Over the last few years, sustainable business has become a priority for every facet of the supply chain. It began with consumers, moved onto suppliers, and now has the attention of investors. With this growing emphasis on green processes, potential shareholders have created the Environmental, Social, and Governance (ESG) framework to screen potential investments through a socially conscious lens. In this article, we’ll be looking at what the ESG consists of, types of ESG criteria, and a few ways your company will be affected by this framework. Read on to learn more.
What is the ESG?
The primary purpose of the ESG framework is to give investors a more robust idea of a company’s overall risk, outside of just financial aspects. By analyzing a company’s Environmental, Social, and Governance health an investor can effectively evaluate issues pertaining to its long-term health and prosperity. In the current social landscape, many investors are searching for thoughtful, forward-looking policies and programs in all three of these areas. Essentially, the ESG helps to answer questions like;
- How secure are its relationships in its social sphere?
- How well will the company hold up to eco scrutiny?
- Is their leadership transparent or are they facing corruption?
Types of ESG Criteria
Each section of the ESG framework has its own criteria and importance in evaluating a company. Without fully investigating all three, it’s easy to overlook potential future risk. Let’s look at what makes up each section.
The environmental aspect of the ESG evaluates a company’s impact on our ecosystem. This can include energy use, treatment of animals, possible pollution, carbon emissions, and if they keep up with environmental regulations. It can also be used to analyze any future environmental risks a company might face and how the company plans to manage those risks.
The social aspect looks at the business relationships a company takes part in as well as how a company manages interactions with its employees, customers, suppliers, and communities. This includes things like gender and diversity inclusion, customer success, employee pay, as well as human rights considerations and the overall social impact their operations have left on their community.
In terms of governance, investors want to know how the company is run by its board of directors. Does it use accurate and transparent accounting methods? Can stockholders vote on important company decisions? Investors may also evaluate any conflicts of interest, possible corruption, and the internal governing hierarchy of the company.
How Will the ESG Affect Your Company?
While the ESG framework grows in popularity and more investors begin to use it, many business professionals may wonder how it will affect them and their company. Fortunately, there is growing evidence that ESG practices will lead to better long-term financial performance as well as the attraction and retention of diverse talent. Here’s a breakdown of these positive impacts:
How Should Your Company Prepare?
Now that we understand what the ESG framework consists of and how it can benefit your company in the long-term, let’s outline how your company should prepare for its widespread use. When building your ESG program, it’s important to keep sight of the big-picture and establish a framework that can withstand changing regulations, investor expectations, and societal shifts. Here are five key steps to doing this successfully:
- Complete a materiality assessment
The first step in creating a sturdy ESG framework is completing a materiality assessment. Simply put, an ESG materiality assessment is a tool to identify potential ESG issues that are the most detrimental to your organization. Without conducting this evaluation, your company will most likely miss important areas of the ESG that you fall short on. The results of this assessment will be your blueprint for your entire ESG strategy, making it an essential piece of the preparedness puzzle. Take a look at this in-depth guide to conducting a successful materiality assessment to help you get started: 7 Basic Steps for Conducting a Successful Materiality Assessment.
- Set objectives and goals
The next step in the ESG process is setting your company’s individual goals for what your framework should look like. Basically, you need to determine what sustainability and ESG mean to your organization. Here are some questions to ask your team to help facilitate your employee’s opinions and begin the goal setting process:
- What are the sustainability goals of your stakeholders? How will you communicate with them throughout the ESG process?
- What would a successful framework look like for your organization?
- What are your financial and time targets?
- What current challenges does your organization face?
- In what ways does sustainability create value for your company?
With these questions answered and your ESG conversation catalyzed, your team can begin collaborating on the overarching goals your company hopes to achieve throughout this process.
- Develop an ESG roadmap
Once your goals are set, it’s time to create a timeline and budget for this process. By putting these aspects into writing and communicating them with your team, you can hold employees and your organization accountable as your ESG development becomes more complicated. This step is also a good time to revisit the level of ambition you identified within your goals and to set in place a reasonable approach your team can follow. When constructing your framework, it’s necessary to consider how it will be utilized across your organization and how you will oversee progress to achieve goals.
- Measure key performance indicators (KPIs)
Once your roadmap is outlined and your team is aware of how the ESG framework will be implemented, it’s time to choose the key performance indicators (KPIs) you will use to measure your progress. Since you have already decided on what ESG success means to your company in your goal setting stage, it can be helpful to use that idea of success to determine what physical measurements you can use to make sure your team is on track. This is also a great opportunity to utilize a centralized management system to track and measure key metrics and performance once your implementation has begun.
- Report progress
Lastly, after your ESG framework development is well underway, it’s important to communicate the progress you make. This means creating internal and external reports to update both your stakeholders and your team of the different ways your framework is coming together and affecting your company. You want to communicate this information concisely, ensuring you report on topics most important to your company and the goals your originally set. As your ESG framework progresses, you may choose to incorporate this information into wider organizational reporting, in the way of annual reports, customer statements, or investor presentations.
With sustainability at the forefront of current business, the popularity of the ESG framework is here to stay. And now that you have a complete view of what the ESG consists of, an outline of the three types of ESG criteria, and are aware of a few of the ways your company will be affected by this framework and how you should prepare, it’s time for your company to take advantage of the opportunities the ESG can bring.
Our DocXellent team would be glad to help you accomplish your sustainability goals and demonstrate how our document management software, ENSUR, can maximize your company’s ability to master the ESG framework. Contact us today.