WHAT’S THE DEAL WITH ESG? EVERYTHING YOUR ORGANIZATION NEEDS TO KNOW
Environmental, Social, and Corporate Governance (ESG) initiatives are impacting companies on a global scale. ESG encompasses everything from how an organization thinks about sustainability to how it measures success, how it looks after its employees, and how it fundamentally affects the communities it serves.
And while most organizations understand the importance of bringing ESG into the fold, it can be difficult to know where to start. That’s why I was thrilled to partner with the Skillsoft team to help provide some context and insight that I’ve gained through working with organizations to help operationalize their values, develop their ESG strategies, and prosper with purpose.
ESG MEANS UNDERSTANDING YOUR ORGANIZATION’S IMPACT
At a very high level, ESG is the criteria that investors use to evaluate the sustainability and ethical impact of a company and its long-term value. As your organization begins to look critically at its environmental, social, and corporate governance efforts, you should carefully consider the following questions.
The E Factor: How Does Your Organization Impact the Natural Environment?
Environmental factors that you might be considering as part of your ESG efforts might include:
- Energy consumption and efficiency
- Carbon footprint
- Waste management
- Air and water pollution
Understanding how your organization impacts the natural environment is an important way to level-set and begin filling in gaps. Who is doing this well? Google and LEGO are leading examples of strong environmental programs.
Since 2007, Google has operated as a carbon-neutral company. By 2018, it reached 100% renewable energy for its global operations, making it the largest corporate purchaser of renewable energy on the planet. The company is currently moving toward running on carbon-free energy – everywhere, at all times – by designing more efficient data centers.
In 2020, LEGO was the first large toy company to announce a science-based emissions reduction target – allocating $15 million to reducing its carbon footprint. Additionally, the company is working to find sustainable solutions for LEGO bricks, having unveiled a prototype brick made from recycled plastic in 2021.
The S Factor: How Does Your Organization Interact with Its Workforce, Customers, and Communities?
Performance indicators for your organization’s social impact might include diversity, pay equity, workplace safety, philanthropy efforts, human rights, and labor practices. Starbucks, Bridgeway Capital Management, and Coca-Cola are social impact leaders.
Starbucks holds its executives accountable by tying executive pay to meeting specific diversity and other ESG metrics . By 2025, the company aims for 30% of its workforce to identify as BIPOC (Black, Indigenous, and People of Color). It also plans to [MO1] nearly double its annual spending with diverse suppliers and vendors to $1.5 billion by 2030 – in addition to allocating 15% of this year’s ad budget to minority-owned media companies.
While it's too early to determine whether these initiatives have made an impact, there has been some pushback. Starbucks was sued in 2022 for its decision to make race-based decisions. The case is still pending.
Another example is Bridgeway Capital Management, an asset management firm that donates 50% of its profits to charitable organizations.
Coca-Cola has a rigorous human rights compliance process and is committed to fair labor practices throughout its supply chain. It engages third party auditors who, in 2021, conducted 2,848 independent human rights audits of, not only Coca Cola’s operations, but also their tier 1 supply chain vendors.
It looks like this article is from 2020, is this still in practice? What have the results been? [MO1]
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The G Factor: How Does Your Organization Make Decisions? How Does It Report On – and Ensure – Ethical Behavior?
From a corporate governance perspective, organizations need to think about how they make decisions and govern their corporate practices. Zappos and Salesforce are great examples.
Zappos is committed to transparency – going so far as to open its organization to outsiders to better share its culture of “WOW!ing customers and employees.” Zappos answers questions online, offers management education courses, and even provides vendors with the same information as buyers.
More broadly, Salesforce CEO Marc Benioff was a strong advocate for Prop C, drafted by San Francisco’s Coalition on Homelessness. This proposition charges companies operating in San Francisco with annual sales above $50 million about 0.5 percent on their gross revenue to support homeless services and housing. Salesforce pays $11 million a year to fund this program.
THE EVOLUTION OF ESG
The idea of corporate social responsibility (CSR) has been around since the 1980s and gained traction when the Exxon Valdez, an Exxon Shipping Company oil tanker, spilled 11 million gallons of crude oil into Prince William Sound in Alaska in 1989.
After the oil spill – the second largest in history – a small group of investors and environmentalists began to re-evaluate the role of corporations as stewards of the environment and agents of social and economic change. Initially called the Coalition for Environmentally Responsible Economies, the group later became known as Ceres.
The term ESG was first mentioned in 2006 as part of the United Nations’ Principles for Responsible Investment, which provided a voluntary framework to help investors incorporate ESG issues into their decision making. And the concept took off from there.
2020 saw a dramatic acceleration of attention toward ESG. COVID-19 brought economic disparities to the forefront, gaps in our healthcare system were highlighted; awareness of systemic racism was amplified by the Black Lives Matter movement; violence against women was spotlighted through the #metoo movement; global labor shortages brought labor rights to the forefront; and we turned our attention to pending environmental disaster.
Companies around the world were forced to take a hard look at their policies and take a stand as customers demanded products that aligned with their values, employees insisted on working for ethical and inclusive companies, and investors saw the higher returns from companies that advanced ESG responsibilities.
WHY ESG MATTERS
Did you know that – of the largest 200 economies in the world 157 (or 79%) are corporations qawq2, not governments?
Corporations have an outsized influence on the world around them, and that is one reason why ESG has become a moral imperative. ESG measurement and reporting are one of the most impactful ways that your organization can assess how you are contributing to society at large.
Here are some other reasons why ESG matters to your company:
- Values Alignment: Alignment between purpose and profit is key. Just look at how Skillsoft is reimagining what it looks like to be a responsible business through the lens of our corporate values.
- Profit: Studies show that strong ESG alignment leads to higher profits.
- Competitive Edge: 99% of publicly traded companies and 67% of privately held companies have ESG programs.
- Customer Loyalty: 77% of consumers surveyed are motivated to purchase from companies committed to making the world a better place.
- Investor Attraction: ESG is the number-one topic investors want to discuss with directors during shareholder engagements.
- Employee Retention: 90% of employees who work at companies with a strong sense of purpose say they’re more inspired, motivated, and loyal.
- Compliance: ESG reporting mandates have increased 74% over the past four years. To date, there are nearly 400 provisions in 80 countries, with more coming.
Should training be a part of your ESG strategy? Read more.
- StrategicPlanning: There is some advantage to being prepared for the future; ESG will soon become a requirement, and when that happens your organization needs to be ready.
Perhaps most importantly, ESG is the right thing to do.
NAVIGATING THE ALPHABET SOUP OF ESG FRAMEWORKS
What framework you choose will depend on your industry and operations. There are many frameworks out there and it can be confusing. (In addition to numerous ESG frameworks, there are an increasing number of ESG government regulations, ESG rating agencies, and international ESG goals.)
If your organization hasn’t started to map its environmental, social, and corporate governance initiatives back to a specific reporting framework, there are two frameworks you should pay attention to.
- The Global Reporting Initiatives (GRI): The most widely used sustainability reporting standards. GRI standards are currently used by more than 10,000 reporters across 100 countries.
- Taskforce on Climate-related Financial Disclosures (TCFD): Presents the risks and opportunities of climate change; improves and increases reporting of climate-related financial information across 1,700+ organizations; integrated into the laws of several countries.
- An additional framework, which will soon be issued, is being created by the International Sustainability Standards Board (ISSB). Established by the International Financial Reporting Standards Foundation, which also oversees the International Accounting Standards Board, the ISSB is bringing together the various sustainability standard-setters at the urging of global financial regulators to create a global unified ESG framework.
ESG PROGRAM BEST PRACTICES
Many organizations are still figuring out how to implement an ESG program that reflects their values. But as we’ve learned, ESG is quickly becoming a necessity to remain competitive in the business world. So, you’re likely wondering where you can start.
Below, I’ve outlined a clear process for kicking off your organization’s ESG efforts:
- Decide on an ESG framework. Choose which ESG framework you will use to report on your environmental, social, and corporate governance efforts. If you’d like, you can construct your own framework, but as regulations around reporting become more unified, it would be beneficial to stick with the preferred industry standards so you don’t have to start from scratch later.
- Conduct a materiality assessment. Figure out what ESG issues are important to your organization and stakeholders, using this insight to guide your strategy.
- Establish your ESG goals. Look at the current state of your efforts. Determine where you would like to be in the next five years. Conduct a gap analysis to help you figure out how to get where you want to go with the resources you have available.
- Allocate resources and prioritize. A successful ESG program is properly resourced and funded. Empower key stakeholders across your organization to collect data, report, monitor, and make an impact.
- Track progress and hold yourself accountable. Ensure that you are tracking your efforts with precision so your data is reliable and actionable.
- Report on and promote your progress. Let investors, employees, vendors, partners, and the community at large know how you are doing with respect to your ESG goals. Be accurate. Be transparent. Be honest.
And that’s it! Easy enough, right?
To double-click on any of the important issues that I covered during the webinar, “Corporate ESG and Sustainability: Understanding ESG Program Best Practices,” feel free to watch the recording on demand.