Insight Article: Why The Right ESG Strategy Is Crucial For Business Success

It seems that almost every day there is something in the media about climate change and ESG (Environmental and Social Governance). This media attention is likely to increase in the run up to the COP26 conference in Glasgow.

Most large companies now report on their ESG performance, not least because of pressure from ratings agencies (Refinitiv, Sustainalytics, etc.) and legal requirements, for example SECR or Streamlined Energy and Carbon Reporting in the UK.

The pressure being applied to large companies is now being extended to smaller organizations, initially via the supply chain where we see large organizations ranking the ESG performance of their suppliers, but also from consumers, staff and other stakeholders.

There is also the likelihood that some of the statutory ESG requirements will be extended to smaller organizations; for example, the UK Government already ‘encourages all private sector organisations which are not in scope of the legislation to report’ on a voluntary basis, and there is talk this may become a legal requirement in due course.

Whilst the emphasis on reporting is a valuable first step, it has some unfortunate side effects. Not only does a focus on reporting encourage ‘greenwashing’ (especially when the ESG performance is not externally validated) but it also encourages companies to look at ESG as a (compliance) cost rather than a benefit. The net effect is that companies are tempted to minimize the effort they put into ESG whilst ‘bigging-up’ their ESG performance.

Is this the right strategy? Maybe it is for a very small number of businesses, but the evidence increasingly shows that such a ‘zero sum’ approach means organizations are losing out on the real and immediate strategic benefits of developing the right ESG strategy for their business.

So, how can a more forward looking ESG strategy help drive business performance?

Firstly, by increasing sales: whether those sales are to consumers who are more inclined to buy sustainable products (think Brewdog with its zero-carbon beer) or B2B sales where sometimes 15% of the scoring of a tender response may be related to the supplier’s ESG performance. Why would any organization want to miss out on this competitive advantage? Yet many organizations that are doing great things on carbon reduction or other aspects of ESG forget to communicate this to their customers and the market, thereby failing to gain much of the commercial benefit.

Secondly, by improving employee motivation and productivity. High performing individuals will, generally, have a choice of employers and we have found that companies who take ESG seriously and put effort into engaging their staff in the ESG journey find it easier to recruit and retain the right people. Adding-in improved motivation is a further step on the road to the elusive ‘high performance team’.

And, whilst an interest in sustainability is often ascribed to younger generations, we have to question whether age is really a factor here? After all, do you know anyone who really wants to work for a company that is bad for the environment or does not care about social issues?

And, finally, the cost of capital… almost all investors now consider ESG performance in some way, and whilst ‘greenwashing’ might work for now, investors and ratings agencies are starting to look at what’s underneath…

Having established the crucial importance of the right ESG strategy for a business, we often hear the objection (especially from small to mid-sized businesses) that it is ‘just too complicated’. And a casual reader looking at the many thousands of words written about ESG and sustainability might be tempted to concur.

But it doesn’t have to be so complicated… With ESG strategy (as with other aspects of strategy), simplicity is often a good thing – certainly when it comes to communicating the strategy to staff and other stakeholders… and then getting people to change their behaviour.

“Strategy is not a lengthy action plan. It is the evolution of a central idea through continually changing circumstances.” – Jack Welch

Some questions you may want to consider in developing the right ESG strategy for your business:

Where you are now?

When businesses assess their current position, they are often surprised at the range of initiatives currently in progress; but a lack of coordination between the initiatives means the organization is not getting the full benefit from them.

Do you need a separate ESG strategy?

Having advocated that ESG strategy is crucial to business success, it may seem strange to ask this question. But, if ESG is to be the fundamental driver of business success that it should be, it may be better to include ESG at the heart of the overall corporate strategy development (rather than as a standalone process).

What are our ESG aspirations?

You need to decide whether to be a leader or a follower. In particular, how do you plan to respond to the pressures on businesses to achieve net zero carbon? And, if you decide to set a target date for net zero, how will you decide the target date and is it credible?

How will you measure your performance?

Most companies use spreadsheets to do this, but we all know that it is hard to maintain traceability with spreadsheets and, as the organization gets bigger, the spreadsheets become harder to maintain and increasingly error prone. Many larger organizations are already using cloud-based ESG software (such as Sustainion from Turnkey Technology) and mid-sized companies are now starting to embrace this too.

Do we need external certification of our performance?

We are strong advocates of external validation of ESG performance (especially for carbon reduction) and the Planet Mark is an excellent way to achieve this.  Certification has great advantages in countering charges of ‘greenwashing’ and ensuring that senior leadership stays focussed on the importance of ESG; if you decide that external certification is not right for your organization, you will inevitably need to consider how to address these challenges by other means.

What is our action plan for improvement?

We encourage companies to look at sustainability actions around a few broad headings:

1. Measure: As described above, it’s hard to assess improvement without measuring performance!
2. Engage: Your staff should be a great source of ideas and will be the people who have to take broad-based action to implement than plan.
3. Communicate: It’s vital to have key stakeholders (customers, suppliers, shareholders, etc.) on board as they can provide ideas and support for change.
4. Technology: Assess how you can use digital technology to transform your products and processes, to improve ESG performance and overall financial performance.

And finally, don’t overcomplicate things….

“The essence of strategy is choosing what not to do”. – Michael Porter, 

For more information and support on developing the right ESG strategy for your business, as well as ways to demonstrate compliance with SECR and other legal requirements, please contact us here at SKCI and the excellent team at Planet Mark.

Author: Stephen Kirk, CEO and Founder of SK Consulting & Investment Ltd.