Authored by Anthony Piunno, Vertical Marketing Manager, Current
Environmental, social and governance (ESG) issues are everywhere, and there is a renewed emphasis on this critical component of corporate strategy. From recent PwC reports to major discussions at trade shows, people are talking about ESG. Why? Because investors are asking questions. ESG has become a key input into long-term risk assessments.
In the PwC report, “Mind the Gap: The continued divide between investors and corporates on ESG,” analysts notes that “[in a 2017 CFA Institute survey] 65% of investors said that their motive for taking ESG issues into consideration was to help manage investment risks.” PwC further cites that “80% of institutional investors have an ESG component as part of their investment strategies.” Investors care about ESG because of its relationship to long-term viability.
Smart ESG strategies that once were used to boost public perception are now essential for identifying future risks and building a more sustainable business. Solid footing in this arena signifies stability and better overall business health in today’s volatile landscape. If you’re trying to get capital, then ESG must be a priority.
Have your corporate responsibility or sustainability efforts expanded from something that helps brand reputation to something influencing business operations? A three-step process can get you started on this critical ESG journey.
1. Evaluate your facility operations.
The first step is evaluating your facility operations. Where are you spending the most money and focusing the most resources? What are the biggest risks? Are you on the path toward zero waste? Are you creating a safe environment? Are you in compliance with government labor laws and avoiding any possible human rights violations?
As vendor who focuses primarily on energy savings, let’s start with the environmental part of ESG. Reducing energy consumption and corresponding utility costs are often a good place to start optimizing your facilities. Energy-efficient operations reduce operating costs, increase margins, and improve cash flow, which investors love, while also making huge strides toward sustainability goals and long-term viability. State-of-the-art lighting, controls and energy management systems can cut your utility bills by 70% or more. Other areas where they may be excess energy consumption are often times in the HVAC systems, air compression networks, and water supply.
Let’s skip ahead to the last part of the acronym and touch briefly on governance. Most commonly when we think about governance it is related to labor laws and human rights compliance, which are indisputably a top priority. There are other elements of governance and one that deserves highlighting is “data governance.” In today’s world of ‘big data’ and virtually everything becoming digitized in some way, data governance is imperative. Investors also recognize the criticality of data security because of the risk implications. When you’re completing your operational assessment, take a close look at how you’re maintaining your data and more importantly how you’re protecting that data. For example, how vulnerable are you to cyber threats?
2. Closely examine your supply chain.
Once you’ve examined and upgraded your own facility operations, it’s time to look outside your own walls. Are your partners, or suppliers, maintaining an ESG strategy that aligns with yours? Are they contributing or detracting from your ESG goals and objectives?
It’s not enough to create a sustainable final product; the public, and investors, want to see sustainable and efficient practices up and down the supply chain. A report from McKinsey & Company titled, “Starting at the source: Sustainability in supply chains” reads, “The typical consumer company’s supply chain creates far greater social and environmental costs than its own operations, accounting for more than 80% of greenhouse-gas emissions and more than 90%of the impact on air, land, water, biodiversity, and geological resources. Consumer companies can thus reduce those costs significantly by focusing on their supply chains.”
Take what Walmart is doing with Project Gigaton. The initiative centers around Walmart’s goal of cutting one billion metric tons of greenhouse gas emissions from its supply chain by 2030. Not only is this a savvy PR move for the superstore, but it also increases long-term viability and strengthens partnerships.
Compliance also plays a role here. Human rights violations or other violations within your supply chain can have a negative impact on operations, as well as your perception among investors.
3. Measure your progress and be prepared to share your story.
Some of the biggest barriers to conveying ESG progress are a lack of formal benchmarking, inconsistent messaging, and unclear expectations between corporations and investors. According to a State Street Global Advisors survey, more than half of companies find it difficult to assess their ESG performance against their peers. Those who attempt to measure against their own past performance or common indices also struggle, since many of these data points don’t illustrate the risk management and long-term sustainability progress that investors want to see.
It’s up to you to close this communication gap. Corporations need to shape the narrative. First, engage with your investors to better understand how ESG influences their investment decisions. You must match investor knowledge about ESG and provide the information they want in ways they understand. Next, create a standardized process within your organization to prepare ESG information. There are third-party groups that have done some of the leg work already. For example, the Sustainability Accounting Standards Board (SASB), has developed industry-based standards to help public corporations disclose ESG information in a format that is digestible for investors. Lastly, communicate that story to investors and other internal or external stakeholders.
Sharing your ESG story and success goes beyond investors. You should keep the public and your employees up to speed as well. Touting your corporate responsibility and sustainability initiatives fosters brand, consumer, and even employee loyalty.
Integrating ESG into operations is the first step on a long road to sustainability and stability. What are you doing to get your business on this path?