Environmental, Social and Corporate Governance (ESG) is one of several terms often used interchangeably with terms such as sustainability, corporate social responsibility (CSR), and responsible investment. More specifically, ESG represents a range of sustainability factors of interest to the investment community, because these factors have the potential to affect a company’s valuation and public perception. As ESG becomes more widely accepted, these issues can have an impact on the financial performance of a company.
On a recent ProcessMAP EHS Leadership Roundtable, we were presented with key insights from Alan Kao and Amy Malick, who are leaders in the Environmental, Social and Corporate Governance (ESG) practice at Ramboll, an independent environmental, engineering and design consultancy and provider of management consultancy, to help educate safety professionals on the importance of ESG in the corporate landscape.
Investor interest in ESG has remained strong during the COVID-19 pandemic. JP Morgan conducted a study* to ask investors what the implications of COVID-19 crisis will be for ESG investment momentum in the next three years. The study results suggest that investors want companies to continue moving forward with their ESG initiatives even in the face of the pandemic. In fact, perception of ESG has been strengthened by the pandemic.
If investors define ESG as sustainability, it is important to understand how investors view ESG and integration with business objectives. In working with investors, Ramboll has learned the way investors think about and approach ESG can vary widely, with the spectrum ranging from being very mindful and cautious about ESG to being very intentional and opportunistic about it. Many investors are somewhere in the middle of this spectrum. They start out using ESG as a risk management tool but are increasingly viewing ESG as an opportunity to create value while they are holding a company. They are trying to be more intentional in their thinking and they are asking “what should I be thinking about?”
A growing body of research supports the business case for ESG. Studies suggest that companies that have strong ESG performance will have a better financial performance than companies that do not perform well with respect to ESG. A report called Project ROI, which identified a particular framework for ESG, found that companies that followed this framework, as opposed to treating ESG as a “check-the-box” exercise, were able to demonstrate an increase in sales of up to 20%, increase in productivity of up to 13%, reduction of employee turnover by up to 50%, and other positive benefits.
Companies and organizations are likely to follow a cycle as they develop and manage their sustainability programs. It starts with a discovery process, which includes identification and mapping of key stakeholders, and developing a materiality assessment where an organization prioritizes the key issues that are most important to them across the ESG spectrum. It also includes benchmarking and baseline analysis, so companies can understand where they currently stand across these issues.
The next step includes visioning and goal setting, so the company can align on where they are going as an organization, articulate their core values, long-term goals, and establish tangible targets like greenhouse gas, energy, or water-use reduction targets. Companies may then develop strategies for achieving those goals, often in the form of a plan that includes key initiatives, and projects to undertake to get there. Then they will work to implement their strategy, and report their progress using a range of management tools to keep things on track, demonstrating transparency to their stakeholders and course correcting as needed.
The use of digital dashboards and management tools like ProcessMAP’s Sustainability Performance Management solution are becoming increasingly important given the ongoing complexity and interconnection of the steps outlined above. From data collection to reporting, the work can be onerous, particularly when relying on cumbersome spreadsheets to manage critical data across multiple realms of ESG, which is not an ideal way to conduct this kind of work. Cloud-based dashboard systems can really streamline the process and ideally improve the quality of reporting and data analytics by eliminating guesswork.
There are an increasing number of reporting standards and frameworks that companies are reporting with increasing complexity. A company might start out by developing an internally focused sustainability report that highlights key accomplishments but doesn't necessarily follow any prescribed format or measure standardized metrics of any kind. The company might then move into standardized reporting, perhaps reporting through the Sustainability Accounting Standards Board (SASB). This includes a predetermined set of issues and metrics that the company needs to report on based on their industry sector. As a company’s sustainability efforts evolve, their reporting may become increasingly specific, and the number of metrics they are reporting on will also increase. Companies might report on multiple frameworks at once to satisfy the expectations of multiple stakeholders. With a process that can be confusing and onerous, Ramboll is especially interested in the digital tools that ProcessMAP provides. Ideally, online data management and reporting tools can reduce the resources that a company needs to dedicate to reporting so that they can focus on making measurable progress.
The year 2020 greatly increased investor and stakeholder interest in the corporate performance across multiple ESG issues, which provides a unique platform for companies to position themselves and their products and services in the marketplace. There is increasing evidence that companies that take a strategic approach to ESG can improve their business performance. An effective ESG strategy can focus on measuring, managing and reporting metrics that are most material to a company’s operations and its stakeholders, and technology solutions are increasingly important tools for ESG management.
* JP Morgan survey, “Tracking the ESG implications of the COVID-19 Crisis”