Developing an ESG (environmental, social and governance) focus across the business is a journey that a company can begin at any stage. This roadmap is intended as a guide for early-stage companies that want to be more intentional about integrating ESG considerations into business operations. Particularly in the early stages, companies will want to be thoughtful about the allocation of resources to ESG efforts. Being educated about best practices, frameworks and structures can help companies use their limited resources in ways that will be most impactful for their particular business and goals.
- Identify Meaningful ESG Issues
The first step in any ESG analysis is to determine which ESG matters are most important to your business. The goal here is to develop an understanding of the ESG landscape for the company's industry and sector as well as the specific interests of key stakeholders, both internal and external.
- Peer and Industry Benchmarks – Some ESG issues may be obvious given the company's industry or business model. For example, data privacy and cybersecurity would be important for a technology company that processes personal information and environmental impacts will be important for a company in the renewable energy sector. Look at what similarly situated companies are doing and consider benchmarking against these peers. There are also likely a number of ESG issues that may be important for the company to begin considering in the early stages but may not be obvious. These might include, for example, environmental impacts (such as water consumption and pollution) in the supply chain for an apparel company, or responsibility for products at the end-of-life stage for a solar panel developer. These may not be on your competitors' radars either and being smart about these ESG risks and opportunities can be a differentiator in the marketplace. We recommend leveraging external standards and frameworks to guide your assessment of what ESG topics are most relevant to your business. These standards also offer specific requirements to help companies determine the appropriate metrics to track for a particular topic, which is important as you start to operationalize ESG goals.
- Engage Stakeholders – Other ESG issues may be important given the company's unique stakeholders. For example, the company's leadership may be passionate about diversity, equity and inclusion (DEI) or one of your investors may require all of its portfolio companies to monitor and track greenhouse gas emissions. An important aspect of any ESG assessment is to solicit input from key stakeholders. This should include interviewing internal stakeholders who have direct knowledge of business strategic priorities, operations, products, and services, including your board (or equivalent governing body), management and employees. Consider soliciting input from external stakeholders as well, including investors, customers, users and suppliers or service providers who may have a broader market perspective.
- Create an Action Plan
Once you have a sense of the key ESG topics relevant to the company, the next step is to create an action plan that includes a strategy to address the ESG risks and opportunities identified.
- Set Priorities – Assess which ESG areas the company should prioritize in the short-term, given the company's resources and what it has determined to be most important to its stakeholders. While there will likely be overlap with companies in the same industry, this set of ESG priorities should be specific to your company, informed both by external standards and frameworks and the specific interests of your stakeholders. Some companies use an ESG prioritization assessment (sometimes referred to as a "materiality matrix") to visualize which ESG impacts are most important to the company's business and how that compares to which are most valuable to the company's stakeholders. The process typically begins with ascribing quantitative values to the ESG data you've collected so that you can rank each potential topic according to the level of importance (e.g. how relevant the topic is to the company's business model and how important the issue is to stakeholders). In a traditional "materiality matrix" stakeholder importance is along one axis and business impact is along the other, so you can see which ESG topics have the most impact on the company's business and which are most important to stakeholders.
- Outline Strategy – Once you have outlined the company's ESG priorities, the next step is to develop a strategy that addresses any identified ESG risks or weaknesses, and leverages identified opportunities. This high-level ESG strategy should be developed by the company's management in consultation with the company's governing body and may include long-term goals as well as short-term action items.
- Empower Task Force – A high-level ESG strategy will not be meaningful unless it is properly implemented. It is important to identify the individuals who will be charged with overseeing the company's management of ESG issues. At minimum this should include a representative from the company's governing body and at least one member of the company's management, though it may be helpful to involve a small cross-functional team. This Task Force should be responsible for communicating the company's ESG strategy to the team members who will manage it at the operations-level and overseeing implementation over time. The ESG Task Force should report regularly to the company's governing body on how the company is tracking against its ESG priorities.
- Establish Metrics – The key to any ESG action plan is identifying the specific metrics the company needs to measure to track relevant ESG impacts. Understanding which metrics are appropriate for the company given its size and priorities should be the work of the Task Force, in consultation with the company's governing body and management. For early-stage companies, the most appropriate metrics may be key performance indicators (KPIs) that are specific to the company. However, it is often helpful to align with a third-party standard or framework early on, so the company is prepared to report against the framework as it scales. Regardless, tracking ESG metrics over time is critical to understand how the company is responding to various ESG issues so that it can better engage with its stakeholders and proactively adjust business strategy or operations to drive value.
- Adopt Policies – An important element of any ESG strategy is good governance. The Task Force, in consultation with the company's legal counsel, should oversee adoption of foundational corporate policies and codes of conduct and establish mechanisms to ensure appropriate oversight over time.
- Reflect and Report
ESG is an iterative process. The steps outlined above are designed to help a company get started with an ESG action plan to begin to measure and track impacts that are important to the company's business and key stakeholders. ESG management involves periodic reflection on priorities and communication to your broader stakeholder community.
- Reflect. ESG risks cannot be managed, and opportunities cannot be exploited, without measurement and reflection. Periodically the Task Force should step back and reassess the company's ESG priorities. Many mature companies have an annual ESG cadence that involves industry benchmarking and stakeholder engagement, reflecting on current ESG metrics and reporting out to stakeholders.
- Communicate. Many stakeholders expect some form of disclosure on key ESG matters. Your customers may expect you to produce a "sustainability report" or have a section of the company's website devoted to describing company ESG initiatives. Your investors may include a covenant in your financing agreements or side letter to report on certain key ESG issues. As the company matures, the audience that expects disclosure around ESG matters only increases so there can be significant benefits to developing this process of ESG "discovery, measurement and reflection" early on to proactively identify and get in front of important ESG issues and differentiate your company in the market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
