06/08/2024 Back to all articles

The Importance of ESG Strategy in Business Strategy

ESG (Environmental, Social and Governance) represent three central factors in measuring the sustainability and ethical impact of an investment in a company or business. Until January 2023, ESG was neither a law nor a directive, but rather a set of criteria to evaluate how a company performs in terms of sustainability, which was and is crucial for stakeholders and investors.

The importance of ESG has grown significantly, leading to various regulations and directives in different countries and regions that require companies to report on their ESG performance.

The Impact of ESG Strategy on Business Operations

Since January 5^th, 2023, EU rules require large companies and listed companies to publish regular reports, to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment. The Corporate Sustainability Reporting Directive (CSRD) entered into force. Starting in the financial year 2024, companies will be required to apply the new rules for the first time, according to predetermined standards.

Civil society organisations, consumers and other stakeholders evaluate the sustainability performance of companies to ensure compliance with the European Green Deal (no net emissions of greenhouse gases by 2050, economic growth decoupled from resource use, no person and no place left behind. One third of the 1.8 trillion Euro investments from the NextGenerationEU Recovery Plan, and the EU´s seven-year budget will finance the European Green Deal).

Every company, even smaller ones, not yet subject to the new law, should start to implement ESG by improving their efforts significantly. Investments will align accordingly. There are voluntary frameworks besides regulations and directives. The stock exchanges have requirements and guidelines for listed companies regarding ESG disclosures. In some jurisdictions, fiduciaries like pension fund managers may have a duty to consider ESG factors as part of their responsibility to act in the best interests of their beneficiaries.

Even in the absence of legal requirements, investors put pressure on companies to disclose and perform as for ESG.

Sustainability embraces Environmental, Social and Governmental factors.

Environmental Factors in ESG Strategy

Refers to how a company tries to improve its impact on nature. This includes

• Energy use and efficiency
• Climate change strategy
• Carbon footprint reduction
• Waste reduction
• Pollution
• Natural resource conservation
• Biodiversity
• Treatment of animals

 

Social Factors in ESG Strategy

Examines how the company implements and manages relationships with employees, suppliers, customers, and the communities where it operates.  This encompasses

• Employee relations and diversity (DEI)
• Working conditions / labour laws
• Fair pay
• Local communities
• Conflict
• Health and safety
• Responsible supply chain partnerships

 

Governance Factors in ESG Strategy

Refers to the company´s leadership, executive pay, audits, internal controls, and shareholder rights. It covers

• Corporate governance
• Risk management
• Compliance
• Ethical business practices
• Accounting integrity and transparency
• Executive compensation
• Board composition
• Audit committee structure
• Shareholder rights

 

Assessing ESG Factors in Your Business Strategy

Companies of different industries do have a different impact and varying focus points depending on the product or service they produce and sell. It is not always obvious how your organization embraces the above mentioned factors. Think of a construction company, a bank, and a gold mine.

Needless to say, that the assessment of the overall situation is the first step of implementing an effective ESG strategy.

1. Assessment of ESG

Determine which of the above factors are more or less relevant for your company. Understand priorities and grade of impact. Conduct an ESG audit or review and assess the company´s current ESG performance.

2. Set goals

What do you want to reach, which aspects do you want to improve in which time. Set clear ESG objectives like reducing carbon footprint, enhancing diversity and inclusion, or ensuring ethical supply chains. Always be aware of the  impact´s significance and the costs of implementing and not implementing a better strategy.

3. Develop policies

Develop a policy and action plan. For example, an environmental policy might set recycling targets or promote energy – saving measures. Implement policies that promote sustainable and ethical practices.

4. Stakeholder engagement

Engage employees and suppliers, customers, and investors, involve them in the process.  Inform them and gather feedback. Build trust.

5. Training

Train employees and leadership on the importance of ESG, and how they can contribute.

6. Transparency and authenticity

Regularly report on ESG performance, both internally and externally. Consider using standardized frameworks like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) for reporting. Represent what you decide as policy.

7. Review and iterate

Continuously review ESG performance and make necessary adjustments to stay on track with goals.

ESG, implementing sustainability policies in a company is a core business decision. Make sure it is not just a side effort but a central component of a company´s strategy. The future and legislative will require this.

Besides laws and directives, the decision of the extent takes place on the leadership level. Once decided, where do you structurally and strategically implement the realisation of set goals?

Structurally implementing sustainability requires a systematic approach, integrating in operations and company culture step by step.

For operations, apply similar steps to those chosen for the company as a whole:

Operational assessment, sustainable procurement, enhancement of resource efficiency, emission and pollution control, sustainable transportation, investment in technology and innovation that boost operational efficiency, implementation of tech solutions that monitor and manage resource consumption, certifications and standard controls, preparedness for crisis in case of environmental accidents.

To implement sustainability in the company culture means to ensure that sustainable principles and values become a natural part of how employees think, act, and interact. As a leader you give the example. You integrate the sustainability policy in the onboarding program. You organize internal campaigns. You look for feedback and dialogue. You incentivize, recognize and reward. You collaborate and form partnerships with NGOs, industry peers and community groups.

Requirements and compliance of sustainability will rise, and companies cannot neglect this.

So far skills to implement sustainability are integrated in requirements of an operational or managerial role. The overall process is hard to optimize this way.

 

Strategic Planning for ESG in Different Business Structures

Depending on the structure of your company -

• functional: organized around functions as marketing, finance, HR, and production
• divisional: organized around products, projects or geographical regions
• matrix: elements of both, functional and divisional
• flat or horizontal: few or no middle management levels
• team based: team based instead of functions or divisions
• hybrid: combination of multiple designs
• holacracy: power is distributed throughout the organization, roles are defined around the work, not individuals

- you may decide how to integrate and execute sustainability, who to attribute responsibility and coordinate with departments.

 

Creating Dedicated Sustainability Departments

Another option, more likely to occur in the future when requirements and compliance become more complex, is to create a sustainability department with particularly educated and skilled professionals. They analyse and coordinate all processes. They know what to look at from the very beginning. These are roles who studied sustainability as a specific subject, a CSO Chief Sustainability Officer (CSO) or Director of Sustainability, Sustainability Managers, Data Analysts, Environmental Specialists, Social Responsibility Specialists, Communications Specialists. We are still in a transitional process where companies and recruiters look for skilled professionals for functions or divisions who have some knowledge in sustainability. Sustainability departments will be the future and inevitable.

 

Maintaining Authenticity in ESG Strategy

Sustainability is a correct and necessary approach and a must to be implemented everywhere. However, be aware of connections and intricacies willingly or accidentally ignored in the name of ESG and the Green Act.

To automate in order to avoid the usage of paper may at first glance be logical. But is automation really sustainable? To what extent? When does the “green amortisation process” start and where does it end?

Sustainability, ESG should not be abused to get finance, or go with the political and “business Zeitgeist”.

We should approach ESG in a critical way, ask, investigate, always be authentic and optimize in the sense of protecting our planet and reinforcing human sustainability.

Sustainability is the commitment to our future.