2021 In Review

Throughout the series, we shared our research from a wide range of investor and corporate voices confirming that ESG has only accelerated as a key focus of their work. Challenge and uncertainty have driven a deeper public desire for all entities of power, including corporations, to act in ways that respect the needs of the world around them.

The reality is that if one deconstructs “ESG” into its most basic principles, poll after poll shows that the public – in the U.S. and across the globe – supports issues such as environmentally- friendly product design, fair treatment of workers, and responsible governance behavior from businesses. Consumers want to support and work for businesses that act ethically and are good members of the communities they operate in. However, there is also a well- documented “intention-action gap” between what people say in polls and what they actually do in their behavior or spending. Working to seize the business opportunity of closing that gap to delight customers, attract great employees, and avoid political/regulatory intrusions should be a significant driver of ESG actions.

The world’s largest companies have the resources and an urgency driven by intense scrutiny of their actions to lead the way on ESG innovation. The most forward-thinking of these global business leaders understands that a comprehensive stakeholder management strategy, inclusive of ESG, well-integrated into a broader business strategy, does not represent a “trade-off” with goals of profitability or franchise value. It’s just smart business.

Investor interest in ESG has been pivotal to its increased importance, particularly the emphasis over the last five years, but today the conversations about why ESG matters (and to whom) have expanded well beyond the investor audience to include consideration of all key stakeholders, both internal and external. It is through this wider lens that companies are assessing their ESG efforts.

As we continue to counsel clients on this ever-changing, increasingly important topic, we are continuously identifying and developing best practice. With all the ‘ESG noise’ out there, we strive to cut through the fluff and deliver relevant and actionable advice that is different and additive to what you are getting from other sources.

Despite frequently reported industry discussions on a unified set of ESG reporting standards (and, in fairness, some real progress from groups like SASB), we suspect that the ESG reporting regime, particularly for global companies, will remain complex.

That said, we suggest that corporate ESG leaders embrace its necessity and use the process as a checklist for intentional cost-benefit decisions. A checklist is outcome oriented and helps to organize your everyday efforts around a larger purpose; that is, following the necessary steps to achieve the desired outcome. Ensuring alignment with various standard setters and framework developers is a good opportunity to methodically and successfully move through the process of data disclosure. For example, do we currently collect the necessary data – based on the SASB Sustainable Industry Classification System (SICs) – to be able to align with SASB?

Too often, ESG communications and disclosure are approached as a necessary risk management and compliance function and communicated accordingly. The result is something that feels tagged on and does little to address stakeholder concerns and opportunities outside of disclosure scorekeeping. An ESG strategy that flows naturally from and is integrated with a company’s overall mission and business objectives is a far more powerful leadership tool.

The most compelling and authentic ESG roadmap is one that is both ambitious and realistic while also being inextricably linked to the larger business strategy. And, the sometimes-arduous details of disclosure carry far more weight when framed in a broader corporate purpose.

When companies begin to place sustainability as a core pillar of their business strategy, it becomes natural to think about how their own governance structures keep track of their progress. While some ESG leaders have created standalone sustainability committees within their Boards, our research suggests that this is still a progressive approach, especially for smaller and mid-cap companies. However, even in the absence of standalone sustainability committees, it is worth having a clear process for how non-dedicated Board committees and other oversight structures incorporate ESG into their work.

Examples include questioning whether an audit committee oversees ESG disclosures as well as financial statements and whether a compensation committee considers ESG metrics as an input to performance measurement for executive compensation. If ESG is truly a corporate priority, savvy observers will expect that there are well-informed oversight professionals keeping score and utilizing both carrot- and stick-based outcomes.

Communicating progress on an iterative process, such as ESG, is a journey with no finite finish line. Part of crafting an effective strategy is naturally setting a sustainable path that is not unnecessarily disruptive to the business. With that in mind, we would emphasize that it is completely acceptable (even expected) for corporate sustainability leaders to admit areas where there is room for improvement. In addition, as part of goal setting, it is good practice to set ambitious long-term goals as well as shorter-term interim goals and measure progress along the way.

Future aspirational goals are more powerful and believable when they are accompanied by interval milestones or what we like to call “breadcrumbs”. Providing updates supported by clear execution proof points along the journey to 2030 or 2050 or any period five years from now, including verification by credible 3rd party sources where possible, is best practice.

As corporate ESG efforts mature, ideally, the associated disclosure also matures. For example, as companies consider adding Scope 3 GHG emissions disclosure – and goals related to reduction – they are engaging various stakeholders up and down the value chain to understand the holistic picture of emissions.

This is important as it is estimated that ~75% of GHG emissions associated with many industry sectors derive from a company’s supply chain (i.e., Scope 3). Thus, as part of an authentic commitment to sustainability (and combating climate change), it is critical that companies incorporate Scope 3 data and associated reduction goals into their Environmental strategy.