ESG is at a crossroads. Stakeholders have different expectations, priorities and requirements. Standards are changing. The law attempts to use a single language but provides for different activities and disclosures. Definitions of ESG vary among standards bodies, rating agencies, regulators, legislators and investor management groups. Some argue for abandoning the term entirely in favor of other concepts such as sustainability, influence, or significance. Some believe ESG is misleading and even value-destroying.
However, ESG is not going away. Companies receive daily requests for ESG information from investors, customers, regulators and lenders (and more recently). Talk to anyone who advises business management and they will tell you that the number of inquiries and requests is increasing, not decreasing, and that inquiries are becoming more frequent and requests more onerous.
Institutional investors need information about ESG performance because their clients need it. Clients need ESG commitments to achieve their ESG goals.and based on research Morgan Stanley Capital International and McKinsey & CompanyESG data can even allow you to get discounts on the cost of capital from lenders.
Stakeholders demand ESG messaging because they believe ESG drives value in concrete, demonstrable ways, providing advantages in the form of risk reduction, access to capital, cost savings, innovation, acquiring new customers, retaining employees and improving reputation.Expectations may change, standards may evolve, laws may increase, and terminology may change—but the simple fact is, ESG is good business when done right.
Here’s the thing: ESG initiatives must be aligned with the business and its strategic drivers. Otherwise, accusations of greenwashing and corporate waste may be legitimate. To find solid ground, drive value and manage anti-ESG sentiment, ESG initiatives must be scaled and integrated with the business.
ESG guidance at a crossroads
To help companies navigate the changing ESG landscape, we created an original, powerful, practical, multi-stream ESG Maturity Model This works for any company, regardless of its business model or industry. Based on practical experience and data, our ESG maturity model provides a blueprint for an ESG program that is tailored, targeted, and most importantly relevant to a company’s business.
board governance
The ESG Maturity Model is grounded in board governance—establishing oversight of a company’s ESG program and use of the model. This often requires amending board committee charters to include responsibilities for ESG oversight and regular communication and review to ensure strategic consistency of ESG measures.
ESG priority assessment
The next step is an ESG priority assessment to identify topics relevant to the business, management and stakeholders. The ESG Priority Assessment informs the board and management of the company’s overall ESG strategy by carefully examining relevant frameworks, peer and industry group benchmarks, and investor priorities. A retail company might consider sustainable products a top priority, while an artificial intelligence company might focus on responsible innovation or data center energy consumption.
Management Oversight and ESG Workflows
The ESG maturity model requires a management-level, cross-functional ESG steering committee to identify existing or new projects to which the company should invest time and resources. A properly constituted ESG steering committee can unlock new synergies and opportunities. For example, providing access and affordability for treatment companies with a forum to speak with diversity, equity, and inclusion leaders can generate patient-centered insights that deliver real benefits to the business. Establishing an ESG office with executive leadership to act on the results of ESG priority assessments will support the progress of day-to-day operations.
ESG Goals, Metrics and Data Collection
At this point, the ESG maturity model shifts to goals and metrics related to business success. The company first collects relevant information or understands where the information is stored. Companies can then consider how to use the data, including whether to set targets on greenhouse gas emissions, workplace safety, responsible sourcing or other related ESG topics.
Stakeholders are increasing pressure on companies to set ESG goals. Our research shows that of the 673 U.S. companies that have set or committed to setting near-term Science Based Targets Initiative (SBTi) climate targets as of June 2023, 61% made this commitment in the past 18 months.
Report, evaluate and iteratively improve
The model builds consistent, accurate, and verifiable disclosures through reporting mechanisms. It also envisions companies evaluating the effectiveness of the program and iterating it year after year, taking appropriate steps along the maturity curve to a level appropriate for each company’s business.
ESG is at a crossroads—and the next steps companies take are critical.
We created the ESG Maturity Model to help companies avoid box-ticking exercises and instead focus on what matters to the business and how to drive long-term value in a practical way.
The model provides a roadmap for saying yes to ESG accurately. Just as importantly, it enables companies to say “no” to ESG measures that are not relevant to the business, do not drive value, and do not advance the company’s strategy.
Jeff Levinson is Senior Vice President and General Counsel and Chief ESG Officer of NetScout Systems, Inc. Ashley Walter is Orrick’s ESG managing partner. The ESG Maturity Model was developed in partnership between Orrick and NetScout Systems, Inc.
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