Rising investor interest in environmental, social, and governance (ESG) initiatives creates a compelling reason to develop a corporate ESG strategy: improved access to capital. Let's explore what an ESG strategy includes, its benefits, and the steps to developing an ESG program for your organization.

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What is it?

What is an ESG strategy?

An ESG strategy is a set of corporate initiatives that address the sustainability of business practices. The abbreviation represents the three common types of sustainability risks that businesses face. Identifying and mitigating these risks can reduce costs, increase profits, and attract new investors.

Environmental risks include hot topics like climate change, energy efficiency, use of natural resources, and waste management. Social risks involve worker safety, human rights, data security, and equal opportunity. Governance risks focus on transparency in accounting and reporting, plus board and corporate practices.

Typically, a corporate ESG strategy defines the highest-priority risks across the three categories and outlines mitigation plans for each. These are often long-term programs with short- and intermediate-term milestones. A company might set a goal to reduce its emissions to net zero in, say, 10 years. In the interim, the company would target smaller objectives to ensure sufficient progress is being made.

Progress on an ESG strategy is usually shared internally and externally via periodic reporting. Public companies typically report annually on sustainability initiatives.

Benefits

Benefits of adopting an ESG strategy

A successful corporate ESG strategy can improve competitive positioning, enhance regulatory compliance, and prevent pricey disasters like lawsuits. It also raises the company's status among those who value good corporate behavior, which helps attract top talent as well as new investors.

Note that ESG investors do not evaluate a company's sustainability practices in isolation. They review ESG initiatives alongside financial results. ESG investors prefer companies that create shareholder value while doing good in the world.

Many organizations have delivered on both fronts. As a result, ESG stocks, ESG ETFs, and ESG bonds are proving to be reliable, long-term investments in an ESG portfolio. Over the last one-year, three-year, five-year, and 10-year timeframes, Standard & Poor's 500 ESG Index has outperformed the broader S&P 500. Some of the best long-term ETFs screen for companies that perform well on ESG metrics.

Two notable stats that speak to the importance of implementing a corporate ESG strategy are:

  1. According to the Institute of International Finance, global ESG debt eclipsed $6.5 trillion in 2024.
  2. Bloomberg predicts ESG assets will account for one-quarter of global assets under management by 2030.

A strategy guide

Developing an ESG strategy

The details of a corporate ESG strategy will be unique to each company and industry. The steps to define those details, however, are consistent.

Step 1: Conduct a materiality assessment

A materiality assessment is a framework for identifying the organization's most pressing ESG issues. Two factors that can influence issue priority are the potential impact on the company and the stakeholder's view on the issue.

Quantifying potential impact requires reviewing each issue's positive and negative outcomes. For example, having no established employee development program could create higher turnover and a less skilled workforce relative to competitors. Implementing a development program, on the other hand, could raise productivity by improving employee skills and workplace morale.

Understanding how different stakeholders view the issue adds more depth to the analysis. Stakeholders may include shareholders, employees, senior leaders, vendors, local communities, and customers. A broad view of stakeholders, well beyond investors, can provide a richer, more balanced perspective. This can help decision-makers identify potential risks and opportunities.

The primary outcome to expect from a materiality assessment is a prioritized list of ESG initiatives. Secondary outcomes include:

  • A clear definition of the company's primary stakeholder groups
  • The data required to make the business case for specific ESG initiatives
  • An outline of future ESG reporting topics
  • High-level actions needed to mitigate ESG risks
Environmental, social, and governance technology concept with illustration of the Earth and corporate governance.

Step 2: Establish baseline metrics

Baseline metrics enable measurement, which is a critical component of any ESG strategy. Without an established baseline, there can be no evidence of progress. Worse, reporting big ESG milestones in the absence of baseline stats can lead to accusations of greenwashing.

Third-party assessments often make sense here. An objective evaluation of the company's current performance is usually more credible and reliable than in-house reporting. Below are six examples of potential focus areas and metrics that may be measured at the outset of an ESG plan.

  1. Board diversity and voting rules: The number of board members who are from an underrepresented group
  2. Employee pay and benefits: Comparison of employee pay and benefits versus peers
  3. Accounting practices: Reporting schedule, use of independent auditors, and history of audit opinions
  4. Executive pay: Executive pay schedules, including wages, bonuses, stock-based compensation, and perks
  5. Total carbon emissions: Carbon emissions from the company, including the supply chain
  6. Water usage: Total annual water usage

Step 3: Set ESG goals

The next step is to develop high-level ESG goals based on the materiality assessment. These goals can include maintaining good performance, improving weak areas, and optimizing efficiency or overall performance.

Goals can also involve obtaining general or industry-specific certifications. An overall sustainability certification is a certified B Corp, for example. Other goals could include moving the business into LEED-certified buildings or meeting sustainable development goals.

Environmental goals

Environmental goals often focus on reduced total carbon emissions, waste, and water usage. They can also focus on a shift to sustainable energy, improved operations, supply chain management, and overall efficiency.

Social goals

Social goals can include closing wage gaps, improving employee benefits, enhancing working conditions, creating opportunities for advancement, and maintaining a safer work environment. This category also includes giving back to the community, supporting social causes, and ethically sourcing raw materials.

Governance goals

Governance goals include transparency in board structure, diversity, accounting practices, and financial reporting. Data storage, security, and maintenance, as well as demonstrable business ethics, are also topics of governance.

Step 4: Analyze performance gaps

A gap analysis evaluates the baseline metrics relative to ESG goals. This defines how far the company must go to reach ESG targets, enabling the development of realistic timelines and intermediate-term objectives.

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Step 5: Create an ESG plan

The core of any ESG strategy is the roadmap for achieving phased ESG objectives in the short, intermediate, and long term. The roadmap guides ongoing ESG management and associated reporting.

Step 6: Implement and measure key performance indicators

With the current state of the company defined and the roadmap in place, implementation and measurement can begin.

Establishing key performance indicators (KPIs) can help avoid the need for a full analysis at the end of every reporting period. These metrics can provide a quick snapshot of progress and reveal areas where more in-depth review may be necessary. It usually makes sense to provide key stakeholders and project owners access to KPI reporting via a shared dashboard.

In the spirit of Lean Six Sigma, ESG is about continuous improvement rather than a single change. Tracking KPIs can reveal that certain goals or timelines are unrealistic without adjustment. ESG teams and project owners must be open to understanding circumstances and adapting their programs appropriately.

Step 7: Perform regular ESG reporting

ESG reporting discloses the policies and programs in place and evaluates progress. There will likely be several layers of ESG reporting. Public reporting may be done annually, while board members may receive updates quarterly. Teams working directly on initiatives may report more granular updates weekly or monthly.

Public reports can include organization- or industry-specific metrics and bigger milestones, like earned certifications. Internal reports will be more focused on evaluating engagement and progress.

Related Investing Topics

Using a standard reporting framework can also add credibility to a company's public ESG disclosures and reporting. Options include:

  1. Sustainability Accounting Standards Board (SASB) standards are industry-based disclosures used worldwide for 75% of the S&P Global 1200 Index.
  2. The International Sustainability Standards Board (ISSB) has published two sets of standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
  3. The Global Reporting Initiative (GRI) was the first to develop global standards for sustainability reporting in 2016.

The bottom line

Building an ESG strategy requires a commitment to improvement and growth, but the payoff can be significant. Investor demand is driving the shift, but companies and their stakeholders benefit in the long term.

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