If you want to successfully become more sustainable as a company, you need a solid plan: a strategy in the field of Environmental, Social and Governance issues (ESG). An ESG strategy is an integral part of the business strategy and not only sets a target on the horizon, but also specifies which themes are relevant. And in addition: it indicates exactly how the positive impact of the company on these themes is increased and the negative impact reduced. A good ESG strategy balances commercial and ESG interests, creating real long-term value for both the company and the context in which it operates. But how do you develop such a strategy?
This article is a summary of the guidance that Empact has developed for Sdu. For guidance and additional tools, visit: https://www.sdu.nl/shop/jes-knowledge.html
The six steps in forming an ESG strategy
There are no legal requirements that an ESG strategy must meet, only within the CSRD reporting. In practice you see a wide variety of strategy forms and elaborations, and the most commonly used models also change over time. However, you can see that when developing any good ESG strategy, a number of fixed steps are followed, as summarized in Figure 1. In the remainder of this article, we discuss what exactly it entails for each step, why it is important and how you can do this.
Figure 1. The six most common components of an ESG strategy
1. Consolidation phase
In this first phase, the right course must be determined for the ESG strategy to be developed. This creates a summary and consolidated overview of the sources below, so that a good picture of the company and the environment in which it operates is created:
- Stakeholder views. Involving both internal and external stakeholders provides insights into the different perspectives regarding the current and future functioning of the company.
- Contextual analysis. In establishing the materiality analysis, an in-depth contextual analysis is carried out that provides a thorough understanding of the company, its business model, the value chain and business activities. In addition, practical aspects are examined, such as the role of the ESG manager, governance, the remuneration policy for the management(s) and current communication about the strategy.
- Material themes. The output of the double materiality test describes where in its business model, its own activities and its supply and sales chain the material impact, risks and opportunities are concentrated. These send a clear signal: a company will have to work on these themes to minimize their negative impact. In addition, it has been mapped out which reporting obligations must be met in the context of the CSRD.
- Gap analysis. This analysis provides insight into what the company has not yet included in its policy with regard to governance, strategy, impact, risks, opportunities, goals, KPIs and reporting of results.
A consolidation of the above input provides a clear and reliable overview of the current playing field. This helps to make a clear distinction between external and internal factors. This can be done using various methods:
- McKinsey’s 7S model to consolidate information within the internal enterprise.
- The DESTEP method to categorize external factors (demographic, economic, socio-cultural, technological, ecological and political-legal). This can possibly be supplemented with external developments in the areas of competition, internationalization and ethics.
- A SWOT analysis to provide a clear overview of internal strengths and weaknesses and external opportunities and threats. The conclusions from this analysis often correspond with the materiality and GAP analysis, which reveals opportunities, risks and impact.
2. Ambition determination
A second integral part of drawing up the ESG strategy is determining ambition, translated into the vision and mission of a company. These core elements must be understandable and tangible to everyone in the company. To clarify this, it can help to answer the following questions specifically.
- Mission (or ‘purpose’). What is our role in the world? Why do we exist as a company? What do we want to change in the world? What kind of impact do we want to make? Why are we committed to ESG?
- Vision. How do we envision the world of tomorrow? What ESG developments do we see? When do we want to achieve our purpose? How are we going to achieve our mission and vision?
An example from AirFranceKLM: ‘At the forefront of a more responsible European aviation, we unite people for the world of tomorrow.’ This reflects a certain realism that is directly related to ESG and at the same time gives a higher purpose to corporate activities by naming ‘unite people’.
3. Define and concretize value creation
The vision and mission provide direction for the company’s further strategy development, in which long-term value creation is central. To concretize the creation of value, a value creation model is used. A value creation model puts the input, the operation of a company, the output delivered and the impact of this output into perspective.
There are different value creation models that can be used. An example of such a model is the interactive model of chemical company BASF. In addition to financial value, this model also includes environmental and social value. A value creation model can therefore be used to provide insights into a company’s revenue model, the respective value chain, relationships and current costs and income structure. Companies that are successful in formulating and concretizing their value creation are able to fulfill their mission and vision in a sustainable and ethical manner, resulting in long-term success for the company itself, society and the planet.
4. Setting strategic goals
Parts 1, 2 and 3 highlight a company’s strategic priorities. Based on this, a direction must then be determined in the areas of E, S and G. You do this by translating these strategic priorities into strategic goals. Goals can be specific, for example, about reducing emissions (E) or treating employees equally (S). Some tips for setting goals:
- Focus on the ESG themes that are most important to the company, sector and stakeholders.
- Ensure ESG goals are integrated into the overall business strategy, rather than operating in isolation.
- Be prepared to adjust goals as circumstances change and revise them periodically.
It is important to keep the strategic goals at an abstract level. This means the strategy remains visionary and ambitious. In a next step, strategic goals can be linked to strategic planning and further operationalization.
- Strategic goal: zero fatalities across our entire value chain by 2030.
- Strategic goal: our business operations will be climate neutral by 2030.
- Strategic goal: From 2025 we will be an attractive employer for both men and women.
5. Strategic planning
The strategy can be developed in different ways. In any case, it is important that an ESG strategy is made concrete internally with KPIs. It must be made clear what the dot on the horizon is and objectives must be formulated specific, measurable, acceptable, realistic and time-bound (SMART). By providing a time-bound indication, it is also possible to plot the goals in a roadmap. This includes identifying annual goals, the most important activities, deploying people and resources, designing the business units, portfolio management and risk management. This can also be reported to some extent, as Enexis does in figure 3.
Figure 2. Strategic goals Enexis 2023.
6. Integrate ESG into the company
The final step is the integration of the new ESG strategy into the broader business strategy. In some cases, ESG is part of a completely new business strategy. But much more often, an adjustment to the existing business strategy is required to include ESG. If this does not happen, you run the risk of two separate strategies that do not reinforce each other or even counteract each other. The biggest risk is that ESG becomes a separate ‘project’, just to be CSRD compliant.
After the initial integration of the strategy, the need for further interpretation soon follows. What does this mean for the company? We call this the operationalization of the strategy. It is important to mention that communication plays an important role in this. There are differences between the strategic goals that are used internally, shared internally and communicated externally.
The actual strategy and the strategic annual plans are determined at management level. These plans contain highly sensitive competitive information, making them strictly confidential. A simplified version of the strategy is therefore often used internally. External communication about the strategy is often even simpler, mainly to avoid making the competition wiser. A strategy may seem simple to an outside observer, but make no mistake: there is an extensive plan behind it. A good example of this simple external communication strategy can be found on FrieslandCampina packaging, as shown in Figure 4. The three fundamental principles form a simple but solid foundation on which organizational decisions are built.
Figure 3. Example FrieslandCampina Strategy.
Want to know more about developing an ESG strategy? Then take a look at https://www.sdu.nl/shop/jes-knowledge.html for further in-depth information on this subject. Or would you like more information about how we at Empact can help you create an ESG strategy that really makes an impact? Please take a look here for more information or contact us today.