Recent research finds European companies are ahead of American peers when it comes to ESG strategy. For example, 80% of Euro companies use ESG strategies to influence supply chains.
Increased focus on environmental, social, and governance standards allows partners, investors, and stakeholders to assess important elements — such as a company’s carbon footprint (environmental) or employee satisfaction (governance).
However, ESG strategy has evolved beyond socially-responsible investing and the latter’s focus on reactive measures. Today, merely avoiding companies with poor reputations is not enough. On the contrary, optimal ESG strategy adopts a proactive approach by aligning company values with financial opportunities to increase profit.
While there’s no uniform method of ESG analysis, the following informs a company about the history of ESG standards and explores ways of implementing strategy. Today’s companies aim beyond mere ESG strategy and compliance to become industry trendsetters.
It’s been difficult for the business and investment world to define what actions, attributes, and processes define ESG standards. However, the Sustainability Accounting Standards Board, Global Reporting Initiative, and Task Force on Climate-related Financial Disclosures all produce annual reports and continue to form standards.
Yet, trends continue to emerge -—from voicing social injustice to investigating how employees are treated in the wake of 2020’s global pandemic. Since there is no exhaustive list of ESG factors to consider or issues to avoid, elements and topics can easily overlap.
For example, air and water pollution, biodiversity, and carbon emissions are normally understood to be environmental factors. And, gender diversification, customer service, and data protection are social concerns. Yet, how a company goes about decreasing carbon emissions or hiring a diverse staff has a lot to do with self-governance.
The Evolution of ESG
In the early 20th century, businesses began embracing standardized ethical standards. Either sanctions were imposed or companies avoided doing business with those using questionable methods, products, or services. For example, companies related to alcohol, gambling, and tobacco were often avoided for moral, religious, and social reasons.
By the 1930s, the Great Depression created repercussions throughout society and the business world. Corporate scandals gained the interest of the public as a company’s self-governance became more of a mainstream concern.
Fast forward to the end of the century, when the environment and the notion of sustainability took center stage. Companies were closely scrutinized over carbon footprints and overall environmental impact. By the early 21st century, modern-day ESG strategy and standards have intertwined with investing and analysis.
The ambiguity of standards and varied methods of measurement allows for uncertainty. What exactly is an ESG strategy? It took the modern world almost 100 years to align a company’s environmental, social, and self-governance with profitability and success.
When it comes to ESG strategy, some companies adopt exclusionary methods. For example, a company may view another’s ESG score before entering a partnership or joint investment. In another situation, a company may provide guidance or make a partnership contingent on another’s ESG compliance. While a separate company can’t make direct ESG choices for another entity, it can choose to invest elsewhere.
A more proactive strategy may involve actively seeking partners that place greater importance on ESG standards. For example, a company seeking partnership with an oil and gas entity may decide upon a company that is the least carbon-intensive of the bunch.
Companies devise methods of ESG analysis and reporting by utilizing in-house tools and dashboards or using third-party providers. A company may have a general idea of what and how to analyze, yet many need more assistance in making ESG strategy a financial asset.
In advanced stages, companies are versed in much more than how to report on ESG. For example, a particular company may use a portion of its internal resources to benefit disadvantaged or low-income communities.
Lastly, proactive ESG strategies impact internal processes as well as those of peers in the industry and beyond. In such a scenario, a company mitigates risk and makes positive reverberations throughout its industry and the business world.
ESG Strategy in the US and Europe
ESG platforms pull in data from a variety of sources to provide companies with the power of real-time intelligence. Companies analyze data and standards that influence the industry, country, and world.
To date, companies in the United States and Europe are dedicated to adhering to ESG strategy and standards but differ in some ways. The Intercontinental Exchange recently released the following data regarding US and European ESG strategies:
- 50% more European companies embrace the United Nations Sustainable Development Goal on Climate Action
- 74% of European companies report on greenhouse emissions as compared to 25% of American companies
- 68% of European companies made intentional notions toward addressing gender equality versus 23% of American companies
- Over 80% of European companies extended ESG strategies to involve supply chains
Overall, it seems European companies are further along regarding ESG analysis and application. This could be due to the segmentation of Europe, which aligns businesses with standards across a range of countries with varying rules and regulations.
Steps of Internal ESG Strategy
Each company benefits from having its own processes and means of communication. It’s why companies have varied mission statements to express culture and their purpose for operation. Take steps to help actualize ESG strategy.
To start, align ESG initiatives with the company’s mission statement. Before personnel can begin applying ESG strategy, proposed actions must align with a company’s culture and reason for existing.
Next, executives must educate staff on company philosophy and how it integrates with ESG initiatives. In addition, larger companies need to educate investors and stakeholders about the company’s approach to ESG standards.
As discussed, companies adopt a range of strategies to complement ESG analysis. But, be sure chosen methods and applications align with the company vision. Moreover, since discussing philosophy is different from actual implementation, it’s important for companies to select the right managers and teams for the job.
Data is only as useful as methods of analysis. Therefore, it’s crucial to invest in ESG services for the purposes of ideation and execution. ESG analysis and application is more than lip service or an extension of public relations —ESG strategy can make a company more profitable and attract more investors and opportunities.