The first post in this series described what ESG (environmental, social, and governance) is and its significance to businesses today. The second described the evolving market opportunities that use “ESG” to describe their market or scope. This post will analyze ESG within the business and how it impacts organizational structure, business strategy, data management and processes, and partnerships, depending on the company’s relative maturity.
ESG is practiced within businesses in many different ways, best reflected on a maturity scale.
Stage 1 (Least Mature): ESG As An Unavoidable Burden
Some ESG is pretty much unavoidable within a modern corporation, but it may not be called ESG, as such. Unavoidable ESG is the data that is collected, by someone who has to collect it, in order to serve some immediate operational need:
- An investor or analyst asks specific questions about the company’s ESG performance.
- A buyer presents someone on the sales team with a questionnaire that includes a host of ESG-related questions that must be filled out.
- A financial services provider presents someone on the finance team with a questionnaire asking about the company’s ESG performance.
- A member of the legal/compliance team discovers that certain ESG disclosures are (or soon will be) required by law.
- Someone on the risk management team decides that some environmental-, social-, or governance-related risks require ongoing observation and management.
This person then has an operational remit to try to gather the ESG data that she needs, which she’ll do through the usual collaboration and communications channels (namely, asking lots of questions around the organization to find out who might have the data she needs and then firing off a barrage of emails until she gets it). Once this initial data collection process is done, she might have ideas about how to do it better next time, which will be soon, but doesn’t at all see the need for specialist talent, technology, or services to support this.
Almost all enterprise-class corporations are well past this stage, but many private companies may still be at the “unavoidable ESG” stage.
Stage 2: ESG As A Managed, Collective Process
One of many triggers are likely to set off the need to lift the ESG process from a series of one-offs to a more sustained, and shared, process. These include the company’s directors or board stipulating that the company’s reputation and success depend on better management of these nonfinancial criteria, errors in an ESG process leading to embarrassment on a team or for the company, or managers identifying that many one-off ESG processes are hurting productivity.
This level of maturity is often synonymous with having someone in the business dedicated to either the environmental management of the company exclusively or its broader ESG footprint. Not surprisingly, this person will often have the remit for wrangling ESG data (or just the environmental data, if that’s the extent of their responsibility).
With collective ESG, the process of collecting and managing the ESG data becomes somewhat systematized, with some kind of routine established between those asking for the data and those holding it; there is, for example, agreement on a data framework (there are many of them, such as SASB, GRI, the WEF, TCFD, and more), which stipulates the data to collect, when to collect it, and what format it should be in. Further, the rigor around ESG rises to that equivalent to financial reporting. It is at this point that the business starts using ESG services, as auditors or process advisors.
At this stage of maturity, however, issues around ESG are not perceived to have much strategic importance; it’s just enough of a hassle to need some organizing.
Stage 3: ESG As Strategic Agenda
ESG data makes the jump from a simple output of operational fact (“We produced X tons of CO2” or “We have X% of female leaders,” etc.) to a key input to business improvement when the business’s leadership recognizes that this data is a reasonable proxy for their competitiveness via their cost of capital, their workforce effectiveness, their innovation rate, and their operational performance.
For example, workplace harassment cases provide an important and revealing perspective on the health of the management culture, and data collection and discussion to this point force conversations around that culture and then improvement.
At this stage, management will appreciate a materiality matrix — a graphing of the company’s stakeholders’ primary ESG-related interests and priorities against those of either the business or its employees — or, to be more specific, those ESG-related issues most likely to impact the welfare and success of stakeholders and the business or its employees. Naturally, leaders will prioritize topics of high importance to both stakeholders and the business.
In order to cement this ESG data-driven management approach in place, leaders become goaled, measured, and compensated based on their ESG performance. This naturally drives ESG-related discussions right down the lines of reporting. While these issues may have been part of management quality and training, it is now explicit and out in the open.
Given the importance of ESG to the management culture of the company at this stage, an ESG manager can look for dedicated and innovative technologies for tracking the data, automating its reporting, fomenting discussion and improvement, and predicting outcomes.
Also important to note is that at this stage, for the first time, ESG is perceived as such throughout the business and may even be called out by name: our ESG. Nonetheless, ESG remains a largely internal prerogative or at least not extending much further than employees and business partners and suppliers; it is not sewn up with the brand image and its product offering.
Stage 4: ESG As A Brand Prerogative
In these organizations, the leadership team perceives aspects of ESG to represent either an existential priority or a vital aspect of their future competitiveness. Some might be surprised to hear that, for many large energy companies, ESG has risen to the level of brand prerogative. Not surprisingly, they’re very mature in their ESG capabilities.
At this level of maturity, the business and its sustainability leads have established a refined and documented understanding of where they need to lead in ESG (that is, which criteria or metrics to drive against). Based on this understanding, they will have built out relatively sophisticated data collection and analysis mechanisms, combining internal and external tools and skills.
The big ESG services players find fertile ground in these companies, as there are clear leaders with specific responsibilities and budgets who can build and assess precise RFPs and make a purchase decision. Further, there’s clear understanding among the leadership team, and both the finance and the risk and compliance functions, of the importance of rigor in the ESG data and its analysis.
Externally, these businesses show some confidence in how they profile their ESG activities, sponsoring major ESG-focused events or forums, participating in ESG-related panels and bodies, and talking about ESG in both their marketing communications and public relations and investor relations experiences.
Stage 5 (Most Mature): ESG Leadership
The final stage of maturity comes about when the business is leading the ESG agenda in its industry or even across industries. For example, it is investing significantly in ESG-related R&D and innovation, pushing for progress in how ESG is measured and understood around the world, and pushing its key stakeholders (consumers, partners, suppliers, or even activists) to engage with the business and drive ESG-related progress.
At ESG leadership, each and every employee throughout the organization is working toward ESG targets right alongside traditional P&L financial targets, largely because these are reflected in their formal performance reviews as well as their reputation within the company — that is, there is a widespread understanding that the welfare of stakeholders, including communities throughout the supply chain, is worth being teams’ primary focus.
ESG leaders recognize that a significant part of their valuation stems from the strength of their ESG and their contribution to and relationships with stakeholders across the value chain. Some of them may even work to incorporate this into the firm’s governance, ownership structure, or remuneration so that all of its partners benefit collectively as the business succeeds.
These ESG leaders are readily recognized as such by the market and consumers through years of dedicated communication, trust-building, and focus. As such, leaders throughout the organization get called upon by governments, media organizations, and interest groups to weigh in on new initiatives, ideas, and programs to progress aspects of ESG.
Where does your business sit on this maturity scale? Not all businesses will have an arc that ends in ESG leadership, but increasing maturity will lead to better company, share, and investor performance. Leaders can build a short- and long-term plan against greater maturity based on some of the criteria here. If you want to talk ESG, schedule an inquiry (clients), book a briefing (vendors), or reach out for an informal conversation (all others).