Understanding ESG

Understanding and Finding Opportunity in ESG

March 28, 2023

Keeping up with the conversation around ESG, particularly for those who do not feel impacted by it day-to-day, can be challenging. From understanding the various ways ESG is being used to knowing what “side” you’re on, the current conversation in traditional and social media is conflicting and rapidly evolving.

It can also feel overwhelming as the discourse in the U.S. has become politicized. There are two seemingly opposite sides–one camp appearing to proclaim ESG is necessary to measure a company’s positive impact on the world and “virtue,” and the other arguing that it’s burdensome for businesses and imposes progressive values on corporations.

The term ESG–which stands for environmental, social, and governance–is also used in several ways, from describing how a company is impacting society to guiding an investment strategy.

We might all benefit from taking a minute to step back and appreciate what ESG is (and isn’t) and how companies might meet this moment to prepare for inescapable future challenges and spur lasting innovation.

Broadly, there are five phases of a company’s ESG journey:

  • Awareness
  • Understanding
  • Compliance
  • Strategy
  • Innovation

Whether you’re just starting to think about ESG or working on the latest iteration of your disclosures, consider where your company falls along this journey and what it might take to get to the next step.

Building from baseline awareness to actionable understanding

ESG can be most usefully understood as a framework for analyzing non-financial business risk and opportunity.

Companies have a vested interest in environmental, social (workforce), and corporate governance issues. ESG is a management tool that provides a framework to develop and input these issues into business strategy. It is fundamentally about good risk management and reflects the changing nature of risks and opportunities that companies face. Business impacts of issues like climate change, cybersecurity, and human capital, and the need to address them, are just the realities of the world we live in.

On a practical level, companies need to have resilient business strategies and avoid disruptions, regardless of how that information is framed. With the volatility and backlash around the current ESG conversation, many companies are simply changing how they talk about it or shying away from broadcasting their efforts. However, many companies (whether they acknowledge it or not) report data that would fall under ESG and actively consider those items as a business risk.

Moving from compliance to developing a management strategy

Companies are facing increased pressure from various stakeholders (employees, investors, customers, and supply chain partners, for example) to comply with ESG in some form–and there are several existing frameworks available that aim to standardize the data collected and how it is presented.

It’s also looking increasingly likely there will be some form of mandatory disclosures in the next year from the SEC, with regulations already underway in other regions globally. However, ticking the box on reporting does not inherently lead to better strategic thinking or drive operational changes. Reporting and meeting the baseline of disclosure is just half the battle. Companies that tie this information to business priorities and their forward-looking strategy will be better equipped to succeed in the future.

Put simply, there’s how you measure and report a data point, and here’s how you act on it.

This summer, the news was dominated with stories on “quiet quitting” and how employers could potentially keep younger workers engaged–signaling that retention and recruitment was an issue many companies faced–something that falls into the “S” component of ESG and that was clearly critical to a company’s ability to continue operating successfully.

To move beyond reporting, creating a strategy requires connecting the tenets of ESG to business priorities. Many companies might find themselves at this step, with varying levels of disclosure and strategy tied to that information. Progressing to an overarching business strategy can take additional investment, internal alignment, and expertise.

Using ESG as an inflection point to fuel innovation

ESG–and the investments companies are making to measure and manage it–can be an opportunity to leverage resources for creativity, move beyond just risk mitigation and open the door to new thinking, which ultimately drives new business approaches or offerings that increase profits.  

If a company has moved through the compliance and strategy phases, then it has a framework outlining where improvements can be made and what challenges may be on the horizon.

When thinking about how to prepare for and address these challenges, the most straightforward approach is likely incremental improvement–taking existing processes and considering how they can be improved. Going a step further, is there a way to break the mold and develop a new approach?

Take construction for example. The industry faces several ESG-related challenges such as significant emissions produced from transporting materials, large amounts of waste generated from surplus materials, and labor shortages. Still in its early days, using 3D printing technology with a standardized material like concrete cuts transportation emissions, avoids accumulating construction waste, and requires far smaller crews.

If you’re trying to get ahead of the pack while navigating the ESG landscape, find more than the areas of improvement–find the things that you can reimagine and rebuild.

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