What is an ESG report for?
It’s a timely question that a new report in Harvard Business Review attempts to answer.
It also highlights the rather interesting dichotomy that so many so-called PR ‘experts’ in ESG appear to ignore.
At its heart, ESG is an investment management tool. It provides a framework for investors to assess the impact of non-financial risks, such as poor corporate governance or climate, on their potential investment.
A company might rate highly on an investor’s ESG score card – strong governance, initiatives to improve diversity and inclusion and relevant policies on climate – yet might not be perceived as ‘green’ or ‘good’ by most people.
The report’s author Tensie Whelan, clinical professor of business and society at NYU Stern Center for Sustainable Business, argues that, with a growing consensus that ESG issues are material to corporate resilience and competitiveness, box ticking is not the way forward. Instead, ‘competitive advantage through sustainability comes from good strategy, culture, KPIs and execution’, with reporting metrics the last stage in the process.
She offers a five-step approach to ensure that ESG reports are relevant and relate to a robust sustainability approach.
1) Identify material ESG issues and associated stakeholder perspectives
Companies should consider existing standards, such as the Global Reporting Initiative (GRI), which should help to identify the ten material topics that need to be managed. Consulting with stakeholders, such as employees, regulators, and local communities, could also help to identify priorities that may otherwise be ignored.
Combining the business and stakeholder assessments into a materiality matrix will help prioritise key themes that are important to both audiences and potentially offer a competitive advantage.
2) Undertake strategic analyses through an ESG lens
First conduct a sustainability-oriented PESTLE (Political, Economic, Social, Technological, Legal and Environmental) analysis, followed by a SWOT (Strengths, Weaknesses, Opportunities, Threats) one.
The PESTLE analysis helps companies understand ESG trends related to their material issues, but SWOT analysis assesses how well these are currently managed.
3) Get granular in tackling business risks
Companies should take a major challenge facing their business, for example water use, and really unpick the potential risks, from extreme weather to depleted local supplies, which arise, then consider strategies to mitigate these.
Once this soul searching is complete, companies should define goals and key performance indicators. But the key, according to the authors, is to develop both outcome and impact-based KPIs. Companies may already have performance goals for their factories, for example, but better water management could become one of these, leading to reduced costs and better community relations.
4) Build a governance structure focused on ESG
Companies should create organisation-wide ESG KPIs, which need to be signed off by the board, supported by leadership and aligned to staff objectives and compensation. This should be supported by a network of sustainability committees, at both board and management levels.
5) Understand and track return on sustainability investment
To improve decision making and build competitive advantage, companies must begin to track financial returns, tangible and intangible, associated with embedded sustainability strategies. This also means tracking avoided costs, so if a company is using recycled materials rather than new inputs, these savings should be considered.
Tensie concludes: ‘Companies who want to win in their markets will be more likely to realise that dream if they embed sustainability core to business strategy, manage implementation and ESG KPIs well, and track the returns on their sustainability investments.’
ESG Reports Aren’t a Replacement for Real Sustainability (hbr.org)
