To find your way in ESG, start with ‘why’, then figure out ‘how’ 

One of the frequent complaints made about ESG is that there is a bewildering ‘alphabet soup’ of measurement frameworks and acronyms. To those starting on their journey, this has created confusion about what is required and where to start, and in some cases, has led to procrastination. There is a simple solution to this conundrum: start with what you are seeking to achieve, and only then select the right tools for the job. 

ESG tools and rating systems provide guidance on the ‘how’ of ESG, providing a framework for what organisations should be working on and in some cases a benchmark to others. To stakeholders, they provide the proxy for how the company manages its ESG risks. Yet they cannot answer why ESG matters to the organisation and where it sits within your strategy and offering. Put more simply, they do not detail why managing risks and future-proofing your business matters to your company. In some aspects of ESG, such as energy and carbon, regulation will eventually set clear guidelines, but that is not the case across the wider universe of ESG. 

Understanding the why isn’t just about de-risking your business; it is about embedding longer-term strategies that will enable your business to thrive in a world that changes and challenges with increasing frequency. If your organisation doesn’t know why it is focusing on environmental performance, social impact and governance, it may be forced to make difficult decisions that result in longer-term actions being de-prioritised. 

When companies understand why this is important for their future, the next step is to integrate their ESG priorities into the business strategy and communication. The cross-functional nature of these actions mean that to succeed, they cannot be siloed into a department and staff buy-in is vital. 

Companies need to tell other stakeholders why ESG (and their broader approach to sustainability) features in their organisation’s strategy. They need to communicate where it sits in the company’s value hypothesis. This enables decision-making in a climate of high uncertainty and makes the chosen approach clear. Embedding a set of values that guide in difficult times can also help to engage staff, encouraging alignment to the company’s long-term strategies. This can also help to attract the right talent, with the majority of candidates under 35 believing it is important to work for companies that share their values, according to EY in 2021.  

Once the why is integrated and articulation of values is established, ESG frameworks can support the direction of travel. The right framework/certification can be useful internally and for external stakeholders. It should also be seen as an imperfect tool to support this work not the reason. Creating an internal focus only on hitting those ratings risks ‘teaching the test’ in that gaps and risks may slip through the net that the organisation should be considering. Only focusing on the headline numbers emerging from tools and frameworks may miss elements that can currently only be reported qualitatively. With many aspects of ESG, there can be a lack of data around which to quantify performance, and qualitative disclosures may need to stand in place (this is particularly the case with some aspects of social value).   

The industry has proven adept at developing practice in ESG reporting over the last 15 years. ESG remains a moving target and having a firm sense of why it matters to your organisation helps you to discern how to navigate an ESG landscape that is perpetually in flux.  

The firm strategy also needs to factor in when the company’s strategy needs to adapt in light of ESG-related matters. For example, as we look to a government and a government-in-waiting that are both willing to trade meeting climate targets for economic growth and productivity. We must consider how changing climate scenarios might affect our operating models and value chains AND what can be done to minimise the contribution to climate breakdown. 

While the Taskforce on Climate Related Financial Disclosures includes requirements for examining a strategy against a range of plausible future climate scenarios, this obligation currently only affects a subset of large and listed companies. The FRC found last year that more organisations need to make this part of their reporting, since it would help them prepare for plausible climate scenarios. This future-focused approach enables businesses to recognise the risk of climate breakdown to the business and needs to be done at the same time as planning how a business will align with 1.5 degrees. 

The instrumentality of understanding the link between ESG and your company’s raison d’être becomes all the more important in reporting season (having just published our own Impact Report, submitted to GRESB, PRI and re-certifying as a B Corp). The Financial Reporting Council observed last year that ESG reporting could benefit from being more directed and concise. Some elements of ESG reporting are mandated by regulation or market expectation, but as to the remainder, it is dealer’s choice. Understand what you stand for and create some clear goals to report (quantitively and qualitatively) against. Ultimately, reporting should inform rather than overwhelm. 

Ratings and frameworks should be a useful tool to inform. but they have limitations. We must also learn ‘why?’. Then figuring out ‘how’ becomes much easier. All of this is a delicate balance that at Newcore we consistently have to manage.