Download Environmental, Social, and Governance Consulting Best Practices

Jim Fitterling, CEO of Dow Inc, astutely observed, "In order to attract investors in today's world, it's not enough to just deliver strong financial performance. You need to set ambitions in Environmental, Social, and Governance (ESG) that are just as high." This underscores the urgency for companies to integrate ESG practices into their core strategy.

ESG considerations stand at the confluence of an organization's impact on society, environment, and the governance mechanisms that direct a company's operations. Where environmental concerns center on the company's footprint on nature—such as energy use and waste management—social factors focus on relationships with employees, suppliers, customers, and the broader community. Governance, on the other hand, is about 'walking the talk', vis-à-vis adherence to ethical standards, managing potential conflicts of interest, and ensuring transparency.

The escalating interest in ESG is driven, in part, by the financial case for ESG integration. There is an increasing body of evidence, including a report by McKinsey, showing that strong ESG practices result in higher corporate financial performance and lower capital costs.

Shifting from Reactive to Proactive ESG Practices

Companies often respond reactively to ESG issues, viewing them primarily as risks to be mitigated. However, the leaders in this space treat ESG as an opportunity for "Strategic Planning", perceiving these issues as levers for value creation and sources of competitive advantage. They draw a clear line of sight from ESG issues to their strategy, and allocate resources accordingly. This proactive approach not only helps insulate them from potential ESG-linked crises but also amplifies their likelihood to outperform their peers in the market.

Incorporating ESG into Strategic Planning

Moving towards strategic ESG management involves the integration of these issues into your existing "Strategy Development" and "Performance Management" processes. Here are some guidelines towards that:

1. Start at the top: Leaders should create a compelling vision and set clear ESG goals. This does not only involve setting targets but also articulating why they matter to the company's stakeholders and success.
2. Embed ESG into decision making: Include ESG criteria in your business case templates and strategic plans. This ensures ESG issues are part of your decision-making processes at all levels.
3. Tie compensation to ESG performance: Including ESG metrics in executive scorecards can strongly incentivize a focus on ESG performance.

ESG integration is a journey. Most companies undergoing this "Change Management" by reacting to ESG incidents or concerns. This reactive stance, however, is no longer enough, with society's rising expectations for businesses that balancing financial performance with social responsibilities.

Embracing the ESG Transition

According to the Boston Consulting Group (BCG), companies that outperform in ESG have a 3% higher "Operational Excellence" margin on average than those that lag behind. This transition needs to be genuine and integral to your business strategies, rather than shallow PR-based 'greenwashing'. Preferably, organizations should see this transition as a chance to enhance their operations and redesign their business models.

Key Takeaways

• Increasing transparency and scrutiny make it imperative for companies to embed ESG considerations in strategic decision-making.
• Companies should shift from a risk-centered view of ESG to one of opportunity and performance improvement.
• Effective integration of ESG into corporate Strategy Development and Performance Management processes can offer considerable benefits.

Leaders at all levels need to recognize and act on the importance of ESG. It is no longer a matter of being on the right side of history—it is now also smart business.