How to integrate ESG and transform your company for the better

In the second in a series of articles we look at how to define and measure your ESG goals, embedding them into your organizational decision-making.
The sustainability space is full of talk. But to achieve your environmental, social, and governance (ESG) ambitions, you need to focus on execution. That was our key takeaway from the Kearney 2021 State of Sustainability Assessment, described in part 1 of this series.

Most corporate leaders understand the benefits of sustainability initiatives. CEOs and boards want to attract and build loyalty with a broader consumer base, including younger consumers. They want increased success at recruiting and retaining talent. They face pressures from stakeholders up and down the supply chain to prioritize ESG and share plans to address sustainability issues. They also face pressures from investors who demand investments in sustainability solutions and banks that look at ESG efforts when setting conditions for financing.

But clients often tell us about the many barriers to successful execution of sustainability initiatives (in other words, making actual progress). There may not be enough coordination and transparency across the enterprise. Key performance indicators (KPIs) may not be clearly tracked—and their relevance may not even be clear. The business may resist change, with a particular fear of increasing costs. How do you avoid such stumbling blocks to achieve your benefits?

The answer is to embed sustainability in every aspect of the business, from strategy and operating models to day-to-day operations and financial decisions, and everything in between.

ESG metrics in a management framework
To embrace ESG, your organization can start by moving the needle with a few impactful sustainability initiatives. Doing this is a three-part process:

Assess current state and select focus areas
Determine strategy and road map
Track progress and report

  1. Assess current state and select focus areas: what topics should your business focus on?

Sustainability is a broad topic full of interrelated ESG impacts. Your first step is to figure out what you are currently doing as a company. Given the complexity of ESG issues, assessing your current state can be a lengthy process. ESG is inherently cross-functional, requiring input from operations, product development, IT, finance, procurement, sales, and other functions. Many times, functions don’t even realize that the activities they are investing in have an ESG angle. For example, consider new product development: at Kearney’s Product Excellence and Renewal Lab (PERLab), we have encountered many instances where designing for value simultaneously reduced a product’s environmental footprint, even when that wasn’t the original intention of the project.

Once you have assessed your current state, understanding where to focus can feel overwhelming. But the double materiality assessment evaluates the impact of ESG issues from both financial and ESG perspectives. It also identifies two-way risks associated with each issue. Double materiality is part of the proposed European Commission Corporate Sustainability Reporting Directive (see figure 1).

As the figure shows, most companies report to investors and lenders on the materiality of how ESG can affect future value. For example, an increase in hurricanes or forest fires could increase risks for certain facilities. However, what is far more valuable to stakeholders is a double materiality report. Double materiality examines the outward impacts of a company’s activities. It helps highlight issues where your investments could best improve society and the environment. When you map internal and external impacts on a matrix, you can see your ESG priorities.

For example, electric vehicles are good for the environment. But investments in electric vehicles by a company that requires substantial transportation are much more impactful than investments by one that does not—say, a real estate company.

A real estate company might instead focus on housing access or supporting local economies—because it can make bigger impacts on those issues from both the perspective of company value and brand, and society and the environment. In short: your ESG agenda should connect closely to your core business.

It’s not easy to quantify the impact of each issue. But this straightforward process helps you engage senior leaders all the way up to the board of directors. They know how to assess risks, set thresholds, and prioritize goals based on impact.

  1. Determine your ESG strategy and road map: chart your organization’s path forward

Now that you have your priorities clear, it’s time to create the strategy. Given the complexity, setting the strategy and creating a road map for how to get there can be a challenging process.

Here’s where you set targets. Like so much about sustainability, target setting can be both complicated and politically charged. Your company’s targets need to be aggressive, to stand out from the industry. But if you can’t achieve them, you will lose credibility in the long term. By doing this process up front, you gain trust, both internally and externally.

This means the accountability cannot sit only within a sustainability department. In true “what gets measured gets done” fashion, all functions need to be measured on ESG-related performance to ensure they feed into the overall targets. Procurement needs to secure the sourcing of renewable energy, certified materials, and supplier diversity, where other functions work on energy reduction, waste management, and so on. Every function has its role to play, and this must be reflected in KPIs and target setting. Once you have your targets, you choose your KPIs. You want to be sure to choose measures that are meaningful and appropriate (to help, there’s an alphabet soup of industry standards such as GRI, SASB, and SBTi).

Furthermore, you need to embed ESG metrics into your daily ways of working. In other words, to make a true impact, your ESG priorities will need to show up in your financial statements, appropriation requests, requests for proposals/quotes, HR policies, monthly business reviews, and other work products. With targets, KPIs, and other metrics in place, you can develop a comprehensive implementation strategy and road map including internal and external communications.

  1. Track progress and report

To track and report on your ESG targets, both internally and externally, you should invest in robust structures—think everything from software tools to new organizational governance.

One reason to do so is that under proposed rules announced in March 2022, the Securities and Exchange Commission (SEC) will require reporting on greenhouse gas emissions and other climate-related risks on your form 10-K. But more importantly, these SEC requirements are responses to the demands of investors and the standards of other developed nations. You need to get ahead of the market and take advantage of the value of integrating ESG into your business offerings.

You will likely not be perfect from the get-go. Your company will learn (and may even fail!). You will have to readjust your strategy, targets, and KPIs as you go. No single company has cracked the ESG code just yet; each company’s ESG journey is going through multiple stages of development. We are all learning together and evolving as we learn (See sidebar: One manufacturer’s ESG initiatives).

An ESG framework can transform your organization
Success in ESG transcends a project mindset of setting, measuring, and meeting targets. The ESG journey eventually radically changes a company’s business model—and also changes the business models of its customers, suppliers, and other stakeholders. The mindset of integrating ESG will make any company’s transformation more powerful and lucrative.

To achieve your sustainability goals, you will need to engrain a new mentality across your organization’s culture. You’re changing the way you work. Sustainability is not just a stand-alone project or initiative, it requires much more collaboration—across the enterprise, with suppliers, with completely new stakeholders you’ve never engaged with before, and perhaps even with competitors. Such collaborations have benefits beyond saving the planet. But to get there, you’ll need changes in your operating model and governance structure. Eventually, sustainability will need to be embedded into all decisions and day-to-day operations. It needs to come as naturally to the business as cost reduction or quality.

This is why we refer to ESG as a transformational journey. You may start with a simple tweak of a single function, such as substituting a less carbon-intensive input for a specific product. But your ambitions can and should be greater. As your ESG transformation moves from a single function to the enterprise, you can have bigger impacts on society and the environment—and also drive new dimensions of growth and profitability (see figure 2).

Some of the best practices for embedding sustainability into organizational decisions include:

Choose a sustainable business strategy rather than a sustainability strategy. ESG should be fully integrated into corporate strategy—not subordinate to other, broader business strategies.
To identify new opportunities for the organization, and ensure compliance with best-in-class practices, appoint an external advisory board with varied functional expertise.
Embed ESG accountability throughout your organization: with the CFO, CPO, CSO, recruiting manager, quality manager, and so on. A position of responsibility includes the responsibility to understand the sustainable business strategy and factor it into decisions.
To promote the importance of sustainability throughout the organization, you can integrate sustainability into visible, daily operations across all departments.
Sustainability is a companywide journey. Thus, you want to engage employees and incentivize their sustainability contributions.
The idea of transforming your organization around ESG may seem intimidating. But companies regularly undergo similar transformations to meet other evolving consumer needs. The next article in this series will take a closer look at how your organization can find the best people to bring that transformation to life.


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