Socially-conscious investors have been around for a very long time but choosing only back companies with excellent corporate social responsibility profiles used to mean that there was a good chance that the investment would be less profitable.
That’s no longer true. Stakeholders, which include consumers and communities, and investors, now hold companies to much higher standards. They want to see a commitment to all of the Ps of the triple bottom line — not just to profit but also to people and the planet.
There’s no question that the immense rise in ESG investing has indeed largely been spurred on by a true desire to do good in the world and invest only in companies that share investors’ most important values. ESG investing decisions are also, however, simply good business in today’s world.
Assessing how a given company compares to its peers and competitors when compiling ESG scores has a real power to expose vulnerabilities that could point to unacceptable financial risks for investors, after all.
Controversial political, social, or environmental decisions or failure to put in the work to ensure that company policies align with modern standards can even deliver a life-threatening blow to businesses. That, in turn, hits investors in the pocket. We only have to look at Equifax for a fascinating case study.
When a company does not score well in ESG principles, especially when compared to its peers in the same industry, some will react by divesting. However, others choose to continue their relationship with the company to add their voice for change.
Shareholder activism and ESG investments have thus become a potent force for change — and no modern company, from small businesses to global industry giants, can now overlook ESG principles. As a business seeks out ways to improve its metrics concerning all ESG factors (environmental, social, and governance), it will also need to adopt and implement an ESG integration framework.
Publishing ESG scores will serve as an important source for investment managers and data providers that offer ESG investors an overview of any company’s performance in the realm of ESG integration.
What should companies know about creating and implementing an effective ESG integration strategy to attract investors and keep the business moving forward?
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How Can ESG Implementation Be Measured?
ESG factors play an increasingly important role in investment decisions, public opinion, and a company’s potential to remain profitable. ESG frameworks are even influencing government regulations.
It is no surprise, then, that ESG integration frameworks are being developed as entire comprehensive systems. Corporate social responsibility is absolutely no longer a vague concept, in which companies could score reputation-related brownie points easily by making it clear that they switched to energy-saving light bulbs or are shunning suppliers that were shown to have unethical labor conditions.
Most investment companies need to show socially and environmental investors precisely why a particular business should be included in their portfolio.
As such, ESG integration frameworks have become mathematical models that allow all those who seek answers to measure precisely how a given business stack up against its competitors. ESG integration is now is a huge part of data crunching — and the more transparent a company is about all its important metrics, the better.
As a result, several ESG disclosure frameworks have been developed.
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Global Reporting Initiative (GRI)
Developed by the GRI, an international and independent NGO, in collaboration with stakeholders, the GRI sets out a constructive and practical framework for ESG that companies can make ample use of as they decide how to integrate ESG.
The GRI ESG disclosure framework looks at critical corporate social responsibility issues that include climate change, human rights, governance, and social wellbeing. This framework is now one of the most commonly assessed ESG frameworks internationally. Any business that aims to implement an ESG integration framework should be deeply familiar with the GRI.
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UN Sustainable Development Goals (UNSDG)
ESG implementation can also be assessed through the United Nation’s Sustainable Development Goals lens, 17 separate metrics adopted by the UN General Assembly in 2015.
Make no mistake — the UN Sustainable Development Goals are very ambitious, and together, much too broad for any single company to handle. They include, for instance, such lofty goals as “no poverty” and “zero hunger” as well as more immediately actionable goals such as “clean water and sanitation,” “climate action,” and “gender equity.”
Many investment managers and potential investors will look at how well any company performs on all of these goals. However, as you wonder how to integrate ESG into your business, keep in mind precisely what is being measured here.
How does your company’s performance compare to your competitors’ in terms of this ESG integration framework? You do not need to be able to solve all of the world’s woes on your own, and nor could you. Your business needs to take measurable steps in the right direction on all 17 UNSDGs to score well.
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Morgan Stanley Capital International (MSCI) ESG Ratings
The MSCI ESG ratings offer a financially focused look at all the parameters that influence a company’s ESG-related risks. In offering a comparison between companies within the same sector, the MSCI ratings provide a cold, hard look at any company’s performance in the context of its field. These ratings will label companies leaders, laggards, or average.
The MSCI ESG ratings have become an important tool in allowing investors to decide where to allocate their ESG funds in terms of environmental and social responsibility and sound financial decisions and investigate all the aspects of ESG in-depth. Easily interpretable graphs result.
Under the environmental heading, the MSCI ESG ratings examine how a company performs in pollution, waste management, clean water, biodiversity, renewable energy, and climate change mitigation steps.
The social portion of the MSCI ESG ratings looks at consumer safety, product liability, community relations, and health and safety in the workforce, among other factors. Governance examines fairness, transparency, and ethics, including as they pertain to increasingly important issues such as data privacy.
Profit-driven companies hoping to measure how they perform and attract new investors should pay special attention to this ESG integration framework.
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Sustainability Accounting Standards Board
The Sustainability Accounting Standards Board, or SASB, is another important ESG integration framework and set of disclosure standards that businesses need to be aware of.
This set of standards is designed to be equivalent to those that organizations such as the International Accounting Standards Board and the Financial Accounting Standards Board launched for financial metrics. Instead, the SASB ESG disclosure framework focuses on social corporate responsibility principles.
This set of standards is internationally applicable and industry-specific, with 77 different standards currently existing for companies within the most important economic sectors. In making these standards available, the Sustainability Accounting Standards Board helps companies integrate ESG frameworks in a manageable manner.
These are not the only ESG disclosure standards currently in use worldwide, but they are the four most impactful and widely used ones at present. As each company decides how to move forward with ESG implementation, it is also important to keep in mind that it is impossible to make radical improvements across the board in a short period of time. ESG integration is a process.
All steps forward matter, both in the impact on people and the environment and attracting ethically conscious ESG investors.
In the process, it may be natural to emphasize one or two areas of ESG over others. To develop an ESG strategy that works for any individual business, it is crucial to set short- and long-term priorities.
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How to Integrate ESG into Your Business
Implementing an ESG integration framework is challenging but worthwhile. It will require a multi-step approach. The following offers a brief practical look at the process.
- Conducting a Materiality Assessment
Developing a comprehensive ESG integration framework is not the same as taking haphazard steps in the right direction. To make consistent progress in corporate social responsibility, a company will need to develop an awareness of all the areas in which steps need to be taken and gain insights into where the greatest needs currently lie.
A materiality assessment is, as such, the first step. Conducting a materiality assessment allows businesses to understand how their business strategy can embrace ESG principles in a manner that improves its financial outlook, the results of which can be explored via a Materiality Matrix.
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- Establishing the Current State of Affairs
This step toward ESG integration, which will require the engagement of outside professionals in most cases, establishes a clear picture of the current state of affairs within the business.
All relevant data, policies, and programs will be compiled to offer a roadmap to meet future goals more effectively during this step. During this stage, a business can see where it has already made great strides and where further steps are required.
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- Setting Future Goals
This is where ESG integration meaning for the particular company will become clear as new priorities and aims are implemented. Where is the company already excelling? Keep up the good work in those areas! Where is improvement necessary? Start working on that or step up efforts. How can the company better frame its ESG disclosure to show stakeholders how it is performing? Get to work on that, as well.
As goals are set, it is also important to identify barriers toward more successful ESG implementation and to assess how those challenges can best be overcome.
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- Making Your ESG Integration Framework Public
Once a company has done the hard work of identifying its status quo and its current performance concerning competitors, establishing future goals, and emerging with a coherent ESG integration strategy, it is time to show the rest of the world what has been done is still planned.
By making your ESG integration framework public, with as much transparency as possible, all stakeholders, including ESG investors, will be able to see where in the process you are.
As you do so, ensure that the company has a dedicated corporate social responsibility team and up-to-date software solutions to measure performance across all the ESG areas that have been identified as immediate goals. Layout plans clearly, and show how they will be implemented.
- Keeping Stakeholders Updated on Your ESG Integration Progress
As ESG investment continues to rise rapidly and increasing numbers of companies are committing to establishing themselves as good corporate citizens with the aid of clear ESG integration frameworks, it has never been more important to update stakeholders on your progress.
Many companies are now achieving this with the help of annual reports in which they highlight their ESG integration process. Each business will have to find a format that is uniquely adapted to their sector, needs, and mission, but these ESG progress reports should include, in some form:
- Evidence of the company’s commitment to financial returns.
- Evidence of the company’s commitment to ESG principles by showcasing successes and highlighting plans.
- Comprehensive data that allows investors and other stakeholders, including members of the media, to assess the progress by themselves.
As companies are moving forward with their ESG integration frameworks, they should consider future trends. As of now, ESG integration is more important than ever before for investors and other stakeholders.
This fact drives increasing numbers of businesses, substantial companies, to commit to voluntary ESG disclosure reports. Rather than simply being a mark of good corporate citizenship, this dedication to ESG integration is also essential for financial health.
As governments implement policy changes, especially within the areas of environmental sustainability and climate change mitigation, however, it is not unlikely that some form of ESG integration will, in the near future, become a matter of policy — a matter of law. The changes you make now in integrating ESG will give you a head start tomorrow.