Four questions to ask as you craft your ESG strategy
A recent EY webcast, ESG in real estate: opportunities to create long-term value in a time of uncertainty, revealed four key research questions that are commonly used to construct an ESG rating:
1. How does your company tackle new initiatives?
As with any strategic change, there needs to be support from the top to get buy-in from the rest of the company. If the board and management team have a history of transparency and clear communication to employees about how and why things are done in the business, the path to implementing an ESG program becomes easier. In a situation where that’s not the case, leadership will need to work harder to make its case and garner support.
2. What specific ESG risks or opportunities does your company face?
This is going to be different for each industry. What’s relevant to a real estate company is much different from what matters to an energy or a pharmaceutical company. Take the time to assess where your company is strong in terms of sustainable business practices and where you may have fallen short. If you find that you’re not where you’d like to be, don’t be discouraged. You’ve taken a key first step by revealing your weaknesses.
3. What is your company saying about these risks?
It’s one thing to talk about making changes and addressing problems. But what happens when the all-hands meeting is over? Leadership must have its finger on the pulse of the workforce through employee engagement surveys and other real-time measurement tools. Conversations should continue in breakout meetings and correspondence that furthers the dialogue and brings the company closer to solutions that can resolve these concerns.
4. What is your company doing about these risks?
Consider the steps that have been taken to act on the programs being implemented and evaluate the results of those efforts. You may have a policy that appears to be comprehensive, but having a clear picture of historical trends, the ability to evaluate the outcome of your efforts, and ways to measure the effectiveness of your strategy is critical.
The challenge for business leaders is to then articulate for investors, and stakeholders at large, the steps being taken to address ESG concerns in their respective organizations. This effort recently received more specific guidance when the World Economic Forum and the International Business Council (IBC), in collaboration with the Big Four accounting firms, developed a standardized set of metrics for companies to use. Its goal is to create alignment by providing a blueprint for how companies should evaluate ESG practices and then report on their performance against these benchmarks.
This effort to develop ESG standards was launched in 2017 when the IBC received commitment from more than 140 CEOs to align their corporate values and strategies with the United Nations’ Sustainable Development Goals. The work began in earnest last January and led to the creation of 21 core metrics and 34 metrics. The latter group is made up of standards that tend to be less well-established, representing a more advanced way of measuring and communicating sustainable value creation.
Metrics centered on four pillars:
People
Reflects a company’s equity and its treatment of employees. Metrics include diversity reporting, wage gaps, and health and safety.
Planet
Reflects a company’s dependencies and impacts on the natural environment. Metrics in this pillar include greenhouse gas emissions, land protection and water use.
Prosperity
Reflects how a company affects the financial well-being of its community. Metrics include employment and wealth generation, taxes paid, and research and development expenses.
Principles of Governance
Reflect a company’s purpose, strategy and accountability. This pillar includes criteria measuring risk and ethical behavior.
Companies are encouraged to report on the full set of metrics in their mainstream reporting. The group’s report recommends a “disclose or explain” approach when certain metrics are not feasible, not relevant or difficult to implement immediately. Additionally, it’s recommended that companies apply their own view of dynamic materiality, reporting on what is deemed material to their businesses and stakeholders.
ESG and implications for finance
74%74% of finance leaders say that nonfinancial information is increasingly used in investors’ decision-making.
In our recent EY 2020 DNA of the CFO survey, we noted that 74% of finance leaders say that investors increasingly use nonfinancial information in their decision-making. When it comes to nonfinancial or ESG reporting, finance leaders – particularly CFOs – will be responsible for, and deeply involved in, creating more open and accountable reporting to win stakeholder trust. No longer will CFOs be measured solely on financial metrics, such as earnings per share growth, dividend yield and return on capital that benefit the interests of investors, but rather they will also be measured on quantifiable ESG metrics (carbon reduction and net zero carbon emissions commitments, diversity and inclusion measurements, customer satisfaction metrics, employee and environmental safety measurements, etc.) that benefit the interest of all stakeholders.
The time is now for companies to broaden their engagement with stakeholders. The combined impacts of climate change, COVID-19 and economic inequality contribute to the urgency for businesses to embrace long-term, sustainable value creation and prioritize the needs of people and planet and the creation of broad-based economic prosperity.
Summary
Defined ESG standards will empower companies, providing objective data that reinforces the value of the work being done to build an organization’s long-term value and sustainability. Within a short period of time, it’s likely that ESG metrics will become an expected part of a company’s financial reporting and an essential tool in measuring a company’s worth today, tomorrow and in the future.
