ESG performance and reporting are important to helping a business sustain progress towards environmental and social goals through good governance. But developing an ESG program is the first, and often the most challenging step.

Where to begin? That is the common question business leaders ask when deciding to establish a formal environmental, social, governance (ESG) program. Company stakeholders (including customers and investors) are increasingly considering corporate ESG goals and reporting when making buying or investment decisions. In addition, more regulators are requiring ESG-related disclosures and reporting. Developing an ESG program is complex and requires top management buy-in, a strategy embedded in decision-making and operations, a commitment of resources, and a reporting mechanism. The best approach is initially developing a high-level understanding of the steps in ESG program development and ESG reporting platforms, followed by then breaking down each step into goals and action plans. From buy-in to reporting, each step is essential to ensuring the ESG program is a value generator.

Spend the Time to Identify Priorities

One of the first actions a company will take to establish an ESG program is identifying the ESG priorities. Though it is tempting to want to do everything regarding environmental sustainability and social support, the reality is that priorities should consider what is important to the company’s stakeholders. Who are the primary stakeholders, and what ESG priorities are most important? A good way to identify priorities and define the issues is first review the popular ESG frameworks. There are several, including the UN Sustainable Development Goals (SDGs) and the UN Global Compact, the SASB Standards for the relevant industry, the Global Reporting Initiative (GRI), and the B Impact Assessment.

Each framework has a focus. For example, the SASB is used by the CEO, CFO, Supply Chain, Corporate Social Responsibility (CSR), operations and more. It is used to determine which ESG factors to measure and report to investors. The GRI is used by the same business leaders, but it helps with identifying, understanding and communicating selected sustainability metrics – either in total or for specific purposes such as climate change impacts. The United Nations Global Compact is the reporting mechanism for the UN SDGs, and business leaders can integrate SDGs into reporting processes. The B Impact Assessment is used by executives, board members, CSR heads, and other leaders to identify ways to improve CSR performance through long-term mission alignment and value creation.

Match the Rating to the Organization’s Focus

There are also numerous ESG rating agencies, and the choice of rating agency depends on the company’s ESG focus. For example, a company may focus on its carbon footprint or human rights. Some of the ESG rating services include Bloomberg ESG Ratings, CDP Scores, RepRisk ESG Rating, Dow Jones Sustainability Index, EcoVadis, and S&P Global ESG Scores, to name a few. The rating services collect data from sustainability reports, corporate social responsibility reports, websites, corporate interviews, and a variety of other sources. For example, CDP focuses on environmental impacts and has programs for climate change, water, forests, and supply chain. Companies report data and are compared to other companies in their sector. iRIS Carbon offers the ISSB framework that merges several frameworks and a sustainability reporting platform. They also developed A Beginner’s Guide to ESG Rating Agencies and Methodologies, that reviews the many reporting options.

Getting Ready to Take Action

It is a lot of information, and it is critical to carefully consider the ESG goals that best fit the business mission and model - and will also create value. Getting started with developing and establishing an ESG program obviously requires careful planning. Sustainalytics, an ESG risk rating company, prepared a general four-step action-oriented plan to start the ESG journey and that is precisely what ESG is – a journey. This is high-level, in that it identifies action items within each step which are used as a guide to developing more detailed implementation steps.

Sustainalytics’ four strategic steps are buy-in and resourcing, understanding the ESG situation, strategy and communication, and progress reporting. For buy-in and resourcing, action items include gaining C-suite support; determining ESG resources required; creating teams for work guidance, data collection, communicating with stakeholders, analyzing costs and benefits; and understanding the ESG ratings chosen. Understanding the ESG situation is the stage at which data is gathered and used for risk assessment. Benchmarks for measuring ESG performance are developed, and the criteria for short and long-term ESG actions are established. The actions for strategy and communication include establishing specific but high-level ESG goals, assigning ESG leadership roles for developing and implementing ESG projects, developing a financial plan with funding, and developing and implementing an ESG communication plan. For reporting progress, develop a corporate report that informs stakeholders of the information they want, incorporating data into the report.

ESG is Value Generating

It is important to understand that ESG is not only essential because of regulatory requirements, it is necessary for minimizing future risks and maximizing business opportunities. There is a measurable ROI associated with a well-defined ESG program. In fact, establishing an ESG program that meets stakeholder needs and using strategic planning as an opportunity to identify growth, risk minimization, and increased profits through better environmental, social, and governmental actions will increase long-term business sustainability. A successful ESG program produces cost savings, reduced legal and regulatory interventions, and increased investment returns through better capital allocation. It also improves the ability to attract and retain talent.

The first steps in developing an ESG program are summarized as defining the ESG issues relevant to the organization, assessing the materiality of the issues, and developing a governance structure. The materiality assessments will drive which baselining and benchmarking data is used for measuring progress, then goals and targets are set, followed by a strategic action plan. ESG strategies are customized to fit the organization, customer and investor needs, regulatory requirements, and industry. When ready for implementation, the strategy is embedded in operations so that it becomes a way of doing business. Careful planning, an investment of human and capital resources, and leadership accountability are crucial to developing, implementing, and sustaining an ESG program that continuously generates value. The ultimate goal is to make ESG a natural way of doing business.