Environmental, social and governance (ESG) factors in business management are complex, multi-dimensional and continuously evolving. So, it is not surprising that companies face challenges in understanding ESG, its potential impact on their businesses, and how best to integrate ESG with existing business needs.
ESG is not going away, however, and the time to deal responsibly and effectively with ESG risk is now. This is especially true as investors are increasingly ready to commit to companies that take ESG seriously. Regulators, in parallel, are working towards a more consistent, comprehensive global framework, with the SEC, the ISSB and EFRAG all working on new standards.
As our research has found, most companies now recognize that ESG metrics are linked to performance, not just compliance. Companies need to set reasonable ESG objectives, then develop plans for reaching these targets. That means not only understanding their own priorities, but also understanding what their customers want in terms of ESG. Once priorities are established, companies need to determine:
- Where to get the data necessary to measure (and report upon) the progress of ESG initiatives.
- How to understand, analyze and respond to the regulatory framework.
- How to establish consistent, understandable messaging; other
- How to separate environmental risk (that is, the physical problems the company faces) from environmental intent (the company’s plans to become a good citizen in terms of ESG measurement).
To accomplish all this, most companies need to build what we call ESG “muscle”, meaning the right people, solutions and processes at the right level of influence within the organization. A key first step is getting the ESG data house in order, with good sources as well as the technology needed to aggregate, organize and analyze the data. And, to keep up with regulatory trends, ESG reporting should become more granular, more consistent, and more current.
Companies should not be put off by the magnitude of the task. Getting ESG right is a matter of starting, learning, building, and improving. It cannot and should not be done all at once.
And businesses need to start with realistic and achievable parameters in place. In their eagerness to show support for the basic premises of ESG, some organizations have committed to unrealizable goals as they learn how to best adapt to the challenge. Some companies, for example, have assumed advancements in direct air capture technology which have been slow to materialize; others have purchased offsets, which are themselves now under scrutiny.
It is also important to recognize that a number of external factors need to be in place before certain goals can be set. For example, a declaration that “all company vehicles will be electric by 2030” may not take into consideration the current state of the electrical grid (which needs adaptation to meet the demands placed upon it by EVs) nor the shortages of key minerals currently hampering EV battery development and production. Similarly, some technologies – such as carbon sequestration – on which companies are relying to meet ESG goals are in their infancy and may not mature quickly enough to support long-term objectives.