Prioritizing environmental, social, and governance (ESG) factors when determining a business’s impact is a relatively recent phenomenon. Historically, business executives have viewed that ESG agenda as running counter to the interests of their shareholders, but it’s increasingly clear that that is no longer the case. In fact, investors and shareholders are demanding that these factors be prioritized, and business leaders who don’t deliver could be held accountable.
The U.N. Principles for Responsible Investment initiative, which consists of global principles for investing in a socially responsible manner, launched in 2006 with 63 signatories and $6.5 trillion in assets under management (AUM). In 2018, that group had grown to 1,715, with $81.7 trillion in AUM — and it appears to be just the beginning.
Research from FTSE Russell suggests that a majority of global asset holders are currently determining how ESG priorities fit into their own strategies. And the Edelman Trust Barometer indicates that 89% of investors are paying closer attention to ESG when deciding on investment strategies. Yet, according to a recent Dun & Bradstreet report, 43% of procurement professionals confirmed that it is difficult to identify ESG within customer due diligence processes.
Investing in companies following ESG principles can be beneficial to the bottom line. A 2018 report from Bank of America Merrill Lynch found that firms with a good ESG record had better three-year returns, were less likely to go bankrupt, and had better-quality stocks.
Prioritization of ESG isn’t about keeping up with a trend. It’s about a shift in thinking that will make the world a better place in which to live and do business. To ensure your company doesn’t fall behind the curve, consider these three steps to ensure ESG is part of your corporate strategy:
- Know who you’re doing business with.
Companies are doing business with third parties across the globe, making it more difficult to determine the true origin of materials. According to research from Dun & Bradstreet, 51% of survey respondents reported the need for more data to identify and verify entities as it relates to ESG.
With every additional link in a supplier base, it becomes harder to manage ESG. There aren’t always options for highly specific parts or products, but when you do have a choice, choose a trusted vendor close to your own operation. As consumers continue to prioritize ESG, certain practices will become industry standard. For now, know where your raw materials are coming from and who’s making them, and you’ll be on the right track with ESG.
- Track your third-party relationships.
Historically, there hasn’t been a clear blueprint for corporations to measure their ESG. When Walmart implemented Project Gigaton and set out to reduce a gigaton of greenhouse gas emissions from 2015 to 2030, it was clear that the supply chain was an important part of the equation. More than 90% of the retailer’s carbon footprint comes from its extensive supply chain, so it offered suppliers six different ways to participate and reduce emissions.
Project Gigaton was the first initiative of its kind to reduce emissions by including suppliers. Since then, other major brands such as Target, CVS Health, and the U.K.’s Tesco have begun looking at how to reduce emissions. If your company is like most, the supply chain will be one of the areas with the most room for improvement. Start by coming up with benchmarks for improvement that suppliers can strive toward, and follow with clear metrics that weigh the total impact of various efforts.
- Automate third-party risk management systems.
As risk management becomes a bigger priority, consider moving away from cumbersome manual processes. Dun & Bradstreet research found that ongoing supplier-vendor monitoring and customer-vendor due diligence were among procurement and compliance professionals’ top concerns. But numerous companies have had trouble implementing automation in their third-party risk programs to combat these issues.
Companies are struggling to gain valuable insights because their data is housed in disparate systems across the organization. Use automated solutions that manage data and workflow to monitor and report problems. You’ll save time and money, which can ultimately lead to more profitable growth.
As consumers and corporations continue to prioritize ESG, new industry standards will emerge to make ESG-conscious practices easier to adopt and measure. Follow the above three steps to break ground in an important undertaking. Consumers are demanding ESG for a reason, and the most respected companies will comply.
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