ESG stands for Environmental Social Governance and includes the application of sustainability criteria in corporate management. It has become a mega-topic across the world, including in light of recent events like the Russian war in Ukraine. A number of specialized ESG research houses have massively downgraded Russia, assigning the country the most severe classification from an ESG viewpoint.
Very few boards of directors, supervisory bodies, and management teams have omitted discussing ESG criteria and their relevance for their organization.
Why is ESG important?
ESG is the framework for responsible action on the part of companies. This action reconciles environmental and social concerns in business operations. It is also connected to a responsible corporate attitude in planned investments, i.e., socially responsible investments.
ESG affects marketing, sales, production, the supply chain, HR, finance, and many other areas of a business.
No more evading
Today, the stakeholders of a company are not limited to the shareholders. They have come to include customers, employees, suppliers, regulators, and the general public. Stakeholders expect companies to make an active contribution to solving global problems.
Companies can no longer evade the consequences of these problems. Stakeholders have raised the bar for corporate leaders, and they are expected to take responsibility for society’s goals, their financial performance, and a brighter future in general.
Leadership at the top today also encompasses responsibility for implementing and developing an ESG strategy: to establish companies as leading providers of reliable, sustainable, and innovative products and services and to exemplify corporate governance. This does not exclude the focus on profit. The main goals associated with an ESG strategy are to improve corporate performance by opening new markets, expanding existing ones, and reducing legal, reputational, financial, and regulatory risks.
Moreover, ESG aims to strengthen relationships with civil society representatives and policymakers domestically and in key markets for sales, production, and sourcing. Last but not least, the ESG strategy must be meaningful and transform the work environment so employees and management can grasp, embrace, and ultimately implement it.
The top ESG issues
Essential ESG issues go beyond climate change. One of the most important ones is decarbonization. It is very relevant but also comes with a great deal of risk.
On the corporate management level, transformations toward climate neutrality require transparent and holistic approaches. As businesses look ahead, they must review products and services, production processes, and the working environment along the whole value chain. Singular targets do not suffice. Quantifiable measures must fortify the path to achieving them.
Shareholders, particularly next-generation ones, are making sustainability a top requirement for their investments. Consumers want to purchase sustainable products and services. The best talents want to work for companies whose purpose includes a clear sustainability orientation. Regulators are increasingly penalizing unsustainable business practices.
Many expect businesspersons to take on a creative and leadership role in overcoming climate change and other huge challenges. Change is a top-down process: in other words, business owners and top executives must fuel and steer the fundamental transformation. The aspects of ESG then become a question of owners´ and executives´ leadership skills and attitudes.
The process of implementing ESG values in your organization transpires on three levels:
- One must lay the foundation, anchoring sustainability in leadership skills and culture.
- You need a plan to align sustainability values with core company values.
- You must enable the transformation and desired change through intensive goal communication in all directions as well as stakeholders’ encouragement.
What are the values of ESG?
- Environmental: biodiversity, climate change, pollution, resources, water security
- Social: Labour standards, human rights and community, health and safety, customer responsibility
- Governance: Tax transparency, risk management, corporate governance, anti-corruption
Where should a business start?
Apart from grasping the need to think differently, small and medium-sized entrepreneurs must have the courage and foresight to put sustainability at the heart of their company’s strategy. You can’t take this for granted. It is very challenging, especially considering that these companies are not very visible, needless to say, unlisted. Companies that have been able to avoid bad press or have not become the target of activists might not feel the pressure to act. The “exemplary” players are silent, concealed, and avoid outside scrutiny.
However, requirements are getting stricter. They no longer apply only to large corporations in the spotlight of the capital markets. Investors, clients, and financial institutions are paying more and more attention to ESG criteria or aligning investment policies with them, putting more pressure on companies to disclose their metrics irrespective of the company’s size. Funding for unsustainable investments is getting hard to come by, which continues in the supply chain.
Suppliers, in particular, are starting to prepare for stricter reporting and disclosure obligations to their clients. Some businesses are thinking ahead, recording their sustainability along the complete supply chain as they get ready for future legislation on ESG.
An important early step is asking employees, managers, executives, and other stakeholders what is important to them, a process known as “values discovery.” Then, they must identify the areas of ESG where they can exert the greatest impact and meet compliance requirements. The final step is rewriting the company values statement based on the foregoing analysis.
Measuring sustainability impact
Many organizations are just getting started with sustainability. The first steps include defining terms within the specific business context, establishing values, and measuring sustainability impacts.
More and more companies are undertaking a materiality assessment that establishes the most vital concerns, impacts, and issues that the company needs to address. Energy and greenhouse gas emissions are the top sustainability categories to look at.
Sustainability is an element of an organization’s broader ESG efforts. It’s crucial to map all potential ESG issues onto a quadrant to assist in prioritizing actions based on the level of impact. The problems listed in the top right quadrant would be the most impactful and those in the lower left – the least. The arrangement depends on the type of company. If we compare a mining operation to a call centre, the former would have much bigger problems with waste disposal but far fewer with IT power use.
Extending the product lifecycle
From software providers to consumers, more and more stakeholders want to use a circular economy to extend the product lifecycle. A circular economy is defined as an economic system based on the regeneration and reuse of products and materials, especially to continue production in an environmentally friendly or sustainable way.
CIOs and other executives need to explore ways of innovating design, among other things, to incorporate a circular economy. They must pay more attention to life cycle aspects in developing IT systems. In the past, CIOs could hide damaged products until disposing of them. Today, new regulations are impacting this process.
Organizations must go back and start looking at infrastructure, strategy, and vendor choices in terms of product disposal. CIOs will be compelled to explore ways to measure the percentage of recycled, reused, or disposed of waste.
A greener lifestyle is crucial to climate change mitigation, but some organizations are augmenting that focus with efforts to adapt to climate change. Adapting to change targets modifications that accommodate climate change’s current and future impact, while climate change mitigation focuses on prevention and reduction. An example of adapting is accommodating the effects of global warming on weather and food security by raising street levels, which organizations in Miami are doing.
Organizations will increasingly work on climate adaptation as an element of their risk mitigation strategy. Adapting means exploring all the different ways in which climate change might disrupt supply chains and operations and how businesses and IT leaders will cope.
Frameworks for greenhouse gas protocols
Scientists worldwide agree that we have a climate emergency on our hands, which merits urgent attention. Researching common frameworks and standards is an essential step in the right direction.
It would be helpful for CIOs to become familiar with the impact of the Greenhouse Gas Protocol, which regulates how enterprises manage and report greenhouse gas emissions. Of essence is the meaning of scope 1, 2, and 3 emissions.
Reliable carbon footprint disclosure
One of the most important ESG metrics involves an organization’s carbon footprint. Disclosure surrounding this aspect is one dilemma facing companies. Many businesses report lower than actual impact in order to paint a rosier picture, but that’s only effective in the short term. New greenhouse gas regulations mandate companies to capture the full extent of their emissions thoroughly. Objectives should be based not on absolute numbers but on reducing your carbon footprint.
It is also imperative to think about how organizations can present these results across various audiences and indicators. Making meaningful changes in scope 1 emissions can improve an organization’s position on carbon exchanges, but changes on other scopes can improve relationships with investors, regulators, citizens, employees, and the general public.
Adopting green IT structures
IT services and structures that make environmental sustainability a priority are becoming more significant as part of the broader climate action movement. CIOs should focus on developing greener IT options. That’s particularly the case in tech-heavy industries such as finance, banking, and telecommunications, where the impact of IT investment on the company’s carbon footprint can be excessive.
Governments are also making progress in this area. After the US government passed the Energy Act in 2020, more CIOs started prioritizing greener IT. The new law increases power use effectiveness requirements. Some of these programs’ main goals include improved tracking, migrating to more sustainable energy solutions, and more automated energy-specific controls.
Many organizations are making efforts to consolidate data centres and migrate to the cloud. Businesses are investing in autoscaling workloads to reduce their energy footprint.
Responsible and transparent AI
Organizations are embracing responsibility and transparency as values; nowhere is this more obvious than within the scope of ESG. More and more companies are using AI to automate processes. Algorithms are capable of many things, including inflicting harm. Consumers and regulators are increasingly calling for more transparent and responsible AI. Many of the recent advancements in this field are based on so-called black-box algorithms, which generate very positive outcomes. However, it’s only sometimes clear when they amplify existing prejudice or go into faulty operation.
Organizations and their executives should operationalize their IT infrastructure to support meaningful objectives, such as adopting the ethical use of AI as a value. It’s essential to consider the holistic process, not just separate technological units.
It’s critical to design an AI framework that addresses the whole, not just isolated parts. A narrow focus on using AI for accounts payable will only consider reading the amounts on incoming invoices. A broader focus would involve achieving zero accounts payable errors and timely responses.
Aligning with ESG values
There are initiatives such as BCorp, a global non-profit network that helps businesses move towards new corporate models. BCorp issues the designation “BCorp Certification.” Businesses that hold this recognition demonstrate that they are meeting high-performance standards and standards of accountability and transparency on various factors, ranging from employee benefits and charity to input materials and supply chain practices.
To earn the designation, an organization must pass a risk review and achieve a B Impact Assessment score of at least 80.
Organizations are required to make a legal commitment and be accountable by changing their corporate governance structure. They must demonstrate transparency by publicizing information on their performance compared to BLab’s standards. This information is published on BCorp’s website.
At any rate, approaches like these aren’t sufficient to achieve values alignment, which must start at the top. Leaders need to walk the talk, prioritizing ESG objectives as much as profits and shareholder value. Earning external recognition will be easier when all the stakeholders share exemplary values in an organization.
The impact of building ESG-based values
The need for action cannot be ignored despite the complexity of building shared values. Executives must act in a thoughtful and balanced manner. There is no doubt IT teams will turn to technology in an effort to tackle ESG issues like sustainability. There is just as little doubt that technology comes with its problems. It takes a lot of energy to train AI.
Organizations are increasingly turning to the blockchain for supply chain help, but that also requires vast amounts of energy. Diversity, equity, and inclusion (DEI) technology can help power a solid program, but it can’t take the place of a cultural and strategic focus.
Executives can act and make real progress with a significant dose of solidarity, like-mindedness, and climate hope.