ESG Strategy: Between Governance & Operations

ESG reporting is getting a lot of attention these recent years. Moreover, ESG disclosure will become regulatory in many countries around the world, and many ESG standards are being issued and prepared to help companies define their ESG strategy and be more attractive on the international market.

How companies will define their ESG strategy? What are the right decisions and steps for the best ESG policy implementation?

In our previous articles, we mentioned the importance of EHS management and its link to a successful ESG strategy in addition to the emergence of new regulations and standards (ESRS and IFRS S1 & S2) and their role in regulating a company’s ESG report and its ESG strategy globally. These standards shed the light on how sustainability goals (threats, impacts, risks and opportunities related to environmental, social and governance) are integrated into corporate strategy and governance.

Companies will be facing new, major and ambitious economic, social and environmental challenges. Organisations will then have to review their strategic views and positioning, starting with a long-term political and economic point of view to include ESG’s regulatory requirements, and simultaneously deploy an operational strategic plan for the short-term period.

Strategic analysis and the standards’ choice

Strategic framework

In today's business, and especially for large companies, it is clear that ESG and corporate strategies are no longer dissociated. One might even say, that ESG is becoming “The” strategy of businesses today. Companies will need to adapt and review their global strategy so that sustainability goals in addition to environmental, social and governance criteria are completely integrated into the company’s purpose statement. This newly developed strategy will increase the company’s value on the market and make it more attractive to stakeholders.

Before defining any strategy, or conducting the materiality assessment, every company should identify its internal and external stakeholders with knowledge about factors and conditions that affects ESG performance. Their feedback will be of high importance when conducting the materiality assessment, choosing the best and appropriate objectives and having a mature ESG strategy.

  What do the regulations dictate? What do we want? What do our customers want? What are investors looking for? How can we contribute to the sustainable development of our company?

The Corporate Governance body will define the overall strategic framework of the company. The corporate governance body generally comprises the company’s CEO, the shareholders and investors. This body will develop and set the strategic guidelines for the long-term ESG objectives.

Once these objectives have been set, the rest of the processes are played out inside the company. The CEO selects a management committee, and together they will define an operational strategy where the objectives and the action plan are set for the short, medium and long term.

For every step of the ESG strategy’s development, it is important to carry out a strategic risk analysis. For this task, the management committee can rely on tools such as SWOT or PEST analysis. This is the major step that will transform risks into opportunities.

Therefore, we talk now about risk appetite, especially when the corporate governance body is setting the company’s strategy and its framework. The question that always comes up is: How far are we willing to go to reconcile ambition and risk-taking? For example, risk appetite and Occupational Health and Safety (OHS) can be related by: “No strategic or economic decision should impact the health and safety of my employees”. The same goes for financial, operational, strategic, regulatory and equipment risks.

Therefore, to define an appropriate internal strategy, it is necessary to define the risk appetite and to have a precise overview of the overall context in which the company wishes to operate. Thus, an exhaustive risk register takes into account the internal (e.g. its values) and external framework of the company (e.g. possible political, military, health, social or environmental pressure).

Standards framework

We have already treated the standard framework in our previous article “IFRS and EFRAG’s New Sustainability Reporting Standards”, and we have mentioned the importance of these set of standards concerning an ESG strategy.

Every board of directors along with the CEO should determine which standards to apply to set their ESG strategy’s framework. Choosing the most appropriate standard for your company is essential as certain standards differ by a certain amount of criteria and metrics, such as the disclosed information and the materiality assessment. For example, IFRS’s standards (International Financial Reporting Standards) rely on simple materiality whereas the whole ESRS (European Sustainability Reporting Standards) set of standards is built upon double materiality.

If you are located in Europe, you will be obliged to comply with the new CSRD directive (Corporate Sustainability Reporting Directive), and thereby apply the ESRS standards.

Define your strategic objectives

Once the strategic analysis is carried out, it will be time to define the targeted objectives.

As mentioned before, it is necessary to prepare and ask the right questions, which will allow the development of the global strategy and the terms of reference for each project. The specifications will be highly ambitious but realistic and above all, they must be measurable.

The strategic objectives can be determined for 2 times period:

• Long-term. This will concern the political and economical objectives defined by the corporate governance body. For example, when setting the safety objectives, the aim is 0 accidents within 10 years, and on the environmental level, the goal is to achieve a negative carbon footprint by 2050 to become a major player in the Climate Plan and its objectives of carbon neutrality.
  
• Short-term. This will concern the operational objectives defined by the board of directors. An action plan will be elaborated to meet the long-term strategic commitments. Clear, precise and measurable objectives are defined. For example, these objectives will rely on daily tasks to achieve 0 accidents within 10 years and a negative carbon footprint by 2050. In this case, the actions are achieved and held by internal processes and in close collaboration with various stakeholders and departments (production, maintenance, Quality, EHS, Marketing, Sales, HR, etc.)

For each objective, there are its own associated risks. Therefore, a risk assessment is necessary and the resulting analysis will lead to the elaboration of an action plan and measurable key performance indicators.

Defining the objectives is never an easy task. Moreover, prioritising them is a whole other matter. Every company should rely on their internal and external stakeholders and conduct a materiality assessment to also define their objectives depending on the ESG topics, and afterwards, prioritise them. The materiality matrix will be generated and the importance and urgency of the objectives will be determined. If your company decided to adopt the ESRS set of standards, you will be subject to double materiality, where you will be obliged to measure both the financial and impact materiality of your strategy. The materiality assessment is conducted via a survey dedicated to all stakeholders.

The materiality matrix results are shared in the form of a graph. The abscissa usually represents the internal stakeholders or the impact on business operations, and the ordinate represents the stakeholders. The rating goes from less important to high importance for both coordinates. Hence, the objectives on the upper right of the graphs are the most important ones.

Below you can find an example of a materiality matrix from Unilever:

Source: Unilever Materiality Matrix 2019/2020

Then, statutory auditors, third-party bodies, and ESG assessment bodies will rely on these analyses and other ESG-adopted criteria to assess and score companies.

Analysis of the strategic risk registers

Once the strategic and ESG plan has been validated, the objectives defined and analysed, a risk register is dressed and after the assessment and analysis, mitigation measures are implemented.

To achieve this task, you can rely on dedicated performance indicators. These indicators can rely on the double or simple materiality assessment and the resulting objectives and actions, to monitor their evolution and the changing risks that might occur through time.

A small reminder about double materiality, which is about the analysis of each strategic and operational decision from an economic point of view, in addition to the impact of these operations on the environmental footprint of the company. With ESG, companies can no longer ignore the environmental and social metrics that weigh heavily on international markets. A company with a complete and mature ESG strategy will attract more customers, shareholders and investors.

A dynamic dashboard makes it possible to structure the approach, monitor and analyse every action linked to a certain objective. This monitoring is conducted thoroughly through time and will allow the transformation of risks into real opportunities.

Nowadays, dedicated tools for the monitoring and strategic decisions of companies are more abundant and provide a fluid and global vision of processes and decisions to make.

When talking about Corporate Governance, the latter is defined by its missions, its short and long-term vision, its fundamental values, its purpose, its risk appetite and its culture. All these characteristics and many others are necessary to develop, analyse and especially share clearly and interestingly way with all stakeholders. This is what we call TRANSPARENCY, the core and the most important aspect of ESG!

Companies adopting ESG strategy, whether it is voluntary or regulated, will be at a certain point audited and evaluated. Therefore it is important to anticipate and invest important time and resources in ESG criteria. Companies should choose and measure the right metrics and carefully choose the best suited ESG framework to prevent overreporting.  ESG strategy and objectives must be integrated into how the company does its business and its functions to be the most successful. Finally, a digital tool makes it possible to correlate the launch of the ESG investment with the standards, centralise and present in a clear and structured way the data to all stakeholders.

To go further: 

> Discover our app Integrated Risk Management to improve your risk assessment and risk register approach with BlueKanGo’s digital platform (available on the BlueMarket) about Corporate Social Responsibility on the BlueMarket.