How to integrate ESG and transform your business for the better

HOW TO INTEGRATE ESG

and transform your company for the better

Most corporate leaders understand the benefits of sustainability initiatives. They face pressures from stakeholders up and down the supply chain, and from investors and banks that look at ESG efforts. This is how to define your ESG goals and embed them into your business.

BY KEARNEY CONSULTING

There are many barriers to successful execution of sustainability initiatives (to rephrase: 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.

MANAGEMENT FRAMEWORK

To embrace ESG, your organisation can start with a few impactful sustainability initiatives. Doing this is a three-part process: 1. Assess current state and select focus areas 2. Determine strategy and roadmap 3. Track progress and report 1. Assess current state and select focus areas. 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.

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 forest fires could increase risks for certain facilities. However, what is far more valuable to stakeholders is a double materiality report.

Issues with outward impact should be presented in public ESG reports for a wide audience of stakeholders.

Issues with business impact should be reported in annual reports to investors and lenders.

Article courtesy Kearney Consulting 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. 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 process helps you engage senior leaders all the way up to the board of directors. They know how to assess risks, set thresholds, and prioritise goals based on impact.

2. Determine your ESG strategy and roadmap. Now that you have your priorities clear, it’s time to create the strategy. Given the complexity, setting the strategy and creating a roadmap 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 upfront, you gain trust both internally and externally.

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.

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 roadmap including internal and external communications.

3. 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 organisational governance. 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.

TRANSFORM YOUR ORGANISATION

Business growth: Radical business model/ecosystem transformation (customers, regulators, industry bodies, and so on)

Operational innovation: New networks, products, services, suppliers, technologies, and so on

Current state: Existing networks, suppliers, products

Figure 2. To achieve their ESG targets, companies can rethink their business models using the ABCs of ESG transformation.

TRANSFORM YOUR ORGANISATION

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 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 organisation’s culture. You’re changing the way you work. Sustainability is not just a stand-alone project, 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.

Therefore 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 drive new dimensions of growth and profitability (see figure 2).

WATCH VIDEO

ESG EXCHANGE

ESG reporting is about to change and change fast. Large investments are at stake. Capital providers are demanding comparable and assurable sustainability information that will enable them to make effective investment decisions. Reuters has called this “a $35-trillion-dollar conundrum for auditors”.

Now, the standard setters are consolidating and starting to publish comparable international sustainability standards. In the pipeline are global corporate reporting changes. All organisations will need to include both financial and non-financial sustainability data – like it or not. Those that don’t will risk their license to operate and face rising costs of capital from banks and investors.

Knowledge about how to do this is scarce and expensive. So, the Good Governance Academy, a non-profit organisation with global governance authority, businessman and former judge Professor Mervyn King as its founding patron, has stepped in to make the “know-how” globally accessible and remove the guesswork.

Hosted by Professor Mervyn King

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THOUGHT [ECO]NOMY

greeneconomy/report recycle

LEADING THE WAY FOR A BETTER TOMORROW | JSE Sustainability Disclosure

Guidance | JSE Limited [June 2022]

While the JSE is considered to have held existing requirements for ESG disclosure through its links to the King Codes on corporate governance, no detailed guidance to assist listed companies on ESG reporting has previously been issued. This guidance provides JSE-listed issuers with recommendations specifically tailored to the South African context, while being fully cognisant of global best practice.

Disclosure Understanding frameworks materiality14 20 23 Different reporting formats 35 Standardised sustainability disclosures

ESG BEST PRACTICE

• Choose a sustainable business strategy rather than a sustainability strategy. ESG should be fully integrated into corporate strategy – not subordinate to broader business strategies. • Appoint an external advisory board with varied functional expertise. • Embed ESG accountability throughout your organisation. A position of responsibility includes understanding the sustainable business strategy and factor it into decisions. • Integrate sustainability into visible, daily operations across all departments. • Engage employees and incentivise their sustainability contributions.

The idea of transforming your organisation around ESG may seem intimidating. But companies regularly undergo similar transformations to meet other evolving consumer needs.

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THOUGHT [ECO]NOMY

greeneconomy/report recycle SOUTH AFRICAN GREEN FINANCE TAXONOMY | 1st Edition | Department of National

Treasury [March 2022]

A green finance taxonomy is a classification catalogue that defines a minimum set of assets, projects, activities and sectors that are eligible to be defined as “green” in line with international best practice and national priorities. The South African Green Finance Taxonomy can be used by investors, issuers and other financial sector participants to track, monitor and demonstrate the credentials of their green activities in a more confident and efficient way.

The Taxonomy is intended to have a range of benefits. Amongst other things, it will: • Help the financial sector with clarity and certainty in selecting green investments in line with international best practice and South Africa’s national policies and priorities. • Reduce financial sector risks through enhanced management of environmental and social performance. • Reduce the costs associated with labelling and issuing green financial instrument., • Unlock investment opportunities for South Africa in a range of green and climate-friendly assets. • Support regulatory and supervision oversight of the financial sector. • Provide a basis for regulators to align or reference green financial products.

28 Taxonomy-aligned finance 39 Impact reporting 51 Technical screening criteria