Author: Steve Morgan, Managing Director, ESG Capital
It is one of the most common questions we get asked as ESG consultants. The simple answer is that you must start with an awareness of what it means specific to your company. All companies are in some way unique, therefore your ESG strategy should take this into account.
We recommend Boards and company leaders begin with 6 simple questions. These give an insight into the knowledge that leaders have on ESG topics specific to their organisation as well as the presence (or lack of) a proper process in place.
1. Are we clear on the ESG topics that are and will become material to our business?
Material topics, according to the Global Reporting Initiative (GRI), are topics that reflect an organisation's significant economic, environmental, and social impacts; or that substantively influence the assessments and decisions of stakeholders.
These topics are determined in part by the scale and reach of your company, the industry you work within and where you operate. What is material in an ESG sense to a company today will not necessarily be in a years' time. Boards need to be regularly reflecting (at least every 2 years) on their material topics whilst planning for future topics based on trends and company evolution.
Companies can end up with a lot of topics that could be considered material. Sometimes too many on which to have a meaningful impact. To manage this, boards then need to apply the process of principled prioritisation, weighing up the influence the issue has on stakeholder assessments and decisions, and the significance of the company’s ESG impact.
These defined issues then form a core part of any ESG strategy and reporting efforts.
2. Is our view of these topics informed by data captured from our stakeholders and do we review this consistently as our business and the context we operate in evolves?
Material topics must be informed through a stakeholder engagement process to ensure all stakeholders have the opportunity to communicate what matters to them. This starts with identifying or ‘mapping’ stakeholders and working out the best way to give them the opportunity to contribute. Common methods include online surveys, direct calls, and workshops. It is important to document this process for records and if you will be seeking assurance of your report.
Stakeholders can be both entities and individuals including:
Employees
Shareholders
Suppliers
Local communities
Indigenous communities
Government and regulators
NGO’s
Stakeholder inclusiveness is an important principle when developing an ESG strategy or report. The organisation needs to ensure it connects with those stakeholders they cannot be in constant dialogue with, as well as those who are unable to express their views through traditional methods or through proxies.
Data must then be captured and analysed by leaders to crystallise an accurate and representative list of material topics.
3. Have we set up a suitable ESG framework that incorporates recognised global frameworks and standards?
ESG frameworks and standards are plentiful and somewhat overwhelming for many company leaders. They exist, just like international accounting standards do, as a tool for the accurate, transparent, and comparable disclosure of a company’s material ESG topics.
Whilst it is still a developing space, there are several global leaders including:
These dominate the global ESG reporting landscape and as a result, investors and ratings agencies seek these frameworks out when evaluating a business. One of the early challenges with ESG is selecting the most suitable ESG framework and/or standards. For example, junior ASX listed resources companies may find that the SDGs are sufficient for their initial strategy and reporting cycle. Mid cap resources companies that are producing and, in the process generating high emissions may want to engage with GRI and TCFD.
4. Are we using our view on current and future material topics to guide the development of our core business strategy?
Gone are the days where a company can have an ESG strategy that sits separate to its core business. Investors and other stakeholders now demand ESG is integrated into the operations and strategy of a company. Risks must be managed, and opportunities explored through the ESG lens to protect capital and unlock value.
Recent examples of the importance of this can be found throughout the passenger vehicle industry. Tesla, which is now the most valuable car company in the world has a mission statement that is “to accelerate the worlds transition to sustainable energy.” (www.tesla.com) Now as the leading global EV brand, it has built a powerful early mover advantage over its competitors through executing on a strategy that was driven by awareness of the climate crisis and its implications on the auto industry.
5. Are we executing our strategy effectively and efficiently, having a positive impact on our material topics?
Sir Winston Churchill once said, “However beautiful the strategy, you should occasionally look at the results.” Whist it starts with strategy, impact on ESG must be measured through a mix of qualitative and quantitative results.
Most of the global reporting frameworks and standards provide KPI’s for material topics. Establishment of a baseline for a company’s material topics is critical for measurement of impact and to communicate this with investors and stakeholders.
Outside of the results, execution of ESG strategy relies upon properly resourcing ESG initiatives, having the right skills and knowledge supporting ESG efforts and a genuine commitment from the company leaders on ESG.
6. Are we effectively communicating with our investors and other stakeholders in relation to our view on future ESG material topics and our strategy on these?
Communication of ESG is traditionally done through an ESG or sustainability report. These can range from short (up to 20 pages) to very long (up to 120 pages). Whilst it is commonplace for these to be standalone, there is a trend towards integrating these reports into a company’s annual report.
Good ESG reporting needs to be communicated in a well-structured, visual document that can tell a story. More importantly, this story needs to be backed by data.
Outside of the traditional annual sustainability or ESG report, companies are innovating with more regular disclosures on ESG for investors & stakeholders through ASX/press releases. We expect that these methods will continue to be the dominant communication tools but that they will be complemented through impactful corporate videos and other more dynamic media.
Good ESG strategy and reporting takes time and expertise but getting started is easier than you think. With the introduction of inevitable ESG reporting requirements in the years ahead, the cost of not acting now is likely to be significantly higher than the cost of acting.
ESG Capital are an ESG Consultancy that work with public and private companies across APAC. Our value-driven approach focuses on the opportunities for value creation through ESG strategy and reporting.
We believe the companies that choose ESG today will be the leaders of tomorrow.
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