10 steps to creating an ESG strategy for your business
ESG-centricity is playing an increasingly important part in economic and wider societal debates. Etienne Cadestin, CEO at sustainability consultancy Longevity Partners, outlines ten steps how companies can create an ESG strategy.
1. Focus on the best strategy
The starting point is to recognise that every business is different. What works for businesses you perceive as similar to your own, ultimately won’t work to the same degree for you. Every business has different internal stakeholders, external stakeholders, supply chains, locations, budgets, and goals. Your ESG strategy must be bespoke if it is to be effective.
2. Establish your goals, from the top to the bottom
Establishing an overall goal from the outset will help define your strategy and keep focuses streamlined. Engagement from top executives of the firm is crucial and the board must believe in those goals. Think about what you are setting out to achieve and keep this goal broad in the initial stage. Firm-specific goals and targets can be devised once a proper audit has been conducted. The best way of doing this is to carry out a materiality analysis.
3. Conduct a materiality analysis
A materiality analysis is the core of any businesses ESG strategy. It looks at what issues businesses need to prioritise and identifies where to invest time and resources through two lenses: importance to external stakeholders and importance to the business and its internal stakeholders. Conducting a materiality analysis requires extensive data collection from both internal and external stakeholders.
Inputting this data into a graph, known as a materiality matrix, creates a visual representation which clearly illustrates which issues are most important to both camps and therefore, where to focus on. The outcome of your analysis will highlight ESG priorities and define any overriding strategy, and will be bespoke to your business.
The following two points are highly important if a materiality analysis is to have maximum effect:
4. Use an objective third party
Whether conducting a materiality analysis or auditing a company’s ESG credentials for another purpose, it is always best to use a professional third party, as an unbiased perspective legitimises the results. This is a key part of what ESG consultants, like Longevity Partners, offer for their clients. Objectivity is particularly important with accusations of greenwashing and public scrutiny on the rise.
5. Engage with all stakeholders
Assessing stakeholder sentiment is a key part of a materiality analysis. This is an important stage to get right, particularly when considering the ‘governance’ aspect of ESG.
A bottom-up approach is favourable; data should be collected from all employees. Looking beyond a materiality analysis, having structures in place which create feedback loops within your company from the bottom-up can boost company culture and shed light on potential issues before they come to fruition. A good strategy results from a mixture between a top down and a bottom-up approach.
It is also important to push for external stakeholder collaboration. Companies can sometimes be reluctant to do this, but it is integral for a successful and fully informed analysis.
6. Assess costs
Once a materiality analysis has informed your business targets and strategy, you should consider your budget, taking a lifecycle approach and not purely viewing it as one upfront, substantial cost. You should also, more importantly, assess the cost of inaction and the risk it would mean to your business.
Although perhaps daunting, strategies with higher upfront costs can lead to significant savings over their lifetime, in the same way that greater initial expenditure on insulation leads to savings on heating bills. As with any financial investment, expert advice should be sought to make outcomes as efficient as possible.
7. Construct an ESG team within your business
Hiring professionals from within the sustainability sector is essential for any business which is serious about its ESG output. Strategies need maintenance and internal stakeholders can offer this consistency, while holding personal interest to the company they are employed by. Hiring a sustainability professional also creates a strong governance structure within the business. The G in ESG is equally as important as the E and the S.
8. Ensure third party verification to demonstrate robustness
It is not good enough to say how responsible a business is, it’s all about proving it. The best way to showcase accountability and transparency is through a third-party verification and validation mechanism, such as corporate or fund-wide certifications.
Certifications are not used as a marketing tool, as many would think, it is a risk management tool to measure and track validated performance and identify potential gaps. It is also a fantastic tool to support green bond financing and other value adding green finance tools.
With stories about greenwashing continuing to make headlines on a regular basis, having such certification allows to stand tall against such claims.
9. Manage your supply chain
When looking to expand any supply chain, it is important to have a sustainable policy in place to ensure ESG is embedded in the procurement process. The procurement policy needs to reflect your business’s values and include a commitment to progressive improvement. A strong starting point is to consider existing frameworks like the UN Sustainable Development Goals and build from there.
At the same time, businesses should conduct due diligence within their existing supply chains to avoid being associated with businesses with bad values and potential reputational damage, especially linked to breaches of human rights.
10. Recognise that the process is dynamic
The most important part of a successful ESG strategy is recognising that it is not a one-time assessment. Strategies needs to evolve with any business, stakeholders’ expectations, and not least, the changing regulatory landscape. This does not need to be constant, but re-assessing your businesses ESG strategy every three years is a workable benchmark, whilst checking strategy progress on an annual basis.
