What Does ESG Stand For?

In nearly every industry, environmental, social and governance (ESG) practices have become a top priority for management teams. Since it is increasingly tied to a company's profitability, the importance of ESG for organizations can't be overstated. Companies that are taking ESG seriously understand their bottom line is tied to successfully meeting ESG's evolving compliance requirements and the expectations of stakeholders. They also understand that doing ESG well means increasing their competitive advantage.

A growing awareness of how business practices impact the environment and society is driving corporate focus on ESG. Investors, customers and employees are tuning in to sustainability, social responsibility and ethical governance. Stakeholders are not just interested in financial performance. They want to know how companies are making a positive impact. In this sense, ESG is not a one-time initiative but an ongoing process of improvement and adaptation.

Successful organizational ESG integration needs commitment, transparency and a willingness to evolve. As companies adjust to the new realities brought on by ESG, they will need to lean on best practices and tools while remaining nimble to emerging trends.

What ESG Demands

For companies, especially finance teams, the reality of ESG means a need to expand skill sets. In developing ESG strategies, companies are setting up reporting systems to ensure that their organizations can measure and communicate their ESG performance effectively. The core of a company's approach to ESG performance includes four management avenues:

1. Board engagement
2. Managing ESG metrics
3. Internal and external collaboration
4. ESG orienting frameworks

ESG is unique to each company, and each company needs to identify ESG factors most relevant to its business and stakeholders. Companies must find the balance between doing good from an ESG perspective and doing well financially.

Companies that will do well with ESG are companies that:

• Invest in understanding industry ESG best practices
• Are aware of—and know how to use—ESG tools
• Leverage the right methods
• Create processes that drive real change

ESG Best Practices

As organizations deepen their ESG commitments, several best practices have emerged to guide effective ESG system implementation. These ESG best practices focus on key areas such as board engagement, data management and cross-functional collaboration.

When these best practices are employed, companies can enhance their ESG performance, meet stakeholder expectations and create sustainable value. When used with intent, these ESG best practices can offer a road map for companies seeking to elevate their ESG initiatives and drive measurable impact. Use of them further ensures that boards can rest easy knowing that ESG considerations are strategically integrated, creating long-term value for the organization and its stakeholders.

ESG Reporting Questions

Effective board engagement with ESG issues as a best practice is crucial for modern organizations. Directors and their management teams are wise to integrate ESG considerations into their corporate strategy, which means moving beyond mere compliance by creating lasting ESG value and driving competitive advantage.

• Board directors should regularly evaluate the company's ESG initiatives against industry peers and competitors.
• ESG evaluations should include understanding how the organization's ESG narrative resonates in the market and impacts company valuation.
• The board can ask targeted questions to ensure that ESG efforts are meaningful and aligned with strategic objectives.
• The executive team can consider linking ESG performance expectations and metrics to incentive plans to drive progress and establish internal accountability.
• Boards can review management's process for engaging with and understanding the expectations of ESG stakeholders, particularly institutional investors.

Given the evolving nature of ESG standards, reporting against established frameworks may be needed to address investor needs for comparable industry metrics. The use of established ESG and ESG-related frameworks, such as those provided by SASB (the Sustainability Accounting Standards Board), can effectively mitigate the risk of overstating ESG efforts, often referred to as "greenwashing," while ensuring that core ESG standards are met.

ESG Narrative Integration

A key best practice is the integration of ESG reporting—material nonfinancial information affecting long-term value—into financial reports, quarterly earnings calls and investor road shows. This approach reflects the convergence of investor interest in both financial and ESG performance. It can further reveal how ESG initiatives can inform key business strategies, create new revenue sources and achieve operating efficiencies.

Implementing this best practice will help companies build ESG into their company readiness checklist. For many companies aiming for an IPO, demonstrating meaningful metrics with ESG issues could positively impact both IPO valuation and long-term market value.

Prioritize ESG Metrics

As ESG regulations evolve and stakeholder demand for reliable metrics increases, the importance of high-quality ESG data management cannot be overstated. As a best practice, organizations must ensure that their ESG data is trusted, accurate, complete and well-defined across numerous systems and sources.

Prioritizing metrics is crucial for creating auditable and attestable ESG disclosures. This process helps identify gaps in data collection and reporting, helping companies know where to make improvements for accuracy. By implementing robust ESG data management and reporting processes, organizations can efficiently comply with current and anticipated ESG regulations while satisfying stakeholder expectations.

This approach supports more informed decision-making and strengthens the organization's overall ESG strategy. It also ensures regulatory compliance while enhancing stakeholder trust.

ESG and the Supply Chain

Forward-thinking companies recognize the importance of cross-departmental cooperation in ESG initiatives. With collaboration between operations on sustainable sourcing strategies and HR on monitoring ethical labor practices throughout the supply chain, companies can ensure their ESG metrics maintain a high standard.

ESG Toolbox

While the field of ESG tools is still developing, several innovative solutions have emerged to help companies navigate its complexities. These tools range from targeted question frameworks to comprehensive third-party support systems.

ESG tools can provide valuable structure and guidance to an otherwise complex process. They can assist companies with developing robust ESG strategies, improving reporting processes and aligning their practices with stakeholder expectations and regulatory requirements.

ESG Reporting Questions

To help clear the fog around their internal ESG landscape, companies can use targeted question frameworks. The ESG Reporting Questions Framework can help directors and their management teams assess and guide their company's ESG strategy.

5. Have we set compelling sustainability targets and goals that appeal to the marketplace?
6. What story are we telling the street?
7. Can we integrate our ESG reporting with financial reporting?
8. What reporting framework are we using, and why?
9. What accountabilities have we set for ESG-related performance?
10. Is our ESG reporting satisfying the needs of the investment community and other stakeholders?
11. What are our ESG risks, and how well are we managing them?
12. What have we done to ensure that our ESG-related disclosures are reliable?
13. Does—and if not should—our independent auditor have a role in ESG reporting?
14. How has the COVID-19 pandemic affected our ESG reporting?

To put structure to their internal ESG approach, companies can use these questions as the building blocks to create a formalized ESG procedure as part of the organization's larger ESG strategy.

Third-Party ESG Support

Implementing strong ESG practices can be complex, but companies don't have to go at ESG complexity alone. Experienced vendors offer valuable tools and guidance to streamline ESG reporting and process improvement. These partnerships can be instrumental in several key areas:

15. Discovery and Strategy-Setting: Discovery and strategy-setting include defining sustainability objectives, assessing program maturity, and identifying material topics for the business and stakeholders.
16. Data Management: Data management includes developing efficient systems for collecting, aggregating and validating sustainability data to support material topic analysis.
17. Performance and Reporting: Performance and reporting include establishing monitoring mechanisms for sustainability objectives and creating comprehensive, transparent ESG performance reports for stakeholders.
18. Governance and Risk Management: Governance and risk management include enhancing governance frameworks to address ESG risks and compliance requirements while strengthening internal controls for ESG reporting.

When companies use external resources, they can access industry-best tools, methods and ESG templates. Subsequently, working with outside support leads companies to improve their ESG processes and gain insight and improvements with their in-house ESG systems.

A collaborative approach with vendors can enable an organization to build a stronger, more efficient and effective ESG strategy aligned with stakeholder expectations and regulatory requirements.

Wrapping Up

Recent global shifts have reshaped ESG priorities for many organizations. Companies are reevaluating their approach to social and environmental issues, including workplace safety, remote work and employee wellness.

These changes are prompting businesses to recalibrate their ESG strategies, balancing immediate needs with long-term resilience in a transformed business landscape. This new arena is leading organizations to integrate ESG considerations into their core operations, from the boardroom to the supply chain.

The evolution of ESG regulations is ongoing, with expectations and demands from stakeholders intensifying. Companies that proactively embrace ESG best practices and ESG tools can get ahead of these friction points. Doing so will ensure that they are better positioned to create long-term value, manage risks and capitalize on opportunities in the changing business environment.

As ESG continues to shape the business landscape, prudent organizations will adapt and evolve their strategies to meet growing expectations. While no company's ESG road map is identical, there are common practices and tools that will help companies on their ESG journey.

Learn more about ESG by exploring these related publications on KnowledgeLeader:

• Regulations and Demand for Accountability Set the Tone for the Future of ESG Disclosures (Updated)
• The ESG Debate: Where Does Your Company Stand?
• A New Reality for CFOs – ESG Is the Top Priority