How to deliver a successful ESG strategy

In the last 20 years, there has been a massive cultural shift in the business world. Elements that have always been considered essential to business success—eg, a strong value proposition, product-to-market fit, and sound financial planning—are still relevant, but are no longer sufficient. Today there is a new necessary component: an appropriate environmental, social and governance (ESG) strategy.

The pressure for companies to live up to ESG comes from all sides: regulators, customers, investors and even their own employees. In its early days, a company can still thrive without thinking too much about ESG, but as it grows and over time, this becomes much less likely.

Companies that do not take ESG into account will find it more difficult to raise investment capital and foster a positive public image, particularly when compared to competitors who can point to a strong ESG track record.

Start with the self-assessment

An effective ESG strategy must start with an honest self-assessment. Since there is no single metric that encompasses all ESG performance, companies need to ensure they focus their resources on what matters most and not try to track as many relevant metrics as possible.

These include areas such as the company’s carbon footprint, its gender pay gap, the diversity of its boardroom, its compliance with national and supranational (eg EU) regulatory frameworks, the strength of its cybersecurity infrastructure. and the labor practices of the companies in its supply. chain.

Once reliable measurements have been taken, the results should be compared to the expected baselines to assess where the business is weakest. Companies should not rush to take drastic measures before completing this assessment. In general, ESG strategies should not be viewed as one-time quick fixes or box-ticking exercises, but as long-term processes that require ongoing refinement, monitoring, and effort.

Taking an accurate and comprehensive measure of a company’s current situation doesn’t fix all of its shortcomings, but it’s a great first step. Starting by identifying gaps allows a company’s ESG efforts to have the greatest possible impact going forward.

How ESG concerns change as companies grow

Some items that might fall under the ESG umbrella are relevant, regardless of the size of the company. All companies, for example, must comply with labor laws wherever they operate. They must provide reasonable written contracts (including a PI clause) to all employees, have equal pay for equal work and pay no less than minimum wage, and have at least a basic health and safety policy.

By the time a company grows to have, say, 50 employees, it should also have a handbook for all new employees, with clear instructions on what behavior is expected of them, procedures to follow if they are experiencing difficulties, etc. in. Health and safety requirements also become more stringent as companies grow.

Once a company has grown even larger, with more than 200 employees, it becomes more important to think about hiring a dedicated ESG professional to ensure it achieves its goals. Having someone whose role is focused on ESG can free up a lot of time for everyone else in the company, as the expert can allow each division to define how best to use the time they spend on ESG and greatly streamline the process of ESG compliance.

Emissions and supply chains

One consideration to keep in mind is that as companies expand, their supply chains and emissions grow exponentially. Since the footprint and practices of all vendors are factored into a company’s ESG metrics, it is very important to carefully select business partners. It’s not enough to ask potential suppliers if they meet certain standards and take their word for it.

It is the responsibility of each company to independently verify that suppliers adhere to ethical and legal principles. In addition to the rules of respect for the environment (such as not causing reckless damage to fragile ecosystems or not polluting), this would include making sure they do not employ child labor or engage in other exploitative practices. Habits that cause small increases in emissions when a business is small become magnified as it grows, leading to emissions skyrocketing over time. This is another reason why, as mentioned, it’s a good idea for companies to get serious about ESG before they “have to”.

For example, a young company with few employees should still set a rule that data is only transferred when absolutely necessary. At first, this may make a marginal absolute difference to the company’s environmental impact, but it will have a noticeable impact if this standard is maintained as the company grows, say, up to 50 times the number of employees. It is much easier to maintain standard work practices than it is to change the culture of a multinational organization.

The future of ESG

ESG is here to stay. Far from being a passing fad, environmental and ethical concerns are becoming an increasing priority as the 21st century progresses.^street the century continues. This is true in a broad sense culturally, in terms of legal regulations and when it comes to investor decisions.

As time passes, there will be increasing cooperation between various groups of investors, decision makers and leading business figures, especially given the pressure from investors and limited partners (LPs). This will allow progress towards common and standardized frameworks for ESG, with clear guidelines on which metrics should be evaluated and the expected baselines for these measurements. Therefore, companies will find it much easier to self-assess and locate their shortfalls.

Measurements will also be more readily available in areas where they are not currently. For example, as things stand today, it is difficult for a company to give an exact figure for its greenhouse gas emissions. In the future, companies will have more precise numbers and accessible measures to calculate whether specific ESG-related actions are having the desired effect, and it will only grow from there.

That’s why it makes sense for startups to create a basic ESG strategy today instead of catching up with their competitors for years to come.

Patrik Backman is a General Partner of OpenOcean.