How to Develop an Effective ESG Strategy: Best Practices, Challenges, Tips
Environmental, social, and governance (ESG) is currently playing a significant role on boards in almost every industry, as over 75% of investors in private markets plan to stop purchasing non-ESG products. However, developing an effective ESG strategy comes with some challenges.
That’s why each board of directors must fully grasp what kind of impact their organization has on society and the environment. They also need to be aware of which ESG factors will be most integral to the organization’s future.
This article explores ESG in business strategy. We’ll also analyze the key steps and best practices on how to develop an ESG strategy that aligns with your company’s values and objectives and why a board should apply ESG in business strategy.
What is ESG strategy?
An ESG strategy is a business approach that integrates environmental, social, and governance factors into the company’s operations, decision-making processes, and overall strategy.
Furthermore, it’s a holistic way of doing business that considers the company’s impact on the environment, society, and its governance structures. This means the company is ESG compliant.
In recent years, the popularity of ESG strategy implementation has significantly grown, and one major reason for this trend is the increasing interest from investors. Indeed, prominent financial institutions such as BlackRock, JP Morgan, Morgan Stanley, Goldman Sachs, and Wells Fargo have adopted an ESG business strategy and contributed to ESG investing.
According to a report by Private Banker International, the community leaders in ESG are mainly US companies.
By 2025, ESG-mandated assets might account for half of all professionally managed investments, reaching $35 trillion, according to a Deloitte report.
Before ESG planning, we encourage you to learn more about ESG compliance in our article.
Why businesses need an ESG strategy
Many publicly traded companies are prioritizing environmental sustainability. However, measuring progress towards these goals can be challenging. That’s where a well-defined corporate ESG strategy comes in.
This leads to several advantages, including:
- A competitive edge. Implementing a successful ESG strategy ensures businesses stay current with industry rivals, as many of them are already using ESG plans.
- Engaged stakeholders. An ESG strategy provides stakeholders with an objective way to evaluate the company’s progress across various important areas outlined in the plan.
- Long-term prosperity. An ESG plan plays a crucial role in shaping a company’s vision and taking necessary steps today to secure a sustainable and prosperous future.
Benefits of corporate ESG strategy
An ESG strategy offers a systematic approach to corporate growth with many advantages. It promotes long-term growth by adjusting to changing market dynamics and fostering longevity via strategic planning.
Let’s explore the competitive advantages of the company’s ESG initiatives:
- Enhanced brand reputation. It shows a company’s dedication to responsible practices, building trust among stakeholders, and increasing brand loyalty.
- Attraction and retention of top talent. Prioritizing ESG concerns attract high-quality candidates, and committed employees, reducing turnover costs and fostering a motivated workforce.
- Improved financial performance. ESG factors improve business efficiency and lead to better financial performance.
- Access to capital and investment opportunities. ESG initiatives attract ethical investors and improve access to capital and investment opportunities for companies.
- Innovation and competitive advantage. Sustainability goals inspire innovation and give companies a competitive edge.
- Positive impact on communities and the environment. ESG strategies benefit communities and the environment, making socially and environmentally conscious consumers happier.
How to create an ESG strategy: 11 steps to follow
Implementing ESG strategy is not just about ticking boxes for social factors, responsibility, or sustainability. It’s about integrating these aspects into the core of your business model. Creating ESG strategy allows for further shaping your company’s identity and driving long-term growth.
Let’s find out how to create an ESG strategy.
1. Assess ESG practices
Every member of the board must know of the potential impacts, risks, and opportunities concerning ESG policies while developing an ESG strategy. They also need to be aware of which ESG principles will be most integral to the organization’s future.
So that it adheres to the above principles, it’s wise for a board to implement ESG inventory and a formal risk assessment. Furthermore, beyond assessing internal operations under this protocol, it’s best to reach out to external stakeholders.
The ESG assessment should weigh the following categories:
- Supply chain
- Resource accessibility
- Usage and sustainability
- Talent recruitment (board diversity and labor practices)
- Environmental factors (climate change, etc.)
- Employee engagement retention
- Financial performance and risk
- Reputational impacts
2. Involve management in the process
Without the management’s knowledge of a company’s ESG practice, the entirety of the organization can’t uphold those values. Senior management must see the ESG priorities of internal and external stakeholders.
This knowledge accumulates through surveys with stakeholder groups. Therefore, a formal process is ideal in this context.
Some companies monitor their ESG reputation on social media. While other organizations converse with a committee of representatives of key stakeholder communities about ESG-related issues.
3. Establish specific ESG roles and responsibilities
Board members need to establish who’ll be charged with handling each respective ESG component.
More substantial corporations will bring a chief sustainability officer aboard. Other companies placed the responsibilities of ESG-related issues in the laps of the CEO or other executives in similar positions.
The board members should have a strategy or risk committee in place to oversee ESG responsibilities. This audit committee’s primary focus should be pushing for comprehensive ESG assurance to the other directors.
4. Perform materiality assessments
Second, ensure that the materiality assessment is data-driven, utilizing both quantitative and qualitative data to identify key issues.
Here’s a step-by-step checklist on how to identify them:
- Engage with your stakeholders
- Review industry standards and guidelines
- Analyze the regulatory landscape
- Collect data and create a materiality matrix
- Assess risks and opportunities
- Align with your values and purpose
- Integrate with your long-term strategy
5. Establish the baseline
This stage involves gathering data and quantifying your company’s current performance in terms of ESG strategy development. By determining the baseline, you create a reference point that helps you set meaningful and attainable ESG goals.
The baseline helps to assess your progress and evaluate the success of your sustainability efforts over time. Additional aspects of baseline establishment include:
- Data collection. It provides the factual foundation for assessing a company’s current ESG performance, and areas of improvement and shaping further strategies.
- Identification of KPI. It enables companies to measure, prioritize, and set targets for their ESG efforts.
- Benchmarking. It prioritizes resources and fosters sustainable business practices.
6. Conduct an ESG gap analysis
The next step in ESG planning management is to analyze performance gaps. Start with comparing the company’s ESG performance and determine aspects that require improvement.
This analysis helps you prioritize your ESG efforts and concentrate on the areas that will have the most effect on your ESG performance.
7. Set ESG goals
Companies may be unable to harness the potential for income generation without thorough planning at the early goal-setting stage. Thus, a critical initial step is to identify the most important and relevant ESG criteria — areas where your organization has the most substantial effects or dangers, as well as the greatest stakeholder expectations.
Below are several frequently reported ESG topics:
Here’s what you can do to ensure successful ESG goal-setting:
- Establish clear and measurable targets
- Integrate with business strategy
- Engage with stakeholders
- Monitor and transparently report progress
8. Consult stakeholders
Stakeholder interests are the foundation of a successful ESG strategy. Identify and involve key stakeholders, including institutional investors, users, regulators, employees, and local communities. Community engagement provides valuable insight into identifying material ESG issues, setting meaningful goals, and aligning the strategy with stakeholder expectations.
Cooperation strategy about ESG integration includes the following:
- Conduct stakeholder surveys and focus groups
- Organize workshops and roundtable discussions
- Collaborate with external sustainability experts
9. Choose the proper ESG framework
Selecting the appropriate ESG framework ensures the strategy’s alignment with globally recognized reporting standards and industry best practices. Consider frameworks like the Global Reporting Initiative (GRI), SASB, and the United Nations Global Compact (UNGC) to structure and report on your organization’s ESG performance.
The ESG strategy framework includes the following steps:
- Evaluation of various ESG frameworks closely related to your industry
- Choosing a framework that matches your organization’s values and objectives
- Exploring integrated reporting frameworks for a holistic approach to ESG performance
10. Build an ideal management team
Choosing the right management team requires careful consideration, dynamic analysis, and frequent reassessment. It’s about picking individuals with the right skills and those who align with the culture of corporate social responsibility. ESG considerations should be flexible as conditions and requirements change over time:
- Identify key roles and key requirements
- Look for leadership qualities
- Engage in a thorough vetting process
- Involve existing team members
- Offer training and growth opportunities
11. Reassess over time
Periodic evaluations are vital ESG criteria to ensure that everyone involved is still committed to the organization’s vision and is effective in their roles. This process allows for the timely identification of gaps, adapting financial planning, optimization of skills, and fostering a growth mindset within the team.
Here’s a step-by-step guide to reassessing your management team:
- Establish a timeline review
- Set clear evaluation criteria
- Involve all stakeholders
- Use a consistent assessment method
- Document and discuss the results
- Identify gaps and opportunities
- Implement changes based on findings
- Follow up and monitor progress
To streamline the periodic evaluation process and ensure efficient collaboration among stakeholders, consider utilizing board portals or virtual data rooms. Board portals and VDRs offer a secure and user-friendly solution for managing evaluations, sharing documents, and facilitating communication between all parties involved.
Take the next step towards enhancing your management team’s performance and optimizing your ESG strategy by exploring the benefits of board portals and VDRs.
Effective leadership for ESG programs
ESG programs are typically managed by the C-suite, including the CEO, COO, or an executive committee. This ensures ESG considerations are included in high-level decision-making and promotes coherence across various business functions.
The C-suite works with legal, compliance, and sustainability departments to underscore the strategic significance of these initiatives.
Some companies added a new position of chief sustainability officer or a chief ESG officer to manage ESG programs.
Let’s take a closer look at what effective management of an ESG business plan entails:
- Visionary thinking. ESG leaders establish and communicate long-term sustainability targets.
- Influential communication. A sustainable strategy manager articulates the business case for ESG initiatives.
- Change management. ESG manager drives cultural shifts toward sustainability.
- Stakeholder engagement. They actively involve all stakeholders in ESG initiatives.
- Accountability. ESG manager ensures transparent tracking and reporting of ESG metrics.
ESG strategy through industries
While the process of how to develop an ESG strategy can be universal, the execution of these strategies is often tailored to the unique context of each sector.
All stakeholders must acknowledge their responsibility to protect the environment and decrease carbon emissions. As shown in the chart below, the industrial sector demonstrates the greatest level of commitment to implementing ESG practices.
Let’s explore the particular examples of ESG strategy implementation:
- The energy sector focuses on transitioning to renewable sources and reducing emissions. For example, Equinor Energy has set an ambitious goal of achieving net-zero emissions by 2050.
- Manufacturing companies are making significant strides to reduce resource usage and improve waste management. Adidas, for instance, is committed to using only recycled polyester in all its products by 2024.
- Data security, ethical AI use, and diversity take center stage in the tech world. Microsoft, a leader in this space, has even committed to becoming carbon negative by 2030.
- For financial institutions, responsible investing and lending are the cornerstone of their ESG strategies. Goldman Sachs exemplifies this by planning to allocate $750 billion to climate transition and inclusive growth initiatives by 2030.
Tracking ESG strategy progress
To track the progress of your ESG strategy effectively, follow these steps:
- Set clear, measurable ESG goals and regularly monitor the progress to ensure you stay on track.
- Utilize globally recognized ESG benchmarks like GRI or SASB to assess the growth and impact of your ESG strategy.
- Establish open communication channels with stakeholders through surveys, forums, conferences, or other means to gather valuable feedback and insights.
- Embrace technological innovations by leveraging digital tools to streamline the data collection, analysis, and reporting process, making it more efficient and effective.
Key challenges in developing ESG strategies
The ESG data strategy is far from flawless and is often tangled in layers of misinformation and fear. That’s why it’s important to overcome the most common challenges and put in maximum ESG efforts:
- Inadequate resources and expertise. Sometimes, companies lack the necessary skills and knowledge to create and execute a successful ESG strategy. This ranges from insufficient understanding of the ESG framework to not having a dedicated ESG team and diverse boards.
Solution: Invest in ESG training, hire experienced professionals, and appoint diverse board members for successful ESG implementation.
- Standardization issues. The lack of consistent ESG reporting standards leads to potential mistrust in the company’s relationships. Corporate policies of universally accepted standards significantly enhance the credibility of the ESG program.
- Short-term vs. long-term goals. The need to produce short-term financial outcomes often collides with the pursuit of long-term ESG objectives. Striking the right balance is crucial yet challenging.
Solution: Create a clear ESG roadmap that incorporates ESG metrics into performance evaluations.
Boards must stay ahead of ESG responsibilities
By considering ESG factors, your business can thrive, earn a stellar reputation, and stay competitive. Crafting a successful ESG strategy calls for a deep understanding of your business’s specific risks and opportunities, well-defined goals, and a continuous performance review.
Indeed, stakeholder engagement and visionary leadership are vital in how to develop ESG strategy successfully. However, companies may face ESG factors. Navigating between limited resources and the tension of balancing short-term and long-term goals presents a complex journey.
In determining how to set an ESG strategy, iDeals board management software helps simplify the secure handling and distribution of key ESG data, promoting transparency and efficient stakeholder collaboration. For more information, please visit iDeals Board for a comprehensive solution for your ESG program.
- ESG is crucial for all industries. Over 75% of private market investors plan to invest only in ESG products. Boards need to understand their organization’s impact on society and the environment.
- An effective ESG plan brings benefits like competitive advantage, stakeholder engagement, better reputation, talent attraction, financial gains, more investment options, and environmental and social impact.
- To create an ESG strategy, assess ESG factors, involve management, set goals, consult stakeholders, select a framework, build a team, track progress, and reassess periodically.
- Various industries are adopting ESG strategies, for example, energy, IT, manufacturing, and finances.
What are the main ESG standards?
The Global Reporting Initiative (GRI) Standards, International Sustainability Standards Board (ISSB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB) are among the most crucial ESG standards and frameworks.
How often should you report on your ESG program progress?
ESG reporting frequency varies, but common options are annual reporting, quarterly updates, and real-time reporting through interactive platforms.
How to start an ESG program?
To start an ESG program, identify relevant ESG issues through materiality analysis, set clear and measurable goals, involve management and stakeholders, and choose an appropriate ESG framework. Then, allocate resources, implement initiatives, monitor progress, and communicate transparently to foster a culture of sustainability and social responsibility.