Common pitfalls in ESG and how to avoid them
Environmental and social governance is here to stay. Companies that take into account their effect on the environment and society are practicing good business, and a company perceived as doing good can make the brand more appealing to consumers and the workplace more enticing for potential employees.
ESG strategies and programs can increase market value due to growing demand from investors. Green finance is already a powerhouse, but ESG investing trends are expecting to increase by more than 50% in the coming years.
But ESG can be complicated, and good intentions don’t always yield results. With increasing reporting standards and understanding throughout the market, savvy investors can spot if ESG is poorly implemented – turning it from opportunity to threat.
Here are some of the most common pitfalls of environmental and social governance to watch out for:
1. Improperly tracking ESG program metrics or not tracking the right metrics
As a concept, ESG can be vague and ambiguous. That sometimes translates to implementation without clear benchmarks or methods for measuring progress. But a business' internal processes and systems are best managed and monitored through strict controls, procedures, and practices.
- Communication without quantifiable goals: The number of companies publishing ESG reports is rapidly increasing. Oftentimes, however, companies that are just starting out have trouble quantifying their goals, making it hard to reach them. If nothing is measured there is a risk of not moving beyond words into action. A rule of thumb is to follow the “SMART-model”; making goals Specific, Measurable, Realistic and Timely.
- Not tracking the right metrics: “What gets measured gets managed”. An essential part of ESG success is to track the right metrics. To make the biggest impact companies are advised to make a materiality assessment to see where to focus their efforts. The most noticeable metrics are usually related to the environmental criteria, including energy consumption and waste disposal, and standardized metrics that can be used for measuring social responsibility includes, like human rights within a supply chain’s labor, code of conducts, whistle blowing policy, diversity etc. See what supplier information to include in your sustainability report for further tips.
- Not using use standardized metrics and methodology for data collection and analysis. To date ESG has been ambiguous and measures varies. Luckily trends are moving towards standardisations as seen in new EU regulations on EU Taxonomy and moves towards harmonisation of reporting frameworks like GRI and SASB. By aligning with standard frameworks companies can avoid creating double work in their reporting efforts and when communicating with stakeholders. Such ESG partnerships often implement a reliable tracking system that uses the necessary standardized frameworks. These tools automate data collection, streamline efforts, and make analysis easier, so the insights can be actionable and productive.
2. Failing to make ESG part of the company culture
Like any other direction in governance, ESG has to be a part of a company’s overall culture to be truly effective. It’s sometimes assumed to be included as part of the general values of corporate responsibility. But because ESG measures cover so many different issues, between eco-friendly solutions and new social trends, it can be easy to brush off or assume that it’s already included as part of the general values of corporate responsibility. If ESG efforts are not overly expressed as part of the company’s values and with clear goals that can be measured, they can cause disruptions and loss of productivity.
- Not clearly expressing company’s values and goals: If this is not clearly communicated and integrated it can create conflict in workflows, with elements of management not being on the same page, causing disruptions and leading to loss of productivity. But they also squander the benefits of ESG for shareholder value, which require wide communication about ESG.This can be avoided by building key performance indicators (KPIs) aligned with key ESG reporting standards into work plans, and making an effort to communicate and get buy-in for ESG across the company – from the board members to employees. Policies like Code of Conducts and Whistle blowing policies also set clear expectations about what actions to take if things would appear outside of the company's expectation. Not only does this create a clear working environment for employees it also helps companies avoid costly payouts by setting expectations and minimizing breaches from start.
3. Not addressing processes or broader systems
Implementing ESG will inevitably mean changing aspects of operations. In many cases, older processes will be replaced or reworked to meet new standards. But it should all be done with the overall purpose of ESG in mind: limiting a company's harmful effects on the environment and society. Focusing too much on specific solutions can result in quickly achieving KPIs that are contradictory to the overall objective in the long run.
- Starting with a scope too large: Companies should adapt their priorities based on their organizational capabilities. Rather than starting off with bigger challenges that may take years to change, policies might best be implemented over a period of time to build and show progress towards larger goals.
- Not utilising sustainability tools: A reliable tracking system that uses the necessary standardized frameworks can get companies on the right track from start. These tools automate data collection and make analysis easier, so the insights can be actionable and productive and save valuable time to focus on the analysis rather than admin work on getting the data.
- Not considering flexibility for future requirements: New regulations will come into play and frameworks evolve just as the companies will. It’s important to select a system that can easily adapt to new changes without having to redo all previous work.
- Too high focus on the measure rather than the process and outcome: If the KPIs are not regularly reviewed in context of overall process and desired outcome, there is a risk of gamification, whereby a company takes action that achieves the KPI, but in the long run is contradictory to the overall objective. An article by Harvard Business Review outlines an example from the 1970’s where the US Government required that car companies produce passenger-car fleets with a higher average fuel economy. As the rules were different for SUVs, the production moved and the overall emissions went up.
Having ESG-savvy leaders and developing actionable insights based on ESG data can help avoid such missteps. But companies should also adapt their priorities based on their organizational capabilities. Rather than starting off with bigger challenges that may take years to change, policies might best be implemented over a period of time to build and show progress towards larger goals. It's also important to implement ESG in a way that can adapt to new changes and regularly review KPIs in the context of overall processes and desired outcomes.
Avoiding common mistakes when Implementing ESG in the organization
Leaders implementing ESG should engage beyond organizational boundaries and tap into diverse perspectives to learn from and collaborate with. But they also need to learn from the people on the front lines of their organization to better understand how ESG responses can affect business at the most basic level. And they need to keep learning, from both outside and inside their organization, as their efforts progress.
In the end, a strong position of environmental and social governance can create incredible value. It can help stay ahead of potential government regulations, but it also often makes brands more appealing to consumers and shares more enticing to investors. Companies that have properly implemented ESG have seen improved financial fortitude, public opinion, and even employee morale. But the benefits of ESG can only be experienced if it’s smartly implemented to avoid its common pitfalls.
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