What are the main challenges when implementing a new ESG strategy?
In the corporate world, the field of ESG (Environmental, Social and Governance) is of ever-growing importance. In addition to increasing pressure from investors and consumers, companies must comply with more regulations and directives, making ESG compliance a legal imperative. Fortunately, most forward-looking companies now understand that today, a firm commitment to good ESG practice is a must.
Indeed, a company that takes good care of its local and extended environment, is attentive to social concerns, and practices good corporate governance is well on its way to sustainable business growth. We also know, however, that these fields present major challenges. In this article, we examine some of the most common headaches for ESG teams, discuss potential solutions, and examine why a greater focus on ESG is the right way forward.
Of course, for any leadership group working on formulating an ESG strategy, one of the first priorities is to assess challenges related to its main business activities. Only once these have been resolved will it be possible to effectively implement ESG best practices across the board.
A shift in culture: A genuine commitment to ESG necessitates a distinct culture change, as the company looks to place greater value on aspects that are not directly related to profit-making. Clear communication and strong advocates are needed to explain the importance of ESG to the long-term viability of the organization.
Transparency and accountability: Empty words about caring for the environment or society are no longer sufficient. Instead, consumers, investors and other stakeholders expect transparent processes and accurate, objective data demonstrating genuine progress and accountability.
Forming sustainable partnerships, lowering Scope 3 emissions: Companies who are genuinely committed to greater sustainability have to look not only at their own activities, but that of their partners. In this area, targets should include lowering Scope 3 emissions, i.e., indirect emissions in a company’s value chain.
Suppose a manufacturer has a carbon-free production plant, but the supplier that produces most of their raw materials is pumping thousands of tons of CO2 into the atmosphere. In that case, they will still be open to criticism. This is why it is necessary to make a detailed assessment of the entire value chain and to always bear ESG concerns in mind when selecting new partners.
Tracking stakeholder sentiment and organizational reputation: Another difficulty is measuring and gauging stakeholder sentiment and the company’s reputation as a whole. The ESG team is typically responsible for eliciting stakeholder feedback from a wide variety of sources, comparing against benchmarks and targets, and adapting stakeholder engagement policy.
Ensuring greater diversity and inclusion: This is a challenge for HR, in particular. Summarized in the US as Diversity, Equity, Inclusion and Access (DEIA), this aspect of ESG places a strong emphasis on hiring a diverse range of people from various backgrounds and creating a workplace where everyone feels welcome and comfortable at all times. It is also an excellent opportunity for growth: countless studies have shown diversity to be a key factor in successful teams, and that an inclusive and diverse workplace is highly attractive to employees.
There are also a number of technical challenges that need to be overcome, particularly in relation to ESG reporting requirements. Effective software solutions in this area can help implement an ESG structure to increase efficiency through accurate monitoring, tracking and standardized reporting.
Finding the right framework: A good ESG framework will provide guidelines, standards and principles that help teams build a clear ESG strategy and provide a roadmap towards true corporate sustainability. When choosing which framework to implement, the best solution may be to speak to an ESG consultant who can assess your company’s specific needs and profile before making a recommendation.
Measuring and tracking performance: Measuring and tracking ESG performance is essential to meet ESG reporting requirements and helps the company monitor its own progress. Here, the right software and clear procedures for team members to follow are vital to ensure a consistent supply of data.
Data management and governance: Once collected, the data must be properly managed, with standard policies in place for effectively tracking, improving and communicating ESG performance. Companies require sophisticated software that supports ESG-related data collection, integration, analysis and reporting.
Visualizing and controlling risk mitigation: Risk mitigation is also a major possible source of headaches – after all, incorrect or misleading statements about a company’s ESG performance can increase the risk of litigation and damage to its reputation. To combat this, it is also essential to have an effective auditing structure in place.
As we mentioned above, compliance with regulations is a significant part of any ESG strategy. Every year, new regulations and directives are introduced, while others are frequently updated. Naturally, this requires greater vigilance from ESG teams and companies as a whole. Here are some of the main directives and regulations from the EU to be aware of:
Corporate Sustainability Reporting Directive (CSRD): This directive encourages detailed ESG. It has already been approved by the EU, and reporting obligations begin in 2024.
Corporate Sustainability Due Diligence Directive (CSDDD): This is a pending directive. If adopted, the CSDDD will require companies to establish due diligence procedures to address the adverse impacts of their actions, including in relation to global value chains.
Sustainable Finance Disclosure Regulation (SFDR): It is an EU regulation on sustainability‐related disclosures in the financial services sector. The SFDR aims to make the sustainability profile of funds more comparable and easier to understand for investors.
Trying to meet all of these directives can be a truly daunting prospect. While expert consultants can provide some clear guidance, ultimately, it is about putting clear internal procedures in place and providing guidelines for all team members. Implementing tailor-made monitoring and tracking technology will also help ensure compliance.
There is no question that when it comes to ESG, going from zero to one is the hardest step. Creating both an effective ESG strategy and the infrastructure needed to support it is a momentous task. To succeed, the company’s leaders must work hard to establish buy-in at every level of the organization, provide staff with clear guidance, implement workable solutions, and build the right technological structure.
The path is hard, but the rewards of overcoming the initial headaches are clear for all to see. A company that can overcome these challenges and creates a thriving culture of good ESG practice will be able to present a more positive face to stakeholders, enjoy long-term growth, and also look forward to a more sustainable future.
Denxpert specializes in innovative and customized ESG and EHS software solutions used by more than 500 of the world’s leading organizations. If you are interested in ESG-aligned business growth through better data, easier reporting, and expert help, we’d be delighted to hear from you.