- The decision by a company to implement an environmental, social and governance (ESG) program marks the beginning of a journey.
- The process of ESG integration is not something that occurs overnight. It is a deliberate, gradual process.
The decision by a company to implement an environmental, social and governance (ESG) program marks the beginning of a journey, one that may well start with a single manager or board member and their own vision of how the company’s future could unfold.
As with any important corporate undertaking, integration of ESG risks into strategy and subsequent reporting begins with high-level buy-in and requires planning, resources, external advice where appropriate, an action plan, and a strategy to communicate the wider economic, social, and environmental impacts the company has while in pursuit of shareholder value.
The process of ESG integration is not something that occurs overnight. It is a deliberate, gradual process.
This article, therefore, highlights four strategic steps that would give any company a starting point for its ESG integration and reporting journey:
1. Set the tone at the top
The tone at the top sets forth a company’s guiding principles, values and ethical climate.
While ESG considerations should ultimately make their way through an entire organization, the initiative must come from the top, accompanied by clear communications, lines of accountability, and the necessary resources.
A top-down approach greatly facilitates the ESG integration process in a company. The board and senior management should, therefore, first, understand the values and relevance of ESG to the business.
To do this, the board and senior managers, need to build their knowledge and capabilities, especially in understanding the link between ESG and risk and understanding their company’s impacts on society and the planet.
Business leaders may benefit from input from internal and external experts to help inform strategic decisions with sustainability implications.
An effective ESG agenda doesn’t just happen on its own, nor should it be delegated to a single person. Having top-level buy-in and support is fundamental to nurturing a supportive culture for driving the ESG agenda or initiating ESG-related discussions across a company.
2. Understand your own ESG situation
This step should begin with the sustainability manager collecting data on their company’s practices, impacts and track record in environmental, social and governance issues.
Some of this information may already exist, depending on the company’s regulatory or shareholder requirements. Additionally, this information may be obtained through feedback from suppliers, employees, investors and other relevant internal and external stakeholders.
A critical analysis of this information would then provide a good idea of areas the company already has ESG information, what is missing and which stakeholders can be consulted to fill the gaps.
A company may also look at the ESG performance of companies within the same sector and begin to assess how they compare.
Once a company understands its current ESG performance, it should have the information needed to know what to do next.
3. Commit to a strategy and communicate
Armed with a clear understanding of its own ESG situation, a company is then able to set credible goals. This includes committing to do its part, setting realistic short and long-term targets, and committing the resources to get there.
In the early stages, it is possible to feel conflicted on the commitments and communication to be made to diverse stakeholders. There is also the pressure to act.
Stakeholder analysis, prioritization and engagement, therefore, becomes a critical step in the ESG integration and reporting process to ensure that the needs of diverse sets of stakeholders are met.
To be effective, the ESG team should prioritize stakeholders according to their level of influence and expectations from the company.
A company may also consider developing a corporate position statement to let others know that it understands the strategic importance of identified ESG issues and is committed to addressing them.
Through developing position statements, boards and executive teams deepen their understanding of identified material ESG issues; clarify the link to the company’s overall strategy; clarify their position for other key stakeholders; and provide the direction and confidence for management and employees to act.
What gets measured, gets managed. ESG integration and reporting is a journey and companies that set ESG metrics and implement a system of collecting, analyzing, and reporting ESG performance see improvements in their ESG performance over time.
Performance disclosure on ESG performance demonstrates transparency to stakeholders and a commitment to responsible investment by the board and senior management of a company.
Without transparency, there is no trust – and without trust, markets do not function efficiently, and institutions lose their legitimacy.
It is therefore important that the process of collecting, analyzing, and reporting ESG performance data to stakeholders is well documented and aligned with the information needs of stakeholders, in order to provide decision-useful data capable of directing capital towards sustainable business practices.
The above strategic steps, read together with the Nairobi Securities Exchange ESG Guidance Manual, that provides elaborate guidance to companies on how to report on a variety of typical material ESG topics in various sectors, should give any company the required confidence to get started on its ESG journey.
Loise Wangui, Chief Officer Regulatory Affairs – Nairobi Securities Exchange