What is ESG?
Reporting on environmental, social and governance (ESG) is an up-and-coming way for companies to prove that they have a positive impact on society and the planet. As the name suggests, ESG is made up of three criteria: Environmental (i.e. resource use, pollution), Social (i.e. internal diversity, community impact), and Governance (i.e. the internal systems that the company uses to meet the needs of stakeholders). While the acronym ESG divides these three criteria, they are actually intimately intertwined. For example, when a company introduces internal policies geared toward sustainability, this is relevant to both environmental and governance criteria. This article will discuss concrete steps your company can take to improve your current ESG score. If your company isn’t reporting on ESG yet, this article will help you get started on the path toward taking advantage of this increasingly popular, value-adding practice.
What is ESG Reporting? What is an ESG Rating and ESG Score?
Investors are increasingly applying non-financial ESG factors as part of their analysis process to identify material risks at companies. Public companies often provide ESG related information, an ESG report, to help investors assess the sustainability of a company. ESG directories like CDP and ratings companies like Morningstar use these ESG reports to produce a proprietary ESG score for companies. There is no one standard for ESG reporting. The most common frameworks are GRI, SASB, CDP, GRESB, SFDR, TCFD, NGER, SECR and SDG. Each has their own methodology and assessments.
How is ESG Linked to Sustainability?
Obviously, ESG is linked to sustainability, specifically the environmental and social responsibility associated with business sustainability. The E for Environmentalism and S for Social Responsibility are most relevant to sustainability. The G for governance is indirectly related to sustainability via transparency and accountability, but less relevant to sustainability compared to the environmental and social elements. In business, ESG is linked to the sustainability of companies because it is a predictor of a company’s ability to sustain itself for a long – in theory, infinite – period of time.
ESG is important for the longevity of your business as it is centered on relationship-building between your company and the environment, society, governments and stakeholders you’re directly involved with. Building strong, symbiotic relationships with these groups will significantly increase your company’s ability to succeed today and in the future.
What are the Benefits of a Strong ESG Strategy?
ESG is not only good for our society, but is also a driver of strong financial results.
A first major benefit of ESG for businesses is that it can help drive growth. It does so in a couple of ways – by building trust with governments and thus making them more likely to award access, approvals and licenses for new opportunities, and by helping to attract ethical consumers and partners. On the ethical consumer side, McKinsey research found that more than 70 percent of customers would pay an additional 5 percent for a green product if it met the same standards as a non-green alternative.
The bottom-line impact of ethical consumers is expected to become more pronounced as Gen X becomes a significant consumer segment.
A second way ESG can drive financial results is by increasing employee quality and productivity. A strong ESG strategy can help companies attract and retain passionate employees and can increase motivation and overall productivity by instilling employees with a sense of purpose.
A third way ESG can lead to positive financial outcomes is by reducing operational costs. ESG initiatives centred around the environmental impact of your company can result in decreased resource use and waste, and thus can significantly decrease costs. Additionally, strong ESG performance helps companies retain employees. Considering that training new employees brings heavy costs, having a low turnover rate is accompanied by considerable cost-savings.
Another financial benefit of a strong ESG strategy comes from its ability to minimize legal and regulatory interventions. In this way, ESG performance increases strategic freedom and reduces the risk of government interference/sanctions. As mentioned previously, ESG can increase governmental support for your business which impacts the bottom-line much more than you may think. In fact, a McKinsey analysis estimates that in a typical company one-third of profits are at risk from state intervention.
One last central benefit that ESG can bring to your company is in terms of attracting investor capital. Previously, companies were solely analyzed based on financial metrics. However, cases like Facebook’s privacy issues and Volkwagen’s emissions scandal have highlighted the importance of using non-financial parameters in assessments as well. According to Morningstar, assets under management in funds abiding by ESG principles have now surpassed $1 trillion for the first time, with 91% of investors agreeing that non-financial performance is critical to decision making.
6 Tips to Improve Your ESG Score
This section highlights major steps your company can take to improve its ESG performance. For a more thorough discussion on how to become a sustainable business, check out this 10-step executive sustainability guide from the Green Business Bureau.
1. Identify the Key ESG Drivers for Your Company
The first step in building a formidable ESG strategy is identifying what aspects of your business drive ESG performance. In terms of the environmental aspect of ESG, main drivers include energy usage and source (renewable or fossil fuel-based), water usage, waste production and CO2 emissions. As for the social side of ESG, key drivers could be engagement with the community, donations to social causes, or other initiatives that contribute to the betterment of society. Finally, some drivers for the governance aspect of ESG could be a positive corporate culture, inclusive hiring processes, or the vetting of suppliers to ensure proper working conditions throughout your value chain.
An exercise many companies use to hone-in on what ESG initiatives they will prioritize are “materiality assessments.” Materiality assessments are formal exercises aimed at finding out how important specific ESG issues are to key stakeholders in your company (employees, investors, customers, etc.). They usually are administered via surveys. The insights gained from a materiality assessment can help to determine which ESG initiatives should be approached with the highest priority and can help you tell a more meaningful story about your company’s ESG efforts.
2. Collect Plenty of Data Points
With your company’s key ESG drivers identified and prioritized, it’s time to get a baseline for performance on these drivers. This step is integral to tracking the effectiveness of your ESG program and reporting progress to stakeholders. As numeric data is the most verifiable and easiest to track, getting this type of data is prefered. Of course, some drivers such as “positive corporate culture” are much more difficult to quantify than “energy usage,” so you may have to rely on some qualitative data as well. That being said, surveys are an excellent way to get numeric data on subjective aspects of your company’s ESG performance.
Get baseline data on every ESG metric your company is trying to improve even if you won’t be taking concrete action on that metric until other, higher-priority initiatives are complete.
3. Get Guidance from a Company that Knows ESG
Instead of hiring full-time employees to focus on ESG or dropping ESG on the lap of an already-busy member of your staff, it can be beneficial to work with a company focused on sustainable business to build a strong ESG program.
There are many companies that are knowledgeable about ESG and can help your business to achieve strong ESG performance.
However, many of these companies charge high consultation fees and require significant correspondence with your employees to be effective. This can make ESG impractical for small and medium enterprises (SMEs) that don’t have many resources at their disposal.
This is where a company like the Green Business Bureau comes in. The Green Business Bureau offers a low-cost, low-effort, interactive online sustainability framework that aids companies of any size in achieving strong ESG performance and advancing their ESG score. Its EcoPlanner and EcoLibrary of green and sustainability initiatives provides pragmatic actions, steps, tips and guides for businesses to become more sustainable. Members of GBB implementing the suggested initiatives as part of their journey to a green business certification often raise their ESG ratings and scores.
For example, the Green Business Bureau helped CyberArk, a publicly traded software company, significantly improve their ESG score. CyberArk first became a Green Business Bureau member when they received a very poor ESG score from Morningstar, and promptly decided that they needed to improve this area of their business to ensure long-term feasibility. With the help of the Green Business Bureau’s online tools CyberArk was able to implement numerous ESG initiatives. The next time Morningstar assessed their ESG performance, they received a top-notch score. This example illustrates that a strong ESG program doesn’t require a lot of time or capital investment if you partner with a company that specializes in the ESG arena.
4. Integrate ESG Into Your Business Strategy
The shift toward ESG being an integral consideration in business performance is not a fad. As climate change becomes worse and global inequalities widen, the importance of ESG to your stakeholders will continue to increase.
Be a company that emerges as a forerunner in social enterprise by integrating ESG into the core of your business strategy. By making ESG central to what your company does, you can take full advantage of the many benefits highlighted above, such as longevity and boosts to the bottom-line.
Commit to ESG in your business strategy by incorporating environmental, social and governance considerations into your company’s Mission Statement and Value Proposition. To enhance accountability for ESG performance and strengthen your ESG score, a best practice is to add ESG metrics to the KPIs (key performance indicators) of managers in every department of your company.
5. Set Ambitious Yet Reasonable ESG Goals
When setting your ESG goals, base them on the key ESG drivers for your company and the results of your materiality assessment (Step 1). Linking environmental goals to UN climate targets can also help by adding context to your pursuits and by showing that your goals are evidence-based.
Setting ambitious ESG goals is a surefire way to foster a sense of urgency and increase the likelihood that action will follow. However, be wary not to overcommit. While overdoing your ESG strategy is better than not having one at all, overcommitting to ESG can be a drain on employees’ time and focus. Also, under-delivering on ESG commitments can be seen as a form of greenwashing and thus can inflict serious harm on your company’s reputation.
A great way to ensure ESG goals are met is by setting interim targets. This allows your company to gauge its progress and signals whether you are on-track to meet goals or need to ramp up your effort.
While many of the ESG goals your company may set are generic across different organizations and industries (ex. Inclusive hiring practices), by catering certain goals to your company’s key competencies they can be made much more impactful and cost-effective than they otherwise would be. For example, if your company is in the food service industry and it has the ESG goal of increasing its involvement in the community, it would be smart to use your resources and connections to run a food-oriented initiative such as a food drive for homeless shelters in your community.
Green Business Bureau provides an EcoAssessment and EcoScorecard that can help you assess your current sustainability and track your progress via the scorecard. Many green teams and sustainability committees use the GBB platform and framework to manage their priorities and set goals. Each GBB initiative is worth a number of EcoPoints that add up to an overall EcoScore. For example, 200 EcoPoints puts a company at the Gold certification level and 400 points puts you at the Platinum level.
6. Create an Action Plan and Follow-Through On It
Finally, based on all the ESG groundwork your company has done up to this point, it’s time to create an action plan and put it into practice.
Identify the specific initiatives that will need to be taken to meet ESG goals, outline the key steps that will be needed to implement these initiatives, and assign responsibility for those steps. Including timelines for completion is another best-practice.
There is nothing wrong with spreading out the implementation of different initiatives over a few years. In fact, focusing on about five ESG initiatives at a time can be optimal, as this keeps employees focused and prevents resources from being stretched too thin. Additionally, starting with a few low-cost, low-effort ESG initiatives can be a great way to instill confidence in your team that your company’s ESG issues are not too large to address.
The main people involved in your ESG program should meet regularly (once every month or so) to ensure deadlines are being met and that your company is on-pace to meet its ESG goals.
An integral consideration for any ESG program is how best to report on progress. As of 2021, there are literally hundreds of ESG reporting frameworks in use, with no internationally-accepted standard. So it is really up to your company how you want to report your ESG progress.
Here are a few examples of popular ESG frameworks and standards:
The Global Reporting Initiative (GRI)
This standard provides a framework to help businesses, governments and other organizations understand, develop and communicate sustainability metrics. The guidelines can be downloaded for free on the GRI website. Whatever industry your company is in or ESG priorities it has, there is surely a GRI standard that applies.
The Sustainability Accounting Standards Board (SASB)
The SASB has developed standards for identifying, managing and communicating financially-material sustainability information to investors. SASB is a great choice to communicate the value your ESG program creates in investor language, and they offer 77 distinct standards depending on what industry your organization is in. SASB standards are often used in conjunction with other frameworks. For example, many companies use SASB along with GRI.
International Integrated Reporting Council (IIRC)
The IIRC revised their Integrated Reporting Framework in 2021, so this framework is as up-to-date as they come. The organization provides extensive information on their website regarding their International Integrated Reporting Framework and its six pillars. The IIRC standard is also often used in conjunction with other standards such as the standard from SASB.
These popular, highly-detailed reporting standards can help you determine the optimal way to report on your company’s ESG progress. It is important to remember, though, that the ESG score you receive is variable on the framework that whoever is assessing your ESG performance is using. So, the focus for companies should be on implementing impactful ESG initiatives rather than optimizing based on a particular scorecard. As long as you have transparent reports, set strong ESG goals and follow-through on those goals, your company is bound to receive a solid score from any external auditor.
For smaller companies with less time and effort to dedicate to creating ESG reports, integrating ESG performance into traditional annual reports or opting for less extensive but still informative ESG reports are good options. Posting ESG reports on your company website is another best practice that will shine a spotlight on your company’s efforts toward creating a better future for all stakeholders to see. Many Green Business Bureau members publish their GBB EcoProfile which includes their EcoScore and list of completed initiatives to enhance the information they provide related to ESG.
The Future Outlook for ESG Reporting
ESG has exploded onto the business scene in the past decade. Practically overnight, it went from a marginal consideration to an integral performance metric. And given the paramount importance governments are now assigning to solving the climate crisis and ensuring equal treatment of all people, this trend is likely to continue to accelerate. It is highly probable that in the near future ESG reporting will be treated the same as financial reporting, with audited ESG disclosure following globally-accepted standards required by every company.
While new standards and frameworks to assess ESG will continue to pop-up, the essential components of it will stay the same. Set your company up for success in the short- and long-term by embracing the ESG mandate.
There has never been a better time than now for all businesses to get serious about sustainability.
About The Author
GBB Green Ambassador
Dylan West is a content creator for the Green Business Bureau who is passionate about the pursuit of a better future through sustainable business. He is currently working toward an undergraduate degree in Business Management from the University of Western Ontario in Canada. Outside of his professional life, Dylan enjoys playing sports and exploring the natural splendor that surrounds his home in Vancouver.