ESG Strategy

Why you need an ESG strategy

Integrating environmental, social and governance (ESG) principles into your business strategy is no longer a should-do, but a must-do. Failing to take a position on ESG factors will leave you trailing the competition. The growth in popularity of ESG investments and asset management reflects the financial markets’ recognition of the impact of ESG risk on financial performance. Meanwhile, the rise of stakeholder capitalism is forcing businesses to consider stakeholders’ interests when it comes to long-term sustainability, governance issues and wider environmental impact.

ESG criteria have become a key part of any risk management strategy. By measuring the impact of ESG factors on operational and reputational risk, you are better placed to mitigate them. Increasingly, legal and compliance risks also need to be managed, as ESG regulation becomes stricter and ESG disclosures mandatory. Without an effective strategy, businesses leave themselves open to ESG risks, and also to missing ESG opportunities.

Having recognised the need for a strategy, the challenge lies in formulating it.

Three steps to defining your ESG strategy

With ESG comprising so many elements, the ESG strategy must be specifically tailored to your business. A bespoke solution requires the consideration of three key factors:

  • Different aspects of the ESG agenda will correspond to various stakeholder interests and expectations. The issues that chime with customers will differ from those prioritised by employees or suppliers. Shareholders will have a greater interest in the impact of ESG issues on financial performance, while the wider community will be motivated by corporate social responsibility and the role your business plays in its local area. Your strategy needs to be based on an understanding of what stakeholders expect from your organisation in the realm of ESG. 
  • Not all stakeholders are created equal, and you can’t please all of them, all of the time. Recognising which stakeholders should be prioritised, and which of their ESG requirements will have the greatest impact on the business, will help refine your ESG strategy. Prioritisation of stakeholders can be achieved by taking an outside-in perspective, to assess each group’s influence on the organisation.
  • Determine what is right for your organisation. An ESG strategy needs to support what you are trying to achieve as a business, and be aligned with your vision, purpose and objectives. Without this degree of authenticity, ESG policies will at best pay lip service to stakeholder demands, and lay you open to accusations of greenwashing – and at worst, negatively impact your corporate reputation and revenue. 

Analysis of the gap between these three considerations will allow your business to determine which of the myriad constituents of ESG should be focused on.