3 Steps to ESG Success
Investor demand has led to a surge of companies adopting an environmental, social, and governance (ESG) framework. Here are the three developmental stages companies go through on their path to ESG success.
As the climate crisis continues to rear its ugly head, more companies are choosing to adopt an environmental, social, and governance (ESG) framework.
Thrive Home Builders in Denver, has built sustainable homes for the last 30 years and has incorporated ESG information into their business model. Gene Myers, CEO of Thrive Home Builders, noticed that “the effects of climate change are no longer abstract to our customers” and that “given the choice of purchasing a home that is a part of the solution to climate change many will.”
He also commented that the “capital and debt availability for our company may increasingly be contingent on the ESG attributes of our company.”
Companies like Thrive Home Builders have demonstrated an increased interest in embracing ESG to fulfill the sustainable investing requirements of investors and to make a direct impact on climate risks. This undertaking can seem quite daunting, but several successful companies have made it to the finish line. Some have sought the assistance of an ESG consultant while others relied on trial and error.
Here at Green Builder Media, we want to demystify the process by outlining the three main stages that companies go through when developing an ESG management plan.
A successful ESG program must consider a company’s commitment to sustainability goals and must determine how its policies will enable them to reach those goals. Companies should engage their stakeholders to set these policies and communicate progress via ESG reports.
Step 1 to ESG Compliance
Small and medium-sized companies starting their ESG program occupy this stage and many of them do not have an ESG team on staff or avail themselves of ESG data. There is little to no outside pressure from stakeholders to quickly set objectives.
Companies can use this extra time to get acquainted with various frameworks such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Internal stakeholders should collaborate to determine ESG issues of material risks.
During this period, companies usually pick and choose criteria from these frameworks rather than following them exactly. This mismatch approach allows companies to pick criteria that directly target their identified issues of material risks.
Companies should begin to collect data to track progress on ESG objectives to meet long term goals. Data collection will be essential for later stages involving ESG reporting. Disclosures at this stage will be reactive and predominantly tackle compliance concerns of regulatory agencies.
ESG Compliance Stage 2
This stage emphasizes the need to solidify ESG goals by conducting an internal and external materiality assessment. The results should go beyond industry standards and focus on the material risks specific to that organization.
Companies at this phase will begin to explore the social and governance aspects of ESG while strengthening their environmental commitments. Many companies will have their environmental data accredited to highlight the reliability of their disclosures.
Disclosures at this phase should be proactive and address energy consumption via scope 1 and 2 emissions. A yearly ESG report should be published to maintain a relationship between the company and their stakeholders.
The disclosures and ESG report should completely follow the GRI or SASB framework. A company’s ESG staff should begin working towards fulfilling the criteria set forth by the Carbon Disclosure Project (CDP) and the Task Force on Climate-Related Financial Disclosures (TCFD). In the final stages of ESG development, there will be increased pressure from external stakeholders to disclose this information.
If a company chooses to set an environmental target, the management plan for achieving that goal should be outlined in their ESG report. Targets can include:
- emissions reduction
- increased biodiversity
- lowering water consumption
- other environmental initiatives.
The quality of a company’s disclosures along with their ESG report will influence their ESG ranking. At this developmental stage, companies will be scored by ESG rating agencies. Companies should use their ESG score to conduct a gap analysis on their ESG performance.
A company’s ESG rating can be used as an indicator for their ESG development. Companies in the second stage of their ESG path to success usually have average ESG scores for their industry.
Step 3 to ESG Compliance
ESG-related issues are an integral part of the company’s business strategy and influence the financial decisions of the company. Companies should release a yearly integrated report that emphasizes the connection between their progress on ESG goals and financial success.
Companies should frequently conduct materiality assessments to ensure that they are addressing the ESG concerns of their stakeholders. Materiality assessments at this stage should include a long range of stakeholders such as suppliers, investors, and community members.
The findings of the materiality assessments should be made public via an impact report. Successful ESG companies will display all ESG documents in an easy to locate space on their website. Transparency is crucial for gaining investor support.
Disclosures should strictly follow either the GRI or SASB framework. At this stage, criteria from the CDP and TCFD framework should be incorporated as well. Investors will want a detailed emissions report containing scopes 1, 2, and 3.
ESG reports should clearly outline the corporate governance structure of the company. Many people who are interested in ESG investment require a breakdown of the employee hierarchy along with the compensation paid for each role.
Companies should have advanced environmental targets and regularly update stakeholders on their progress. Robust programs should be in place to emphasize their commitment to diversity and inclusivity, a safe working environment, among other social issues. Companies should strive for recognition or certification of their environmental and social achievements.
ESG rating agencies will typically score companies with accreditations higher than their peers. Companies at this ESG level should consistently rank among the top of their peers on all ESG ranking websites.
Inconsistent ESG Ratings Agencies
Investors rely on ESG rating agencies to select companies for their portfolio. Unfortunately, ESG scores from these rating agencies are highly volatile and inconsistent. A call to action has been issued to remedy the subjective rating system of ESG companies.
Read our first post in this ESG series here. And stay tuned for the next post in our ESG blog series detailing the volatility of ESG scoring.