Three ways to directly tie ESG strategy to corporate strategy

“Addressing ESG expectations requires a major shift in how CEOs and boards view the value their company creates,” Monica Dimitracopoulos, EY Global Long-Term Value Leader, says. “Leadership teams that focus on an ESG approach that is directly tied to their corporate strategy can make their companies stand out from the competition. Those that do not will fall behind when confronted with regulatory, customer and investor pressure.”

ESG strategy as a driver of success

Fortunately, most CEOs are beginning to understand the importance of ESG: 82% of US CEOs in the EY CEO Survey 2022 say that ESG investment is a key strategic value driver.

A forward-looking ESG strategy can deliver the following benefits:

• Deeper customer relationships and loyalty
  
• Improved ability to attract and retain talent, especially in these highly competitive times
• Reduced regulatory risk
• Greater ability to attract capital
• Increased resilience, driven by a more nuanced understanding of stakeholder expectations

Steps CEOs can take now

“ESG strategy needs to be about more than just checking a box. All companies will need to address ESG expectations from stakeholders, but leading CEOs make ESG initiatives an integral part of their corporate strategy. They focus on select initiatives where the company can truly make an impact, both for society and their competitive position,” Seth Reynolds, EY-Parthenon Americas ESG Leader, says.

To embed ESG into corporate strategies, CEOs can use three guiding principles:

1. Find out what ESG elements matter most to stakeholders 

Reducing the carbon footprint? Designing products with less waste? Creating a more inclusive workplace? Having greater impact in the communities in which the company operates? 

For example, an EY team has worked with a major consumer products company that set a goal of reaching net zero emissions in less than 20 years. This requires changes not only inside the organization, but also with its suppliers, where most of its carbon footprint lies. The company is partnering with suppliers to scale up new solutions, reformulating its products and developing a new decarbonization program for suppliers.

2. Don’t try to run every popular ESG initiative

Determining the elements in Principle 1 can lead to a laundry list of options if companies aren’t careful. Pick the areas that are most material to the company’s industry, aligned with the company’s purpose, and that can make an impact on its competitive position with customers, employees and investors or lenders. 

For example, EY professionals are working with the leadership and board of a global life sciences and health care company to enrich its ESG strategy. The priorities are ESG issues that improve stakeholder outcomes and connect to the company’s mission, operating model, reporting and disclosures. With this lens, it is focusing on critical issues such as patient access and affordability.

3. Develop the blueprint for driving the right behavior

This includes choosing the right KPIs to measure impact, aligning incentives to ESG goals, standing up technology to manage the underlying data and developing processes to monitor progress.

Companies should focus on progress, not perfection, to keep the organization moving toward its ESG goals. One oil and gas company looking to become more sustainable while maintaining its core business developed a strategy to help executives focus on stakeholder expectations: by integrating financial and non-financial performance into their communications. These changes allowed the company to more effectively navigate a volatile market environment and respond to external pressures.