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ESG Strategy: How Can Sustainability Be Measured?

Analysis

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Having an ESG strategy is no longer an optional extra for companies. The subject of sustainability has become a strategic priority for firms around the world. It is how they identify ESG risks in their supply chain.

Who sells the most cars or makes the biggest profit? These figures were what drove the automobile industry for decades. For a long time, how high carbon emissions were or what energy was used to power a factory wasn’t important. Today, though, companies like automakers are setting different goals: In a few years, they want to half their carbon emissions. The goal is part of an ESG strategy and is representative of the global shift towards a sustainable economy.

Large companies are increasingly focusing on identifying and reducing ESG risks not just within their own enterprises but also with their business partners. For example, according to the Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (LkSG), companies must check their suppliers concerning ESG risks.

The strategic approach is derived from the fact that these activities must be designed for the long term and, in many cases, also require a transformation of processes in a company. Based on specific figures, companies worldwide must prove how well they fulfill ESG criteria due to increasing regulatory requirements.

“Companies today need an ESG strategy based on valid data. There are different requirements depending on size and industry, and these have to be taken into account when setting up the strategy and weighting the various ESG criteria,” explains Carsten Ettmann, a senior business consultant for risk and compliance at Dun & Bradstreet.

While environmental aspects are weighted particularly heavily in a chemical company, the sustainability concept of a personnel service provider should focus on social components.

Defined Criteria

Measuring and evaluating sustainability, social responsibility, and value-based governance requires defined criteria. These include aspects such as the amount of carbon emitted, the establishment of equal opportunities in the company, or certification in areas like health protection or the circular economy. Such factors are used to measure and evaluate sustainability in the company and compare it against competitors.

“There is currently a lack of standardized criteria and reporting standards. Companies, customers, policymakers, and the financial sector define the term “sustainability” very differently),” says Ettmann. “The European Consultancy Group for Accounting is working right now on a template that is intended to provide help with standardization. Until this template is available, we recommend that companies orient themselves towards standard setters like the Sustainability Accounting Standards Board (SASB),” he explains.

Based on the SASB and other international standard setters, Dun & Bradstreet categorized its ESG data into 13 subject areas: natural resources; greenhouse gas emissions; climate risks; environmental risks; environmental opportunities; human capital; products and services; customer loyalty; social engagement; supplier engagement; certificates; corporate governance; and resilience of the company. These subject areas are further divided into subsections.

“For the categorization, we strongly oriented ourselves to legal requirements like the Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains, and the EU Taxonomy. Companies today are required to obtain information on aspects such as the carbon footprint of their business partners, working conditions, or social engagement. With D&B ESG Intelligence, Dun & Bradstreet provides a solution that makes this data easily available,” says Ettmann.

The ESG ranking from Dun & Bradstreet expresses a company’s risk of being involved in an ESG compliance-relevant situation that could result in financial damage. A scale of one to five is used to measure the risk, with one being the lowest risk and five the highest. If a company has a supplier with an ESG ranking of five, it can be concluded that the risk is very high.

Industry Comparison

Yet this also makes it possible to identify areas where a company has a good ranking. For instance, there is an “E” ranking focusing on the environment, an “S” ranking for social issues, and a “G” ranking that covers governance aspects. In addition, industry comparison data and information on the source data used is available so that the risks can be assessed very accurately.

“In this way, D&B ESG Intelligence supports companies in easily identifying business partners with high ESG performance to make the right business decisions and uncover risks such as damage to reputation, regulations or operations in the supply chain,” Ettmann says.

Sustainability is no longer a niche topic and, as such, is highly relevant for companies. Refusing to address the issue means risking falling behind the competition in a complex and constantly changing market with many challenges.

That’s why every firm needs an ESG strategy. However, the requirements for such a strategy differ significantly and depend on industries, target groups, products, operating models, and the company’s size. What is needed is an individual ESG strategy with specific goals and measures.

Such an approach covers all aspects necessary for the company’s sustainable development over the long term. What is important in a company in terms of ESG? What are the goals? Where are improvements possible? Which positive or negative side effects result from a transformation that centers on ESG criteria? The number of questions goes far beyond these aspects, however, and is very extensive. That’s why a strategy helps to structure all the complex issues and approach them in an orderly way.

Forrester’s in-depth survey of 268 ESG decision-makers about their ESG-related challenges and goals yielded several notable recommendations:

Understand Your Business’s Actual ESG Exposure.

Compliance addresses regulators’ ESG concerns (which are increasing), but a broader perspective is required to capture the ESG expectations of other stakeholders. Materiality mapping and assessing external and internal stakeholders’ ESG expectations helps businesses look beyond compliance to the real ESG risks and opportunities.

Make ESG Excellence Part of Everyone’s Job.

A sustainability or ESG lead working in isolation will not improve a company’s performance. Many boards have pushed ESG-related targets into executives’ performance reviews; ESG leaders have gone one step further and made these KPIs part of everyone’s success criteria across the business. This motivates the desired improvements and pushes the organization to improve how it tracks ESG.

Apply the Same Rigor to ESG Data as to Financial Data.

Regulators, investors, and business partners are scrutinizing ESG data; in many organizations, auditors are getting involved to improve rigor and hygiene. Businesses need to bring a higher degree of focus to ESG data management and reporting through dedicated improvement programs and partnering with IT and operations leaders.

Invest in ESG-related People, Processes, and Technologies.

Achieving the benefits of ESG excellence depends on the right inputs to produce accurate and actionable ESG data. Dedicated managers, bespoke automation, and improved workflows all tee up the business to succeed with its ESG initiatives. Given the business value reflected in respondents’ answers to this survey, there is ample foundation for a business case to support these investments.

This article was first published in the Budapest Business Journal print issue of February 10, 2023.

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