The influence of Environmental, Social, and Governance (ESG) on board decisions is growing in nearly every industry, with over 75% of private market investors planning to stop acquiring products that lack ESG credentials. This is due to the increasing focus on environmental issues over time, such as climate change, energy consumption, resource utilization, and waste management. In the current business environment, companies are facing mounting pressure to integrate ESG considerations into their strategic planning.

Compelling evidence indicates a positive link between sustainability and financial success, with research showing that companies that emphasize ESG are more likely to achieve better long-term performance through trust with customers, investors, and stakeholders compared to their competitors.

Companies with robust ESG practices are more attractive to investors, which can lead to easier access to capital and potentially lower borrowing costs. A well-defined ESG strategy can also open doors to a broader range of investors and funding opportunities. Moreover, developing an ESG strategy helps companies stay ahead of regulatory requirements, avoid legal penalties, and ensure compliance with emerging laws and regulations.

There is a growing expectation among stakeholders—such as customers, employees, investors, and communities—that companies will take responsibility for their impact on the environment and society. There are other advantages to developing and following an ESG strategy, including enhanced stakeholder relations and elevated brand value. To develop a successful ESG strategy, it is essential to understand how these issues impact the company. Moreover, such strategy should encompass the company's current processes and operations, as well as the prospective impact of these factors its reputation and financial performance.

 

                 

 

Key Elements of an Effective ESG Strategy

Organizations employ major elements of ESG to assess their performance and influence in these key areas. An ESG strategy represents an approach that incorporates ESG considerations into the decision-making process. The three key elements that assess the sustainability and impact of a financial investment in a business or organization are categorized into the following:

ESG Key Elements#1: Environmental

This element addresses how a company manages its environmental impact and contributes to environmental sustainability through strategies to reduce greenhouse gas emissions, manage climate risks, and adapt to climate change impacts. As well as an efficient use of natural resources, including energy, water, and raw materials, along with efforts to minimize waste, and promote recycling and circular economy practices.

ESG Key Elements#2: Social

This social component addresses a business’s interactions with its employees, clients, suppliers, and the local communities where it operates, focusing on ensuring fair labor practices, protecting employee rights, maintaining health and safety, and promoting diversity and inclusion in the workplace. Ensuring human rights standards are upheld across the supply chain, addressing concerns such as child labor and forced labor, while also safeguarding product safety, adhering to ethical marketing practices, and protecting consumer privacy and data.

ESG Key Elements#3: Governance

Governance encompasses the structures, policies, and practices that ensure a company is managed effectively and ethically, including adherence to ethical business practices, anti-corruption measures, and regulatory compliance. Additionally, it aligns executive compensation with long-term performance and ESG objectives to prevent conflicts of interest and maintain accountability.

The objective of an ESG strategy is to provide long-term value for all stakeholders, including investors, employees, customers, and society. By demonstrating attention to ESG issues, companies can foster a more positive opinion among investors, customers, and other stakeholders.

It is crucial for the company's entire business plan to be aligned with its ESG strategy, and both should align with the organization's values and goals. To develop and implement an ESG strategy, companies can utilize a variety of frameworks and guidelines, including:

1. Sustainable Development Goals (UN SDGs).

2. Global Reporting Initiative (GRI).

3. Sustainability Accounting Standards Board (SASB).

What is the best way to develop an ESG strategy?

The creation of an ESG strategy necessitates a systematic approach. The development of a strategy may entail the following steps:

Identifying and Prioritizing ESG Issues

A fundamental initial step in the development of a successful strategy is the identification and assessment of significant issues. A variety of tools and systems are available to companies, including SASB's Materiality Map, which identifies the most critical ESG issues based on industry data and input from stakeholders.

The establishment of goals and objectives represents a critical phase in the formulation of an ESG strategy. Goals and objectives provide direction for a company's SD activities, enabling the tracking of progress, measurement of effectiveness, and communication of actions to stakeholders.

Development of policies and practices

Another crucial aspect of developing an effective ESG strategy is the adoption of policies and the establishment of guidelines that direct actions.

By way of illustration, a company may implement ESG policies and practices such as:

· Environmental Policies and Practices

· Social policies and practices

· Governance Policies and Practices

Evaluating Performance and Documenting Successes

It is essential to measure and report on performance to create a successful ESG strategy. By implementing these practices, companies can evaluate their performance in relation to their initial ESG goals and objectives, identify areas for improvement, and allocate resources in a strategic manner. By keeping stakeholders informed of their progress, companies can demonstrate their commitment to ESG principles, strengthen their brand, and attract investment.

Continuous improvement

The creation of a successful ESG strategy hinge on the implementation of a continuous improvement process. To remain relevant and competitive, an ESG strategy must be continually updated because aspects of ESG are subject to change on a regular basis. The optimal approach is to identify emerging ESG challenges, anticipate regulatory requirements and stakeholder expectations, and generate long-term value for stakeholders by continuously enhancing operational practices.

How can we help

At PKF Antares, we have a dedicated ESG team that will be able to assess your current ESG rating, and assist you in developing/enhancing your strategy to reach your targets. Reach out to Director, Advisory and Assurance, Shameer Abdool, CPA, CA by calling 403 375 9955 or shameer@pkfantares.com.