What if ESG became the growth engine for rail transport?
Gone are the days when ESG was considered a vanity. Sustainability is no longer a nice-to-have concept. Slowly, it is emerging as a standard for an organization’s long-term value creation goals. Not so long ago, the driving force for ESG implementation was state and governmental regulations. Now, investor and financier insistence and demands of stakeholders — employees, general public, customers — to know the impact of their choices make long-term ESG strategy an absolute necessity.
A unified ESG approach saves time, effort and money while bringing greater value — to the organization, stakeholders involved as well as the society in the midterm. That’s precisely what we did for our client.
Prior to making an investment or providing finance, socially conscious investors and financiers scrutinize companies for ESG compliance to make sensible and ethical decisions. The 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey points out that 98% of the investors surveyed evaluate nonfinancial disclosures, either formally or informally, with 72% saying they conduct a structured, methodical evaluation
COVID-19 accelerated the process. It brought social, humanitarian and environmental considerations to the forefront for corporates. Ninety percent of investors surveyed said that since the pandemic, they attach greater importance to ESG performance when it comes to their investment strategy and decision-making. Thirty-four percent of the respondents to the EY Long-Term Value and Corporate Governance Survey 2022 think that incorporating ESG factors into corporate strategy can create new sustainable products and services, to drive revenue growth and meet the needs of ESG-conscious consumers. Twenty-nine percent suggest that it can differentiate them from competitors while building brand reputation and value.
Employees too place greater importance on equality, working conditions and safety, all part of a wider ESG framework. Besides, there’s a lot to gain in the form of incentivized “green taxes” and other support from the state.
Do all these considerations make ESG a great opportunity? That’s what one EY client — Lithuanian railway company Lietuvos Geležinkeliai (LTG)— thinks. For the client, ESG is an opportunity to showcase their commitment and add resilience to operations — in the short term as well as the long term.
LTG approached EY to develop a policy document — defining key ESG priority areas and the general vision for client’s sustainability approach — that would stay relevant for a long time. The document would set the goals and objectives for sustainable activities of the company, determine ESG principles and priorities, and establish the sustainability governance model. At an implementation level, the document would help to map operational principles to sustainability management and determine the procedures for their implementation. In essence, the policy sets out the priorities for each ESG area in which the client seeks to create the greatest value.
While railways is considered one of the least polluting transportation modes, still there are opportunities to improve sustainability further. ESG considerations impact every stakeholder: it helps them understand an organization, its broader values, social obligations, performance and impact.
“We were always mindful of the social as well as environmental impact of our operations. However, it was important for us to align and unify sustainability objectives and practices between different group companies. EY helped us to develop the long-term group approach that will allow us to pursue sustainability goals in a targeted manner,” says Anastasija Goncarova, Sustainability Lead, LTG.
Arriving at the best ESG approach for the organization
LTG is a group of businesses, and each of them had various approaches and numerous initiatives in sustainable development. There was a need to unify and reconcile the main goals of the whole organization and set a uniform ESG policy.
The first task for the EY team was to identify these diverse approaches and incorporate the best into the new ESG policy document. Later, LTG would develop a stakeholder management plan and communicate the importance of sustainability principles within and outside the group.
Once the ESG framework is in place, LTG would establish a system for monitoring and reporting on sustainability performance. Gradually, consistent implementation of sustainability principles and priorities would build LTG’ reputation as a fully sustainable and socially responsible organization.
At a practical level, this included assessing the impact of LTG’ operations on the environmental, social and governance factors by performing an initial, high-level materiality assessment.
The principles of sustainability would be reflected in the development and renewal of LTG’ functional strategies, including communication, safety and security (environmental, cyber), and human resource strategies.
Micro- to macro-level steps for a unified ESG approach
There are many ESG-related international regulations in place for enterprises. New ones are rapidly evolving. Working with no ESG strategy and plan or a half-baked one could be damaging on all fronts.
The sustainability policy document should cover environmental, social and governance aspects, and align the group’s strategic priorities in ESG areas. The essence of the ESG policy document is to set the standard guidelines for each entity within the organization to follow. A cohesive framework enables decision-making through a defined governance structure and accountability in terms of ESG-related performance indicators. Such an approach focuses not only on the coherent functioning of a corporate ecosystem, but also on the smaller corporate cells such as employees, processes and functions.
To develop the ESG policy document, the EY team conducted multiple strategic sessions. Interviews with managers from various entities and functional areas helped in identifying existing sustainability initiatives, priorities and directions.
The interviews and sessions covered questions on the existing sustainability strategy, the overall vision for the inclusion of ESG in the strategy, management of sustainability, and the like. It also considered whether and how to include sustainability in the group-level strategy and targets; criteria to assess the environmental, social and governance impact of projects; and guidelines for identification of viable projects.
There were multiple rounds of interviews — all at the management level. Interviews were held to better grasp the operational model and the key focus areas of each corporate function. The EY team was aware of LTG’ operational environment and core business activities. Combining this with the team’s prior experience, knowledge of global best practices, ESG expertise, methodologies and regulations helped fast track the policy document.
Making the world better for everyone.
Successful implementation of a comprehensive ESG policy provides a competitive advantage, encourages long-term decision-making, boosts stakeholder confidence and differentiates the client from other enterprises within the region.
The EY team, along with Lithuanian Railways, identified several core ESG priorities for the policy document.
The new ESG policy document provides operational guidelines for different business lines. Further, each business line will have additional documents based on the new ESG policy document to define day-to-day operations. Yet, it stays relevant for the future. It encourages effective long-term sustainable decision-making, and enables a unified approach among various entities of LTG toward the management of ESG areas and compliance with the defined sustainability practices in the market.
An improved sustainability management model will help with the implementation of activities in the ESG priority areas in accordance with the best sustainability practices and standards, as well as the legal regulations of the country and the European Union.
At a practical level, the new ESG approach leads to two key achievements for LTG in the short-term future:
- Implementation of the sustainability priorities set out in the policy document across various entities
- Integration of the ESG policy into other documents as well as strategies of the group
In the long term, LTG could accomplish objectives within the sustainability management plan by putting the policy guidelines to action. Implementing the priorities of the policy and group strategy targets, improving management and governance practises, the company will continue to put efforts to active engagement with stakeholders including communities, state and regulators, increase of client loyalty and attractiveness to business partners. The major initiatives of environment protection and HR strategies will lead to reduced environmental footprint and improving involvement and working environment for employees.
“Big organizations always run the risk of having differing ESG priorities among smaller entities within the group or large organization. A unified ESG approach saves time, effort and money while bringing greater value — to the organization, stakeholders involved as well as the society in the midterm. That’s precisely what we did for our client,” says Linas Dicpetris, Consulting Partner, EY.
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