(Credit: Canva Pro)This year, Environmental, Social, and Governance (ESG) conversations among company executives, board members, shareholders, and employees have matured significantly as businesses are pressed on all sides to enact an effective ESG strategy.
A 2022 IBM survey of corporate executives found that nearly half ranked sustainability among their top priorities, understanding that these initiatives are critical to remaining competitive, compelling, and constructive in today’s business landscape.
There are several reasons for this shift, presenting both challenges and opportunities for companies willing to understand the complicated factors driving ESG initiatives and the best ways to measure and report progress.
ESG initiatives are not new – the term was coined in 2005 – but they’ve taken on renewed relevance as urgent climate imperatives, expansive equity issues, and the need for more sustainable operational practices press companies to improve.
Investors are increasingly looking to ESG priorities when making decisions, and investment in ESG-related companies and sustainability-oriented funds is thriving. Last year, ESG funds grew by 55 percent, a trend that JP Morgan and other financial institutions expect to continue in the years ahead.
A PwC Survey of investors found that nearly half expressed a willingness to diversify from businesses that don’t take sufficient action, and 79 percent say ESG risks are an essential factor when making investment decisions. Others see ESG priorities as creating value by transitioning to renewable energy, hiring more diverse talent, and optimizing workflows for post-pandemic operational realities.
Companies are preparing for increasingly onerous demands for ESG disclosures as rapidly-shifting regulatory standards will force more companies to collect and share relevant ESG metrics. As a result, a McKinsey & Company analysis found that 90 percent of S&P 500 companies publish annual ESG reports to demonstrate their efficacy. And with more than 70 percent of employees demanding more purposeful work, businesses frequently view ESG reporting as important to attracting and retaining top talent.
A Deloitte survey of 300 senior executives found that companies are overwhelmingly “working toward more reliable – and timely – data” as part of “growing expectations for high-quality ESG reporting information.” Undoubtedly, they have a difficult road ahead.
Measuring and reporting ESG metrics can be complicated. Numerous reporting mechanisms and methodologies have emerged alongside ESG initiatives. As the Harvard Business Review succinctly laments, “ESG accounting is a mess.”
However, companies can’t wait for a universal ESG standard to emerge before collecting, analyzing, and reporting data. The following best practices can help companies begin this process now, allowing them to demonstrate efficacy and iteratively improve moving forward.
ESG initiatives are inherently investment-oriented as companies make strategic changes today that produce unparalleled results tomorrow. However, with executives and shareholders grappling with monthly or quarterly earning reports, it’s easy for these long-term priorities to succumb to short-term scrutiny.
An Ernst and Young analysis captured this dynamic, finding that 87 percent of business leaders report stakeholders having higher expectations for ESG-driven growth, while a similar number identify short-term economic headwinds as the leading impediment to ESG priorities.
Simply put, while executives and shareholders want and need to support ESG initiatives, they also want to maximize returns, requiring companies to understand and address shareholder priorities.
Pairing clear targets and KPIs with relevant and transparent ESG reporting can help build trust among all stakeholders, allowing everyone to move together towards a shared priority.
Having a clear, proven leader to champion ESG initiatives is critical to the program’s success, bringing authentic leadership and proven expertise to an urgent priority.
This sustainability champion should be someone who can produce results that matter and last. Task this person with ensuring the program succeeds while empowering them to implement real change.
A Director of Sustainability or a Chief Sustainability Officer will identify the metrics and methods that matter most, preventing company infighting or differences of opinion from undermining progress.
With nearly 60 percent of surveyed executives telling Harvard Business Review, “there are ‘significant differences of opinions within the leadership team’ on balancing short-term priorities with long-term ESG goals,” it’s clear that a single, authoritative voice is needed to make and maintain progress.
Companies that truly want to excel at their ESG goals will align employee incentives with organizational ESG outcomes. Create measurable objectives and benchmarks as part of the evaluation and performance reports, and align internal evaluations with external expectations. When everyone is incentivized to promote progress, ESG outcomes can accelerate more quickly, efficiently, and effectively.
As companies continue to have important conversations about ESG, they will need more than a promise and a press release. The above best practices can help any organization make real progress, ensuring that all stakeholders benefit from a more sustainable future.
(Credit: Green Badger)"I’ve been involved with sustainable design and construction my entire career. I started on the owner’s side as Director of Sustainability for a development company, then transitioned into running the consulting firm Trident Sustainability Group, and now as the founder and CEO of Green Badger. I’m a huge proponent of not only sustainable design, but of the value of transparency and third-party verification."
Tommy Linstroth is the Founder and CEO of Green Badger, a leading SaaS provider simplifying sustainability and ESG in the built industry.
