ESG represents one of those rare seismic events that reshape the business landscape. It's plate tectonics of the corporate kind, or at least will be once the regulatory dust settles. And although we can't say with absolute certainty exactly how everything will look five or ten years from now, we have an extremely good idea of what companies need to do to prepare.
That's why ESG leadership is so essential. Yes, organizations can wait for ESG requirements to crystalize, then dive into the pool and fight to stay afloat. However, proactive leaders will put their companies in the ESG pole position, heeding the writing on the wall and formulating a game plan today. And because we like the cut of your jib, Embark's providing some prime-cut insights and tips on what effective ESG leadership means both today and tomorrow, helping you establish a pretty formidable competitive advantage along the way.
ESG Is Already Evolving
It wasn't so long ago that just knowing what ESG stood for – environmental, social, and governance, if you’re a noob – was a significant feather in an executive's cap. But those days are long gone, with sustainability reporting and ESG strategy at the forefront of the collective corporate mindset, not to mention a mighty battle for ESG-seasoned leadership and talent.
Put another way, ESG is rapidly evolving from its philosophical and conceptual foundation to a tangible, required reality, like it or not. Even companies with sustainability reporting protocols already in place for a decade face a steep learning curve, especially with the SEC officially getting off the sidelines with their climate change disclosure proposal.
Therefore, it's incumbent upon leadership to guide that evolution. Rather than Frank from the corner cubicle leading your "ESG initiative" in an entirely ad hoc, saw-it-in-Forbes manner, companies need true expertise – ideally in-house and outside specialists – to ensure they stay ahead of a rapidly-changing landscape.
Since we want your ESG reporting strategy to start on the right foot, we recommend leadership initially focuses on six specific areas:
- Understanding the many ESG frameworks available, identifying which would help tell your ESG or sustainability story best through company- or industry-specific metrics, and developing policies around that framework that are appropriate for your organization, industry, and stakeholders
- Look at your financial reporting processes, data environment, and systems to identify what you can utilize for ESG reporting, as well as what additional tools you might need down the road.
- Establish senior management buy-in and be prepared to "walk the talk," where leadership serves as a communications conduit between the organization and your people, partners, customers, internal and external stakeholders.
- Develop project and change management strategies in preparation for your policy rollout.
- Implement your ESG policies across every level of your organization, making sure your communication and execution remain consistent, reliable, and relevant between your business segments.
- Start conversations with external partners – across the entire value chain – on their own emissions data and overall ESG strategies, laying the groundwork for either imminent or future scope 3 reporting requirements.
While this isn't an exhaustive list, it provides a good idea of what leadership should concentrate on first. We also recommend looking at our guide, ESG Reporting Best Practices: Implementation & Beyond, for a more comprehensive look at the many responsibilities and tasks sitting on leadership's ESG reporting plate.
ESG Leaders Are Under a Glaring Spotlight
It's one thing to say ESG is evolving, but quite another to actually see and react to the rising tides, pun somewhat intended. So what, exactly, are those tides, aside from the ones coming from the SEC and other regulators? Glad you asked.
ESG no longer belongs to faceless, anonymous middle managers and those ad hoc specialists we mentioned, especially in the eyes of the public. No, the buck stops at the C-suite and board today. The head honchos. The decision-makers. And while that might be different from how things were just a few years ago, it's not necessarily a bad thing.
It's all about expectations now, those from employees, investors, shareholders, other stakeholders, and the world at large. ESG is under a bright spotlight, putting leadership under that same 1000-watt bulb. And given how vital DE&I (diversity, equity, and inclusion), sustainable development goals, and corporate social responsibility are these days, it only makes sense that all of those different groups would expect to hear directly from leadership regarding ESG.
From a practical perspective, that means educating executives on speaking to your value and mission statements through an ESG-colored lens, perhaps expanding the executive footprint with a Diversity and Sustainability Officer, or even a dedicated ESG team to boot. Granted, this depends on the size and scope of the organization, so where a Fortune 500 company might look to take many – but not all – of these roles in-house, small- to mid-sized companies may be better off engaging with outside specialists.
Further, those same expectations extend to the board and corporate governance overall, making it a sage-like decision to have board members with ESG experience to turn to, along with a focus on board diversity itself. Also, the SEC’s proposed disclosure rules require you to identify board members with expertise in climate-related risks, along with the nature of that expertise.
Above and beyond that requirement, however, it just makes good business sense to provide your stakeholders with a holistic, starts-at-the-top approach to ESG. This way, it’s ingrained in everything from your board members and decision-making to your hiring processes, and not just a side component of your reporting function.
Map Your Data and Sustainability Reporting Course
We know you're a standup person, good to your word, and always putting your money where your mouth is. The problem, however, is that investors, customers, and the talking heads on TV aren’t privy to that same information.
To them, you're just a pretty face in a crowd of business leaders that seems to say the right things, but they can’t vouch for you beyond that. In other words, if you don't have the evidence to back your ESG action plans up, they might as well not even exist.
So how do you prove your ESG mettle? Through data, of course. Metrics, KPIs, financial reports, and disclosures – they're all going to be your exhibits A, B, and C. And if you don't button them up like a tuxedo at the Oscars, people could very well look at you and your organization with a disconcerting eye.
But it's not merely a matter of proving the effectiveness of your ESG-focused endeavors. It's also about, once again, expectations. Everyone from bankers and analysts to a fresh college graduate starting their 401(k) expect numbers from you. Cold, hard data that irrefutably speaks to the scope and impact of your DE&I efforts, supply chain partner emissions, and commitment to sustainable business practices.
Therefore, you need to make certain your data environment, systems, and processes are ready to collect, analyze, and report on those specific data points you've identified as essential to your stakeholders within your ESG program.
Of course, in an ocean of current and potential data points, just choosing the right data to report can feel like a downright herculean task. So to take an unnecessary sense of mystery out of the process, we suggest simply sitting down with your stakeholders and asking what ESG data points are most important to them and most relevant to your operations.
Also, considering ESG metrics, disclosures, and recommendations from organizations like the World Economic Forum or TCFD (Task Force on Climate-Related Financial Disclosures) will help ensure your reporting takes into account principles widely respected around the world.
From there, once you have your data and systems in good working order, the challenge is to quantify and track your ESG efforts over time. Just remember, even if you were starting from scratch and have nowhere to go but up, your stakeholders, customers, and financial statement users – amongst others – will still smile if they see consistent improvement in your metrics over time.
In that sense, think of your approach to ESG as a three-act narrative that will forever be missing a final scene.
- In the first act, you’re getting the lay of the land and establishing a foundation by data mapping and putting the reporting pieces together, the same ones that will eventually drive your analysis and reporting.
- The second act is the implementation of your game plan, working out the inevitable kinks as you go.
- With the third act, you’re tracking metrics and a never-ending stream of updates, disclosures, and action planning. Literally.
Together, this narrative is how you’ll demonstrate the incremental process you're making with your overarching ESG strategy. Like a story with a finale that’s perpetually TBD.
Reap the ROI and Competitive Advantage Rewards
Our word of the day thus far has been expectations. And for good reason. The stakes are high and will only continue to escalate with each passing year.
Case in point – 85% of institutional investors already incorporate ESG factors from issuers into their decision-making. Further, companies with better ESG performance scores have seen an average cost of capital roughly 50 bps lower than their brethren with lower ESG ratings since 2015. And you don't exactly have to be Nostradamus to understand the future differences between the ESG haves and have-nots will be even more dramatic.
In that light, perhaps a more fitting word of the day would be opportunity. Companies that take ESG methodology, strategy, and reporting to heart are already reaping the ROI and competitive advantage rewards. Mind you, we're talking about a genuine commitment, not just hiring some ESG-minded millennials or Gen Z folk, publicly talking about renewable energy and net-zero emissions, and calling it a day. We mean quantifiable, data-driven results.
But here's the catch – the clock is ticking. Quickly. According to recent research from Workiva, 75% of companies across the globe have already started reporting on their ESG initiatives since those glorious pre-pandemic days of 2019. However, 63% still feel unprepared to address regulatory requirements or even their own internal ESG issues and goals, with only 35% believing they have the technology and data in place to support their ESG strategies. So what does that mean for you, a corporate leader searching for answers in this brave new world?
Well, there's still time to transform your ESG reporting and strategy from yet another responsibility to a full-blown opportunity. Remember what we said about getting your data environment, systems, and processes in shape to handle ESG reporting requirements? The time to address those tasks is now.
After all, the early bird gets the worm, right? Here at Embark, we want you to be that ambitious sparrow, the one where ESG and sustainability boost the bottom line rather than drag it down. And we'll always be here to lend you our expertise in ESG reporting, no matter how steep the climb might feel. So let's get going because we’re already burning daylight.
