strategy
Organisations looking to effectively develop an ESG strategy can follow these steps:
Step 1: Assess current performance
Conduct a thorough assessment of the organisation’s current ESG performance by identifying areas for improvement within each pillar and prioritising those areas with the most significant impact on your business.
Step 2: Set clear goals and targets
Establish clear and measurable ESG goals and targets for each pillar that are aligned with your company’s overarching strategy. Creating a roadmap with intermediate milestones which can be tracked helps to monitor progress and ensure accountability. Example goals could be:
- Environmental goals: Reduce our carbon footprint by 25%
- Social goals: Create a better work-life balance for all employees
- Governance goals: Have a diverse and inclusive Board composition
Step 3: Develop an action plan
Creating a detailed action plan is essential for translating ESG goals into concrete actions. For example, you might have a target of reducing your carbon footprint by 25%. The action plan can detail a timeline for upgrading equipment, optimising energy usage, investing in energy-efficient technologies, switching to renewable energy and encouraging your suppliers to adopt sustainable practices and reducing their emissions.
Step 4: Integrate ESG into decision-making
Incorporating ESG considerations into all business decisions means ensuring that environmental, social and governance factors are taken into account when making choices that affect the company’s operations, strategies and investments.
Step 5: Monitor and report on progress
Tracking progress and reporting on performance to stakeholders is crucial for ensuring that ESG goals are being achieved and for maintaining accountability. This involves establishing KPIs, internal and external reporting, stakeholder engagement and continuous improvement.
Step 6: Re-evaluate your ESG strategy
As your business evolves and the external environment changes, it’s essential to regularly reassess your ESG approach. This allows you to identify new opportunities and address areas where your current strategy may be falling short.
ESG Strategy Examples
Some examples of ESG strategies from companies that are exhibiting sustainable and ethical business practices are as follows:
- Mace, a construction and consulting company, sees ESG strategy as a key component of the long term value of the business, being intrinsically linked to its business strategy, improving resiliency and preparedness for future risks.
- Pharmaceuticals company Alliance Healthcare’s ESG strategy is embedded across the business, with compliance and ethics forming the cornerstone of their approach. Their ESG strategy is focused on three priorities covering team members, operations and the community. Initiatives include a global training program, waste reduction of hard-to-recycle plastics, and continuous improvement of the traceability of business processes and technology.
- Strategic priorities for Marks and Spencer are supported and enhanced by their ESG strategy to help them maintain their position as a trusted brand. Environmental aspects of the ESG strategy include responsible sourcing, such as aiming for 100% of soy to be sourced from verified deforestation and conversion-free (vDCF) supply chains by 2025/26. Social initiative examples include aiming for 50% of senior managers to be female by 2025/26, and governance aims include “doing the right thing” through ensuring compliance with policies and standards.
In summary
In today’s highly scrutinised society, where investors and customers increasingly demand ethical and sustainable business practices, an ESG strategy is no longer just a nice-to-have but a necessity.
Verita can play a crucial role in helping organisations implement effective ESG programs. For example, by using our specialised clinical governance tool we carry out healthcare due diligence to review structures and processes to provide insights into regulatory compliance, evaluate care quality and financial stability. Our due diligence work also enables us to evaluate all areas of a business to identify risks and key areas to ensure the organisation is well positioned for an acquisition, a partnership, a contract, or investment.
Our team of ESG consultants can provide support with:
- ESG assessment: Conducting a thorough assessment of an organisation’s current ESG performance.
- Strategy development: Developing tailored ESG strategies that align with the organisation’s goals and values.
- Implementation support: Assisting with the implementation of ESG initiatives, including risk management, reporting and stakeholder engagement.
ESG strategy should be embedded into your organisation’s overall business strategy so that ESG initiatives can enhance a company’s reputation, mitigate risks, improve financial performance and contribute to a more sustainable future for all.
If you’d like to find out more about how we can help your organisation with its ESG strategy, please book a free consultation or contact Ed Marsden on 020 7494 5670 or [email protected].
