7 mistakes corporates make while considering ESG
Published on July 22, 2022 by Prachi Murarka
Corporate sustainability is the concept of incorporating environment, social and governance factors into a company’s decision making and business strategies. It is about balancing considerations for the planet and society with the company’s regular course of business. Corporate sustainability is increasingly becoming an integral part of every organisation. Investors, customers, employees and the community are all now aware of the concept of sustainability and are choosing wisely. For organisations to be sustainable in long run, therefore, they need to adopt ESG parameters in their core operations.
However, there are common mistakes companies make when trying to do so that hinder implementation.
1. Not syncing ESG strategies with their broader goals/mission
For ESG initiatives to be most effective for a company’s growth and building its reputation, the company needs to make them part of its broader vision and culture. ESG should be considered as a concept and embedded in all the company’s activities across departments.
A proper governance system is needed to incorporate sustainability across the organisation. This would include a dedicated board committee that oversees sustainability policies and practices or making it a responsibility of each board member. Belief in corporate sustainability concept at the top would ensure it flows through to make it part of the organisation’s culture.
Ensuring corporate sustainability is not limited to engaging in CSR activities. Many companies donate to charities and educational institutions but are not involved in other ESG practices. Sustainability, being a long-term concept, needs long-term solutions.
2. Not identifying the most relevant ESG metrics to measure and track
Companies need to identify which KPIs are most material to them and measure and monitor those closely.
The first step in doing this assessing materiality. A company needs to identify the most pressing issues it faces and work on addressing them and measuring progress. What gets measures, gets managed.
Identifying the right set of metrics is half the battle. Instead of trying to achieve everything and trying to quantify everything, focusing on a few correct metrics is more sustainable. Setting goals and strategies in line with these metrics helps management formulate a vision and create a path to achieve that vision. Regular monitoring of the identified metrics is vital, as it helps management understand the current position and measure progress.
3. Being overwhelmed by the number of sustainability frameworks and indices in the market
There is no framework to compare company performance on ESG parameters. Different international organisations are launching different ESG frameworks, trying to achieve uniformity in reporting, tracking and comparison of ESG parameters. Different index providers and consultancy firms are launching different indices to compare companies on common KPIs, so responsible investors could choose where to invest.
The number of frameworks and indices available creates confusion as to which framework to follow for reporting and what information needs to be provided to score well. A company needs to focus on its objectives and determine what level of reporting its internal and external stakeholders would require. This would help it choose the framework most relevant to its business.
4. Seeing ESG as a means to obtain cheaper funding
While engaging in a few ESG activities, mostly relating to CSR, could provide access to cheaper loans and funding in the short term, incorporating ESG considerations into its decision-making process ensures a company’s sustainability in the long term. This helps build its reputation, attract investors and customers, and retain employees. It also helps avoid penalties for non-compliance with regulatory changes and not following ESG parameters.
5. Not communicating effectively with internal and external stakeholders
Communication with stakeholders helps a company align its vision and goals with the expectations of its stakeholders. It helps manage risk better, as stakeholders can assist the company in identifying material issues and suggest ways to overcome them.
Companies should conduct regular meetings and surveys to understand stakeholder views on important matters and incorporate these in its decision-making process.
6. Starting with a scope that is too large and beyond the company’s current capability
When starting to incorporate ESG parameters into operations, companies often try to achieve everything at once. No company is able to measure a wide range of metrics and adopt multiple programmes focusing on different ESG issues at the start. It is advisable to begin with the most material topics and aim to measure and track these effectively, and to adopt a few ESG programmes that can be run with the available resources.
A company must assess its own capabilities and resources before committing to any goals or setting up an ESG programme. Most companies abandon programmes or are unable to achieve goals on time mainly due to a limitation of resources. Evaluation of skills for achieving goals is also important. A company must either have resources with the necessary skills or be able to hire such resources.
7. Not monitoring regularly
Companies sometimes follow the “set it and forget it” approach. They list their goals but do not work towards achieving them. The need to have a mechanism to regularly track progress on goals. Not achieving a goal in time leads to a damaged reputation in the eyes of investors.
Companies must consistently track ESG performance and update ESG programmes and goals. They should also communicate with internal and external stakeholders regularly so they could be apprised of the need for new initiatives or programmes that could help the company’s or society’s growth.
As companies move towards corporate sustainability, it is important that the process of adaptation is well thought out and structured. Corporate sustainability helps a company conduct its operations smoothly; grow faster; build reputation and brand value; have better investment opportunity and access to a wider variety of products and a wider array of customers; retain employees and be keep abreast of changes in regulatory policies. To transition smoothly to sustainable business, a company needs to make ESG a part of its culture and vision. It needs to identify the most material set of KPIs and measure and monitor it regularly. In all aspects of incorporating ESG parameters, consistent dialogue with internal and external stakeholders is important, so as to be aligned with their expectations.
How Acuity Knowledge Partners can help
Acuity assists clients with customized support across the entire ESG research value chain. We offer a wider spectrum of customized research in order to fulfil our clients’ Sustainable and ESG business goals, including strategy formulation, fundraising, target screening, monitoring and reporting. Acuity offers customized research support to sustainability / ESG research across sustainable strategy formulation, target screening and due diligence studies. Additional services include design and implementation of sustainability programs; monitoring & reporting as per the guidelines; and content creation support. We provide services across the value chain and support cross functional needs of our end clients — ranging from producers, services providers, investors to consumers. Some of the services include current ESG state assessment, materiality assessment, ESG roadmap, peer benchmarking, assist in goal setting, KPI identification, action plan, KPI tracking, progress of ESG strategy, among others.
About the Author
Prachi is a postgraduate in management from NIA, Pune. She specializes in corporate sustainability with 3 years of experience in ESG research-based projects across various domains including just transition to net zero carbon in oil and gas and automotive industry, human rights due diligence, labor rights, SFDR, gender equality, responsible investment and underwriting of insurance companies, ESG issues in commodities like timber and pulp and palm oil, allocation, and impact of green bonds. Prior to Acuity, she has worked with a ESG research provider where she was responsible for designing customized scoring parameters for set of indicators and ensuring timely delivery of quality research.