The vision for businesses to serve a greater good is no longer a fixture of corporate mission statements or a feel-good exercise—it’s a new management discipline that companies need to tackle with the same scrutiny as their financial results.
Chief executives are under pressure from all corners today to deliver on environmental, social, and governance (ESG) objectives. But most companies are at the starting gate. More than half (58%) of executives have little or no confidence in the reliability of their current ESG programs, according to a September 2021 survey by the corporate governance advocacy organization OCEG.
Some have the leadership and organizational will in place, but lack proper data management tools and processes. Others may have the right infrastructure but lack sufficient attention from the C-suite: Only 48% of executives, the survey noted, believe that ESG factors into a company’s financial results.
[Infographic: The business case for ESG]
Recent executive surveys and studies suggest they need to fast-track ESG efforts or risk falling behind competitors in several key areas. Here’s a look at recent findings that show why ESG is now a strategic imperative; where most companies are falling short; how strategic ESG programs can work in practice with the right methodology and digital tools—and the payoffs that await those who can pull it all together.
“We have intense engagement with our customers around operationalizing ESG efforts to increase impact and drive sustainable growth,” says Barbara Kay, senior director of product marketing for security and risk at ServiceNow. “When you embed ESG goals into digital transformation, you can achieve amazing results.”
ESG is now an executive-level priority
Consumers, employees, and shareholders are demanding that companies deliver more on their ESG priorities and goals. The global ESG investment market now exceeds $30 trillion, and investors poured $51 billion into ESG assets in 2020, more than double what they invested in 2019. In turn, companies with strong ESG commitments are showing they can attract and retain quality workers who seek a higher sense of purpose in their work.
Where those groups aren’t applying sufficient pressure, regulators are stepping in with new mechanisms of enforcement: In the past decade, the number of ESG-focused regulations, mostly from government agencies, has soared. (More than 200 new global ESG regulations emerged in 2020, up from 128 in 2019.) Most new regulations, according to investment research firm MSCI, focus on meeting the challenges presented by climate change, making greater commitments to alternate energy sources, and showing more transparency in corporate governance.
Most companies are still getting started
ESG represents a complex set of challenges for most enterprises. Despite internal and external pressures to step up efforts, just 46% of executives say they have a formal ESG program in place, according to the OCEG survey, and even fewer (43%) have established KPIs for ESG objectives. The relative experience of corporate boards is likely one reason for the slow pace of progress. Just 29% of Fortune 100 board directors have relevant ESG credentials, according to a report by NYU Stern Center for Sustainable Business.
The bigger challenge for many organizations is the lack of integrated data-collection methods, reporting, and related processes. In most organizations, activities that define the component parts of ESG are scattered throughout operations and corporate departments. Not surprisingly, then, of U.S. companies surveyed in 2021 by Global GSM Monitor, just 27% explained their methodology for overall ESG reporting, and even fewer (19%) disclosed their formulas or calculation methods on how ESG data was gathered.
The benefits of ESG
Companies that assemble and manage strong ESG programs are likely to see a variety of strategic benefits. According to McKinsey research, successful ESG programs are tied to five core advantages:
- Higher top-line growth
- Reduced costs
- Minimized regulatory and legal interventions
- Higher employee productivity
- Optimized investment and capital expenditures
Well-managed ESG programs are also more likely to pull in more top talent: 71% of employees say they would be willing to take a pay cut to work for a company “that has a mission they believe in and shared values,” according to a LinkedIn survey.
Putting ESG into practice
Since ESG remains a nascent management practice, companies don’t have precise best-practice playbooks to follow. Yet models of ESG management are emerging. Some companies are starting to use enterprisewide digital platforms to integrate all of their E, S, and G activities—from setting targets and metrics to data collection, auditing, and performance tracking.
Doing so, according to ServiceNow (the publisher of Workflow), can help companies advance ESG initiatives through four stages of maturity:
- Ad hoc: ESG-related activities are still siloed across the enterprise, with no formal ESG tools or processes.
- Disclosure-driven: Regulatory requirements and investor disclosure expectations help drive automation of manual data collection and annual ESG reporting.
- Governed: Executives lead formal tracking of ESG initiatives, governance processes, policies, and continuous monitoring and compliance.
- Integrated: ESG activities become embedded into daily work across the enterprise and instrumental in influencing everything from business decisions to executive compensation.
Graduating any ESG program to that level, of course, will take time. But for many companies, the facts suggest they need to speed up their efforts.