Implementing a rock-solid ESG strategy? Here’s what you need to know
As the world turns its attention to Cop26, issues surrounding environmental, social and governance (ESG) have never been more important. If it’s not already, ESG should be at the forefront of corporate thinking, viewed as a source of risk and opportunity.
While it is crucial that organisations play their part in the fight against climate change, there is no denying that regulation around ESG is coming thick and fast, and finding global answers to what is required, market by market, is something that many companies will struggle with.
For organisations thinking of implementing an ESG strategy (or in the throes of implementing one already), here’s what to be aware of.
Standards and frameworks
It’s important that organisations take a look into the different standards, guidelines, frameworks and accreditations that it could consider adopting when it comes to ESG.
Anticipating what aspects of various schemes will become law and preparing your business for the upcoming compliance environment is critical to managing risk and ensuring the future success of your organisation and its ESG strategy.
If your organisation hasn’t yet started to grapple with how it integrates ESG into its broader organisational strategy, it needs to do so, and quickly.
We are often brought in to help our clients horizon scan – this means looking ahead to help identify risks and opportunities that changes to legislation might represent for them and their business model.
Rarely are there issues that have to be tackled globally that impact every market and every business model. But ESG is one of those issues.
Managing ESG on a global scale
One of the most complicated aspects of managing ESG is that rules and regulations vary from country to country, which makes leading, managing and monitoring an organisation’s ESG strategy very complex.
Just because you have understood your legal baseline and market approach for one jurisdiction, doesn’t mean it will be the same elsewhere.
ESG and employment
Over the last decade, we have seen a significant shift in the way that businesses approach social responsibility.
Businesses are now being scrutinised by their ability to drive and shape policy changes that promote a positive environment for the entire workforce.
The benchmark has also moved into the global arena as international standards of fairness and equality are used.
Getting it wrong can have a huge impact, in terms of both profitability and reputation. In 2020, we launched a hugely successful ESG methodology for our clients that focuses on three core principles when it comes to ESG: anticipate, measure, manage.
It’s proven across a number of client engagements to be a robust structure around which an organisation can confidently build its ESG analysis and response.
Here’s how it works:
- GATHER INFORMATION, ANTICIPATE CHANGE
Every good ESG strategy starts with a rock-solid foundation. In order to achieve this, it is important that you identify any ESG concerns you may have, review what your competitors are doing, and identify the elements of E, S and G that resonate the most for you and your business.
The list is long, but other crucial aspects to consider include knowing what existing and upcoming ESG related disclosure obligations are relevant to you, preparing a legal baseline of current and near-term regulatory requirements, finding out what data you need and understanding the cost, risk and opportunity associated with your current ESG state and your desired future state.
Step 1 is about doing your homework.
2. SET YOUR STRATEGY
When it comes to building your strategy, start by defining your ESG strategic goals and integrating them into the organisation’s broader business strategy.
Then assign responsibility, and make sure cross-team (and, if relevant, cross-market) stakeholders are engaged and accountable.
3. MANAGE IMPLEMENTATION
The final piece of the puzzle is implementation. Have plans by business function, for example, talent acquisition by HR, supply chain and supplier management by procurement, ESG due diligence protocols for corporate affairs.
Ensuring that each business area has responsibility for key elements of this plan will enable everything to be done properly by a dedicated team of experts.
Part of implementation also comes down to agreeing on strategy for reporting and properly communicating successes to your board or key stakeholders.
While all of this may sound daunting and overwhelming, there is a lot to be gained from implementing a rock-solid ESG strategy.
Reputation is everything when it comes to business and companies that are failing to meet the expected ESG performance standards can expect to see a knock-on impact on their reputation.
In recent years, stories of modern slavery, sexual harassment and race discrimination have never been far from the news. In turn, these stories have a substantial adverse impact on the share price and market value of large and well-known companies.
Studies have proven that having a proper ESG strategy in place has become a competitive advantage in attracting and retaining talent, especially millennials, who are hugely influenced by how a business responds to and tackles social issues.
Companies with a strong ESG and labour relations proposition typically have better productivity among staff.
Addressing the widening gap between executive and workforce pay is also directly linked to productivity. Fairer incentive structures can help drive an inclusive culture and employee engagement, which in turn, can boost productivity.
There are many examples of how poor ESG performance can sink share prices and lead to significant costs.
Almost all investors and stakeholders are now alive to ESG performance, and want to see not just short-term plans but also how the core business model incorporates and deals with these issues in the long term.
Businesses that do not have an ESG and labour relations agenda will find themselves struggling to find investment from savvy backers, who recognise the need to manage these risks and promote compliance.
While many countries operate in markets with labour laws that provide relatively low levels of protection to employees, businesses will no longer be able to rely on their geographical location.
There are international frameworks that set out expected employment standards across the world by which nongovernmental organisations, investors, other stakeholders and the media are now judging businesses.
This includes the UN Global Compact, a sustainability initiative with around 12,000 corporate participants and stakeholders from nearly 160 countries.
The ability to investigate ESG breaches and issue fines has significantly increased. For example, gender pay gap reporting is now compulsory for companies in the UK with more than 250 employees and similar legislation applies in Australia and California.
While the level of penalties varies considerably from country to country, the willingness to impose top-level fines has increased across the board.
What’s clear is that ESG analysis and reporting can provide extremely valuable insights that can not only help create long-term value for a company’s stakeholders but can also increase a company’s bottom line.
At Dentons, we understand that addressing the ESG agenda requires cross-practice perspectives to be integrated and for solutions to be holistic.
For further information and to contact our team, click here.
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