Demystifying ESG and Tackling the “S”
ESG (Environmental, Social, and Governance) is the buzz-acronym of 2022. Business is waking up to the reality that ESG is a way to prove you are serious about tackling climate change and social issues. Everyone from startups to multinational B2B companies seems to place it front and center in their strategic plans and branding efforts—and with good reason. Having a strong commitment to ESG has never been more fundamental to future-proofing your organization.
But what is ESG, where did it come from, and how can you use it to drive real change, rather than making it an exercise in greenwashing?
The idea of embedding ESG into capital markets began in 2004, with the publication of Ivo Knopefel’s “Who Cares Wins,” but it was climate- and socially-conscious Millennials who sparked the remarkable rise of ESG as a key consideration for corporate stakeholders over the last decade. Today, however, research shows that all demographics have become increasingly committed to working for and with, investing in, and buying from companies with a strong ESG track record. According to Morgan Stanley’s Institute for Sustainable Investing, at least 85% of individual investors are interested in sustainable investing. Research also shows that ESG performance as a workforce strategy is a competitive advantage.
Being proactive and transparent about your organization’s ESG strategy and results can generate new opportunities, build brand reputation, delight your clients (and your clients’ clients), bring value creation through top-line growth, reduced costs, equity returns, and increased productivity. It can also give your organization a competitive advantage over others who are silent on the matter or, worse, found to be greenwashing their company.
Demystifying ESG: What is it anyway?
ESG refers to the three broad pillars—environmental, social, governance—that characterize a sustainable, socially responsible, or ethical investment. Each pillar represents an area of interest for socially responsible investors who want to incorporate their values and concerns into their investment choices. Simply put:
Environmental is related to your organization’s impact on the planet, climate change, and human beings as a result. This includes criteria such as your organization’s climate risk, carbon emissions, waste and pollution, and water usage.
Social refers to your organization’s relationship to and impact on its key stakeholders: it people or human capital, customers, suppliers, and wider society. Its topics might include diverse and inclusive hiring practices, corporate philanthropy programs, community knowledge sharing, eliminating the gender pay gap, and improving the representation of people of color and the LGBTQ community at all levels of your organization, including executive and board.
Governance refers to how your organization governs itself, makes decisions, manages risk, protects shareholder interests, structures its Board, and complies with the law. It includes topics such as your company’s tax strategy, oversight of top executives, executive compensation, corruption, and ESG reporting and disclosure.
How do you measure ESG?
One of the greatest challenges for organizations looking to integrate ESG frameworks and metrics into their strategy and operations is the lack of consistency among ESG information providers. This makes it difficult to know where to start and how to gain a competitive edge on the matter.
However, some pillar metrics have more consistency than others. On the one hand, E has universally accepted approaches to pillar reporting and metrics, including those of the Global Reporting Initiative and Sustainability Accounting Standards Board and G data has been compiled for much longer than both environmental and social, so the criteria for what comprises good governance has long been widely discussed and accepted.
On the other hand, S, is the unruly child of ESG. Despite being the ESG pillar that matters most to the largest living adult generation, it is the least developed and understood of the three pillars, largely because it is difficult to define and capture the extent of an organization’s social impact.
Committing to firmwide social goals and then measuring your progress towards them can be overwhelming at best and, at worst, disheartening enough to make your business nix its social efforts altogether. But it need not be.
How do you tackle the S in ESG?
- Identify your key stakeholders. Social goals should be tied to stakeholders’ rights: your organization’s behavior toward its employees, customers, suppliers, and wider society. Whose lives can you improve today and tomorrow?
- Identify Sustainable Development Goals (SDGs) or human rights commitments to pursue. In 2015, the United Nations adopted 17 SDGs, also known as Global Goals, as “a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.” Goals include No Poverty, Quality Education, Gender Equality, Reduced Inequalities, and Decent Work and Economic Growth, among others. Which goal or commitment does your organization value most?
- Create S goals that improve the lives of stakeholders in relation to SDGs or human rights commitments. For instance, if Gender Equality is the SDG that your organization values most, your goal might be to ensure gender parity among employees of all levels at your firm by 2025. You might want to tackle a similar goal for wider society by helping to double the number of women in the tech industry in the next five years. What goals can you advance and for whom? How can you contribute best?
- Make sure you are addressing a real issue and offering value. If you are working on an initiative to serve a particular stakeholder or community, make sure you ask them about their needs, wants and requirements. Getting out of the building to listen to the stakeholders you wish to serve is key. This means speaking to and observing and listening to them, be it through interviews, surveys, and other forms of outside-in research. What is your social value proposition? What real needs will you address?
- Identify the activities that will enable you to achieve your goals. Your activities will involve one or more of your products, capabilities, and financial resources. To achieve your ambition of doubling the number of women in the tech industry in the next five years, you might use your capabilities and financial resources to create mentorship and internship programs from women and LGBTQ communities, tech education and training programs for women and girls, or a Gender Equality Pact with industry partners, suppliers, and customers that includes a mutual commitment to the same goal.
- Measure your progress. In 2020, the World Economic Forum commissioned a six-month open consultation process to define common metrics for sustainable value creation. The metrics are a work in progress, but a good starting point for businesses looking for shared social indicators.To measure your firm’s progress toward achieving gender parity among employees of all levels at your firm by 2025, you may want to use the following metrics, adapted from the Global Reporting Initiative and Dodd-Frank Act, US SEC Regulations:
- Diversity and inclusion %: Percentage of employees per employee category, by age group, gender, and other indicators of diversity (i.e., ethnicity).
- Pay equality %: Ratio of the basic salary and remuneration for each employee category by significant locations of operation for priority areas of equality: women to men, minor to major ethnic groups, and other relevant equality areas
- Wage level %:
- Ratios of standard entry level wage by gender compared to local minimum wage
- Ratio of the annual total compensation of the CEO to the median of the annual total compensation of all its employees, except the CEO
- Share your data. Finally, it is good practice to report one your social goals and indicators. Be sure to include how your data was collected and any evidence of impact, such as stakeholder interviews, beneficiaries’ stories, visuals, case studies, and other relevant data.