Sustainability as a Competitive Advantage: How ESG Values Can Drive Business Success.
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment or business. Today, ESG considerations have become increasingly important for companies, as investors are now interested in how businesses are run and their impact on society and the environment.
Therefore, companies must consider the development of an ESG strategy as part of their corporate development plan.
In this article, we will explore a range of key strategic values for those considering implementation.
Key strategic values:
1. Integration: Integrating ESG into the company’s overall strategy and decision-making process means considering ESG factors when making any decision, from investment decisions to daily operations. ESG integration is about embedding ESG into the company’s culture, systems, and processes, ensuring that it is part of the DNA of the company. Companies that have successfully integrated ESG into their corporate development plans have shown better financial performance and a better reputation with stakeholders. For example, Unilever (1) has successfully integrated ESG into its business model, and as a result, the company has improved its brand reputation, reduced costs, and increased revenue.
2. Materiality: Focusing on material ESG issues means addressing the ESG issues that are most relevant to the company’s industry and operations. Identifying and addressing material ESG issues can help companies mitigate risks, improve efficiency, and create new opportunities. For example, a mining company may focus on reducing its carbon emissions, while a food and beverage company may focus on reducing food waste. Materiality is determined by the significance of the ESG issue to the company’s stakeholders, the impact it has on the company’s business operations, and the potential risks and opportunities associated with it.
3. Metrics and Reporting: Developing metrics to measure and track progress on ESG issues is essential for companies to understand their impact, identify areas for improvement, set targets, and demonstrate their commitment to ESG to stakeholders. Companies should use relevant and reliable metrics that align with industry standards and best practices. For example, a company may use the Global Reporting Initiative (2) or Sustainability Accounting Standards Board (3) standards to report its ESG performance. An example of a company that uses metrics and reporting to measure its ESG performance is Microsoft, which set ambitious targets to reduce its carbon footprint, and it reports its progress annually (4).
4. Stakeholder Engagement: Engaging with stakeholders, including investors, customers, employees, and communities, is essential for companies to understand their expectations and concerns regarding ESG issues. Stakeholder engagement can help companies identify key issues, develop better solutions, and build trust and loyalty. For example, Starbucks engages with its stakeholders through its Global Social Impact Report (5), which includes information on the company’s progress on its ESG commitments. Starbucks also invites its stakeholders to participate in its annual general meeting to discuss the company’s ESG performance.
5. Board Oversight: Having board oversight of the company’s ESG strategy and performance is critical to ensuring that the company’s ESG commitments are aligned with its overall strategy and that progress is being made. The board should provide leadership and guidance on ESG issues, set targets, and monitor progress. For example, Nike’s board of directors oversees the company’s sustainability goals and reports on the company’s progress toward those goals annually.
6. Collaboration: Collaborating with other stakeholders, including industry peers, NGOs, and government agencies, to address ESG challenges collectively is essential to creating a collective impact. Collaboration can help companies share best practices, leverage resources, and create a collective impact. For example, the Sustainable Apparel Coalition (6) is a collaboration of over 250 companies, including Nike and Adidas, that aims to reduce the environmental and social impacts of the apparel and footwear industry. The coalition has developed a tool, the Higg Index (7), which measures the sustainability performance of products and companies.
The pitfalls of poorly planned execution:
While developing an ESG strategy is important, poorly thought-out planning and execution can lead to several pitfalls, including:
1. Lack of integration: One common pitfall is a lack of integration of ESG factors into the company’s overall strategy and decision-making process. Without proper integration, companies may overlook ESG risks and opportunities, which can have a negative impact on the company’s financial performance and reputation.
2. Greenwashing: Another pitfall is the practice of greenwashing, which involves making false or exaggerated claims about a company’s ESG performance. Greenwashing can damage a company’s reputation and erode stakeholder trust.
3. Failure to prioritize material ESG issues: Failing to prioritize material ESG issues can also be a pitfall. Companies may focus on ESG issues that are less relevant to their industry or operations, which can lead to a misallocation of resources and missed opportunities to mitigate risks and improve efficiency.
4. Insufficient metrics and reporting: Companies may also struggle with developing metrics to measure and track progress on ESG issues. Without relevant and reliable metrics, it can be challenging for companies to understand their impact, identify areas for improvement, and demonstrate their commitment to ESG to stakeholders.
5. Lack of stakeholder engagement: A lack of stakeholder engagement can also be a pitfall. Without proper engagement, companies may not understand stakeholder expectations and concerns regarding ESG issues, which can lead to missed opportunities to build trust and loyalty.
6. Lack of board oversight: Finally, a lack of board oversight of the company’s ESG strategy and performance can also be a pitfall. Without proper oversight, companies may not have the leadership and guidance needed to set targets and monitor progress toward ESG goals.
Success Case Study:
In 2017, Danone launched its “One Planet, One Health” framework (8), which outlined the company’s commitment to addressing global sustainability challenges through its business activities. The framework focused on three key areas: climate, water, and circular economy.
To integrate the framework into its operations, Danone created a sustainability committee comprised of board members and senior executives to oversee the company’s ESG strategy. The committee developed a set of material ESG issues relevant to Danone’s business, such as reducing greenhouse gas emissions, improving water stewardship, and promoting sustainable agriculture.
Danone also developed a set of metrics to measure its progress towards its ESG goals, including a target to become carbon neutral by 2050 and a commitment to sourcing 100% of its agricultural ingredients through regenerative agriculture practices by 2025. The company regularly reports on its progress towards these goals and has received recognition for its sustainability efforts, such as being named the top-ranked food company in the 2020 Dow Jones Sustainability Indices (9).
In addition to these internal efforts, Danone also engages with external stakeholders to understand their expectations and concerns regarding ESG issues. The company collaborates with other organizations, such as the Ellen MacArthur Foundation, to promote circular economy practices, and engages with investors to discuss its sustainability strategy and progress.
Overall, Danone’s “One Planet, One Health” framework and ESG strategy have helped the company become a leader in sustainable business practices. By integrating ESG factors into its business strategy and decision-making processes, developing metrics to measure progress, engaging with stakeholders, and collaborating with others, Danone has demonstrated how companies can create long-term value for all stakeholders while also contributing to a more sustainable and equitable future.
Why this is valuable:
Developing an effective ESG strategy is becoming increasingly important for companies in today’s business landscape. By integrating ESG factors into their overall strategy and decision-making process, companies can create long-term value for all stakeholders and contribute to a more sustainable and equitable future.
In summary:
At informd, we believe that the development of an ESG strategy is crucial for companies today. Integrating ESG into the overall strategy and decision-making process, focusing on material issues, developing metrics, engaging with stakeholders, providing board oversight, and collaborating with others can help companies mitigate risks, improve efficiency, and create new opportunities.
However, companies must be aware of the potential pitfalls of poorly thought-out planning and execution to avoid any negative impact. By focusing on the key strategic values for implementing an ESG strategy, companies can create long-term value for all stakeholders and contribute to a more sustainable and equitable future while achieving their business goals.
Referenced Links
(1) https://www.unilever.com/planet-and-society/sustainability-reporting-centre/
(2) https://www.globalreporting.org/
(4) https://www.microsoft.com/en-us/corporate-responsibility/reports-hub
(5) https://www.starbucks.com/responsibility/reporting-hub/
(6) https://apparelcoalition.org/
(7) https://apparelcoalition.org/the-higg-index/
(8) https://www.danone.com/stories/one-planet-one-health.html
(9) https://www.spglobal.com/spdji/en/landing/investment-themes/esg/
