In this recent article featured in Investment Week, Katie Jeffery, Associate at ITPEnergised explains why ESG really matters.
The scale and scope of climate change is unknown and there are economic, scientific, social, and political realities of the energy transition. We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. However, there is no denying the direction we are heading, and that every government, company, and shareholder will face continued pressure to confront climate change. So, what are the first steps a company should take when approaching the challenge of climate change?
Katie Jeffery, Associate at ITPEnergised with over 15 years’ ESG experience, unpicks the nebulous ESG and carbon landscape and articulates the optimum action plan for turning strategy into action.
In 2021, the landscape of ESG has become mainstream with the prominence of ESG ‘screening’, where investors consider ESG both alongside, and integrated with financial factors, in their decision-making process. These include aspects such as climate change, corporate governance, gender diversity, privacy, and data security. Advanced ESG strategists ambitiously gain business advantage through optimising sustainability and integrating their company’s risk-mitigating culture with a robust ESG profile. Formulating an ESG strategy has never been so important and there are some key planning considerations and pitfalls to avoid.
The first step in creating or revising your company ESG strategy is to take time to consider stakeholders involved and affected by this diverse set of topics, beyond the company employees themselves; investors, banks and lenders, insurance agencies, consumers, industry regulators, communities, business associations and your supply or value chain.
Next, look at what ESG aspects are important to your business and start thinking about how you can measure these. The key is to establish what is most important for your company, your market and your stakeholders, and to better understand what your stakeholders are basing their decisions on.
There are many ESG rating systems which evaluate how a company is managing its ESG risks. For instance, the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and The Task Force for Climate Related Financial Disclosure (TCFD) all provide structures for reporting which support stakeholder comparability between companies. Engaging with a ratings system which is both meaningful to your stakeholders and which prioritises the aspects most relevant to your company is an important consideration when deciphering alignment with voluntary rating programmes.
There are also many other ratings agencies which populate their evaluations based on publicly available data, such as Refinitiv and MSCI. It’s important to be cognisant of the data and metrics published in all ratings reports, as well as more general publicly available information – such as your website, as your stakeholders will likely monitor your performance and will want to see you improve year on year.
Another important consideration is the concept of ‘greenwashing’. Companies focused solely on the external narrative or ESG messaging, without consideration for materiality and the implementation of a robust strategy, typically don’t get the same long-term benefits as companies that engage comprehensively and integrate ESG into their day-to-day business risk management systems. Greenwashing is clearly on the radar of regulators, investors and consumers alike. It is worth being mindful of the fact that reputation is very easy to lose and even more difficult to regain.
The greatest consideration for business leaders is that ESG must be fully integrated into your company and engagement must start at the top and run throughout the entire company. Executive-level decision-making and accountability is absolutely expected when it comes to the ESG rating organisations.
The critical planning phases for an ESG strategy:
- Identify who: The company’s network of interdependencies, how they look after the environment, their people, their stakeholders and investors, and look at how they are already following regulations and committing to ESG issues.
- What is important: What are your company goals? You need to ensure that ESG is 100% aligned to these goals. Reflecting on what is important to the company and its stakeholders is imperative. Investors will analyse how the company is managing its risk, not just financial and operational, but also ESG aspects.
- What is meaningful to your company? What do you want your ESG performance to be in the future? This means defining what are the most important aspects to your company and what you are baselining. You then need to agree what those measurement boundaries are in relation to what is direct (company) and indirect (your supply chain). This is where some companies need a steer in terms of what they should be baselining.
We are seeing an increase in ESG investment with companies looking to re-evaluate their priorities. Now is the time for businesses to consider how they make ESG matter for their company. Those companies who avoid ‘greenwashing’ and develop a meaningful strategy that leads to demonstrable actions will undoubtedly reap the benefits and successfully and consistently outperform those who don’t.