You can catch up on the fundamentals of ESG in our primer, but here’s a quick recap: ESG strategy helps companies evaluate investment risks and opportunities, and track the progress of sustainability goals in three areas:
- Environment: How your business interacts with and impacts the natural world, and how climate change and other environmental forces impact your business.
- Social: How your business impacts employees, vendors, suppliers, customers, and people in surrounding communities.
- Governance: How your business leadership is structured, your political affiliations, and what safeguards you have in place to prevent corruption.
ESG by the Numbers
ESG has been a trending issue for investors for some time. It's quickly becoming a focus for customers, employees, and the public.
- $17.1 trillion in U.S. assets were chosen according to ESG criteria in 2020. This is up from $12 trillion in 2018.
- 85% of investors considered ESG factors in their 2020 investments.
- 91% of banks monitor ESG, along with 24 global credit rating agencies, 71% of fixed income investors, and over 90% of insurers.
- 95% of all assets will incorporate ESG factors by 2030.
- 303% growth was seen in media mentions of ESG data, ratings, or scores year-over-year in 2020.
ESG Reporting Frameworks
There is also an effort underway to standardize and regulate ESG reporting and measurement. The Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are all coming together under the Value Reporting Foundation to create consistent and robust ESG disclosure frameworks.
- SASB: Provides industry-specific standards that focus on financially material issues, making it easier for investors to compare companies within the same industry.
- GRI: Offers a more comprehensive approach, covering a wide range of sustainability topics. It's widely used by companies to report on their broader impacts on the economy, environment, and society.
- TCFD: Focuses on the financial impact of climate change on companies, providing a framework for companies to develop more effective climate-related financial disclosures.
Choosing the right ESG reporting framework is essential for accurate and meaningful disclosures. Companies should consider their specific needs and stakeholder expectations when selecting a framework.
ESG and Financial Performance
There is a growing body of evidence that strong ESG performance correlates with better financial performance. A study by Morgan Stanley found that sustainable investment funds had equal or higher median returns and equal or lower volatility than traditional funds.
In 2020, sustainable funds outperformed traditional funds by 4.3 percentage points and exhibited lower downside deviation, indicating better risk management during market volatility. These findings highlight that integrating ESG factors can lead to more resilient and profitable investments. (Morgan Stanley)
Which Factors Matter Most in ESG Strategy?
There is no universally consistent answer to this question. Many opinion studies and polls have been conducted, which generally point to environmental topics being prioritized ahead of governance and social. But the reality is that it all comes down to the nature of your business, industry, and community.
The best way to rank and prioritize which ESG topics should be tackled first is to conduct a materiality assessment for your company. This involves steps like conducting internal stakeholder research, designing a materiality survey, and analyzing the insights you find.
The final output is an actionable starting point for building your ESG strategy around priorities that align with what truly matters to your business.
Finding Your Focus for ESG
Creating or refining an ESG strategy is a company-wide undertaking, but should have a core organizational owner to shepherd the process forward. Though each organization’s priorities will differ, here are some of the key topics underlying the ESG pillars to help you get the conversation started. A materiality assessment will help determine which ones are most worthy of your initial focus.
Environment covers your company’s impact on the natural world. Here are a few of the most common areas of interest:
- Greenhouse gas (GHG) footprint: Arguably the most important environmental factor for many companies, investors heavily scrutinize the measurement and management of greenhouse gas emissions to determine whether their portfolios are prepared to meet ambitious, science-based GHG reduction targets.
- Air and water pollution management
- Waste management
- Water resource management
- Natural disasters and climate risk
Social covers the company’s impacts (positive and negative) on communities and how the company treats employees. Some common topics for measurement and disclosure include:
- Human rights
- Diversity, Equity, and Inclusion (DEI)
- Fair wages
- Community impacts and philanthropy
- Data security and privacy
- Labor conditions (directly and within the supply chain)
Governance covers how well a company discloses and manages its actions, priorities, and ethics management. Governance covers:
- Board composition
- Conflicts of interest
- Bribery and corruption
- Political contributions and affiliations
- Whistleblower protections
The Role of ESG in Risk Management
ESG strategies play a vital role in risk management by helping companies identify and mitigate potential risks.
- Environmental risks, such as those related to climate change and resource scarcity, can significantly impact a company’s operations and supply chain in the long term.
- Social risks, including labor practices and community relations, can affect a company’s reputation and operational continuity.
- Governance risks, such as corruption and lack of transparency, can lead to legal and financial consequences.
By integrating ESG into their risk management processes, companies can proactively address these risks and enhance their resilience.
For instance, companies with robust ESG practices often have better crisis management protocols, reducing the impact of unforeseen events. A strong focus on governance can prevent issues related to compliance and ethical breaches, as well, which can be costly both financially and reputationally.
Launch Your ESG Strategy
Remember that ESG is not just about managing risk; it also helps unlock opportunities. Understanding and addressing the ESG issues that are most important to your business reduces vulnerabilities and identifies growth opportunities. It’s good for business, good for people, and good for the environment.
You don’t have to tackle ESG alone. We’ve created a step-by-step guide to help you develop an ESG strategy and a 7 step process to help you conduct a materiality assessment to get started.
