It's no secret that companies are under pressure to implement sound environmental, social and governance (ESG) practices to keep both regulators and their key stakeholders happy. But what's the best way to go about it?
There's no one-size-fits-all answer, but a good starting point is to make sure your ESG strategy is robust and well-managed enough to keep your sustainability efforts on track. Your ESG strategy is your roadmap for how your company will meet ESG benchmarks.
Here, we’ll look at why an organization needs an ESG strategy, how it’ll set you up for success later on, and how to differentiate between CSR and ESG. Lastly, we’ll discuss what to keep in mind as your team forms an effective ESG strategy.
Why Your ESG Strategy Matters
Before we dive into how to create an ESG strategy, let’s talk about why this strategy matters. Recent research from ESG Book (as reported in Reuters) found that businesses with good ESG integration scores — particularly strong governance — were more profitable over the course of five years.
As the spotlight shines (and will likely continue to shine) even more on ESG issues like climate change and other environmental issues, shareholders are becoming more discerning about their investment decisions and are more likely to practice responsible investing. So, it's clear that ESG is an important competitive advantage.
However, it's not enough to make public statements that say your business is a socially responsible firm. You need to use meaningful decision-making and follow-through as ESG becomes part of your daily operations. In today’s economy, organizations must keep ESG principles at the forefront of their corporate governance strategies to show their public commitment to ethical business practices, especially when dealing with external vendors.
The Importance of Scope 3 Emissions in Your ESG Strategy
When managing the third-party risks in your supply chain, your approach to external scope 3 greenhouse gas emissions (GHG) can play a huge part in deciding which vendors align with your ESG strategy. It can also prompt you to hold your vendors accountable for promises to reduce their emissions.
According to MSCI, a leading research organization for global investment firms, companies are increasingly putting pressure on their energy and technology suppliers to work towards net-zero carbon targets. As a result, all those vendor reductions in carbon emissions help offset scope 3 GHG emissions for supply chains.
In addition to reducing the environmental risk of scope 3 GHG emissions, a good ESG strategy will also help your business to operate more efficiently within your supply chain and external-facing business operations.
How Your ESG Strategy Will Lead Your Regulatory Compliance
When you design your ESG strategy, the most important consideration will be its impact on your organization’s regulatory compliance. Aligning your ESG goals with effective policies and workflows within your vendor risk management processes will keep your operational teams on top of compliance efforts in your supply chain.
To keep your business ahead of the pack, incorporating third party risk monitoring into your ESG strategy will give you a head start once the proposed U.S. Securities and Exchange Committee (SEC) regulations around ESG reporting — particularly scope 3 GHG emissions reporting — come into effect in the next few years.
It’s worth noting that the European Union also rolled out its Corporate Sustainability Reporting Directive (CSRD) in November this year, which will result in new laws making it mandatory for a wider range of businesses to report on their ESG matters.
Although this may seem like a non-issue for businesses in the U.S. and elsewhere, Cooley suggests it’s likely your organization will also feel the impact of the regulatory burden if you work closely with a business subject to those new E.U. regulations — being part of that entity’s value chain would require you to share your own ESG data for their reporting disclosures.
While potential penalties are yet to be determined for non-compliance, you may want to consider that the SEC fined BNY Mellon Investment Adviser, Inc., $1.5 million in March 2022. The organization hadn’t adhered to ESG disclosure requirements for certain funds it managed.
Avoid the risk of non-compliance by using a bespoke dashboard like Certa’s ESG software to benchmark your vendors’ ESG performance against your strategy’s key performance indicators (KPIs).
For maximum efficiency, consider optimizing your strategy by collecting, monitoring, and benchmarking vendors’ ESG metrics in one streamlined process. This will help your risk management team quickly check if vendors are adhering to your internal processes and regulatory requirements.
Using a dashboard to keep an eye on these areas can help your risk managers understand your business’s overall performance. This will offer a straightforward review against your ESG goals, whether that’s reducing scope 3 emissions or avoiding other risks in your supply chain.
CSR vs. ESG
It’s important to note the differences between ESG and corporate social responsibility (CSR). Although both focus on sustainability and ethical business practices, they are two different concepts.
CSR is a business model and strategy that companies can use to publicly hold themselves accountable. It isn’t a framework like ESG, meaning that it doesn’t hold the same regulatory reporting requirements.
CSR focuses on subjective areas like culture and company values, such as diversity, equity, and inclusion (DEI). This means CSR impacts can be difficult to measure. However, ESG factors focus on objective metrics and use a tangible scorecard based on an organization’s chosen reporting criteria.
With its corporate culture focus, CSR can be useful for driving internal, team member, and board member accountability at all levels of the business strategy, while ESG would be more helpful for gathering data about how your business interacts with the world.
For instance, ESG reporting would measure your concrete environmental impact through scope 3 GHG emissions data, while CSR may look at the business’s social impact through public human rights campaigns or specific partnerships in the local community.
How to Create Your Organization’s Sustainability Roadmap
Alongside measuring and reporting on your company’s sustainability performance, your leadership team should keep the following in mind when charting your ESG roadmap:
- Align your ESG strategy with your overall business strategy. Conduct an ESG materiality assessment to discover, prioritize, and outline your ESG considerations based on internal and external stakeholder input, as well as their potential effects on the business.
- Identify and track key performance indicators (KPIs). Understanding the specific ESG metrics that apply to your supply chain will help clarify your business goals and objectives, so you can track your company’s performance.
- Use your ESG-related KPIs to select and review vendors. Aligning your procurement processes with your ESG strategy will put you in position to achieve your ESG goals, right from the start.
- Streamline as much of the process as possible. Collecting and reporting on metrics like scope 3 emissions can easily become cumbersome, especially considering all the aspects of your supply chain that need to be monitored. Automating and systematizing as much of your processes as possible will free your risk management team for more impactful tasks.
To complement the above actions, it’s also a good idea to choose an ESG reporting framework that best fits your business objectives — for example, here are four of the most well-known ESG frameworks:
- The Global Reporting Initiative (GRI) Standards
- The United Nations Global Compact’s (UNGC) 17 Sustainable Development Goals (SDGs)
- The Sustainability Accounting Standards Board (SASB) Standards
- The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD)
These reports will give you a structured way to collect useful data from your vendors based on the factors and metrics that are most important to your business.