If you want to successfully become more sustainable as a company, you need a solid plan: a strategy on Environmental, Social and Governance issues (ESG). An ESG strategy forms an integral part of the corporate strategy and not only sets a dot on the horizon, but also concretizes which themes are relevant. And in addition: it indicates exactly how on these themes the company’s positive impact is increased and the negative impact is 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 does one arrive at such a strategy? This article is a summary of the guide developed by Empact for Sdu. Look for the guide and additional tools at: 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, as we do when it comes to reporting, for example. In practice, you therefore see a wide variety of strategy forms and elaborations, and the most commonly used models also change over time. However, you do see that in 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 for each step exactly what it entails, why it is important and how to approach it.
Figure 1. The six most common components of an ESG strategy.
1. Consolidation Phase
In this first phase, the right direction should be set for the ESG strategy to be developed. In this, a summary and consolidated overview of the sources listed below is created to provide a good picture of the company and the environment in which it operates:
- Stakeholder viewpoints. Engaging both internal and external stakeholders provides insights into different perspectives regarding the current and future functioning of the company.
- Contextual analysis. In creating the materiality analysis, an in-depth contextual analysis is conducted that provides a thorough understanding of the company, its business model, value chain and business activities. It also examines practical aspects such as the role of the ESG officer, governance, executive compensation policy(s) and current communication of strategy.
- Material themes. The output of the double materiality test describes where in its business model, its own operations and its supply and marketing chain, material impact, risks and opportunities are concentrated. These send a clear signal: around these themes, a company will have to work to minimize their negative impact. In addition, the reporting requirements to be met under the CSRD have been identified.
- GAP analysis. This analysis provides insight into what the company does not currently have included in its policies regarding governance, strategy, impact, risks, opportunities, goals, KPIs and reporting of results.
A consolidation of the above inputs provides a clear and reliable overview of the current playing field. This helps to clearly distinguish between external and the internal factors. This can be done using various methods:
- McKinsey’s 7S model to consolidate information within the internal enterprise.
- The DESTEP method of categorizing external factors (demographic, economic, socio-cultural, technological, ecological and political-legal). If necessary, this can be supplemented by external developments in the areas of competition, internationalization and ethics.
- A SWOT analysis to clearly identify internal strengths and weaknesses and external opportunities and threats. The conclusions from this analysis often correspond to the materiality and GAP analysis from which opportunities, risks and impacts emerge.
2. Ambition Statement
A second integral part of creating ESG strategy is setting ambition, translated into a company’s vision and mission. These core elements must be understood and felt by everyone in the company. To get these in focus, it can help to answer the following questions concretely.
- 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 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 will we 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 expresses a certain realism that is directly related to ESG and at the same time gives a higher purpose of corporate activities by naming “unite people.
3. Defining and concretizing value creation
The vision and mission provide direction for the company’s further strategy development, which focuses on long-term value creation. To concretize value creation, 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 in perspective.
There are several value creation models that can be used. An example of such a model is the interactive model of chemical company BASF. This model includes environmental and social value in addition to financial value. A value creation model can thus be used to provide insights into a company’s revenue model, respective value chain, relationships and current cost and revenue 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 both the company itself, society and the planet.
4. Strategic goal setting
Parts 1, 2 and 3 reveal the strategic priorities of a company. Based on these, a direction should then be set 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 on 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 review them periodically.
It is important to keep the strategic goals at an abstract level. This keeps the strategy visionary and ambitious. In the next step, strategic goals can be linked to strategic planning and further operationalization.
Examples:
- Strategic goal: no fatal accidents throughout our value chain by 2030.
- Strategic goal: by 2030, our operations will be climate neutral.
- Strategic goal: By 2025 we are an attractive employer for both men and women.
5. Strategic planning
The elaboration of the strategy can be done in various ways. In any case, it is important that an ESG strategy is made concrete internally with KPIs. Here it should be made clear what is the dot on the horizon and objectives should be formulated in a specific, measurable, acceptable, realistic and time-bound (SMART) manner. By giving a time-bound indication, it is also possible to plot the goals in a roadmap. Consider naming annual goals, key activities, deployment of people and resources, business unit design, portfolio management and risk management. In part, this can also be reported on, as, for example, Enexis does in Figure 3.
Figure 2. Strategic goals Enexis 2023.
6. Integrate ESG into the company
The final step is to integrate the new ESG strategy into the broader business strategy. In some cases, ESG is part of a completely newly defined business strategy. But much more often a modification of the existing business strategy is needed to include ESG. If this is not done, you run the risk of having two separate strategies that do not reinforce each other or even work against each other. The biggest risk is that ESG becomes a separate “little project” just to be CSRD-compliant.
After the initial integration of strategy, the need for further interpretation soon follows. What does it mean for the company? We call this the operationalization of the strategy. Here it is important to mention that communication plays an important role. There are differences between the strategic goals that are used internally, shared internally and communicated externally.
The actual strategy and annual strategic plans are set at the executive level. These plans contain highly sensitive competitive information, making them strictly confidential. Internally, therefore, a simplified version of the strategy is often used. External communication of the strategy is often even simpler, particularly so as not to make competitors wiser. To an external observer, then, a strategy may seem simple, but make no mistake: there is a comprehensive plan behind it. A good example of this simple external communication strategy can be found on FrieslandCampina’s 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 Strategy FrieslandCampina.
Want to learn more about developing an ESG strategy? Then check out https://www.sdu.nl/shop/jes-knowledge.html for a more in-depth look at this topic. Or would you like to learn more about how we at Empact can help you create an ESG strategy that really makes an impact? Take a look here for more information or contact us today.