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The ESG implementation can enhance the sustainability of the enterprise, as well as the trust of stakeholders and consumers, and the proper setting of ESG goals will be the basis for the improved ESG execution.
This article will first briefly introduce ESG, then guide enterprises in 3 steps, i.e., finding ESG key indicators, selecting ESG disclosure framework, and finally setting ESG goals to help enterprises take the first step towards ESG.
What is ESG and Why Enterprises Should Do ESG?
ESG assesses the environmental, social and governance performance of enterprises against the four principles of the United Nations Global Compact (UNGC): Human Rights, Labor, Environment and Anti-Corruption.
Environmental aspects, ESG takes into account the negative impact of the enterprise on the environment, including GHG emissions, energy consumption and waste disposal. Social aspects, ESG takes into account the impact of the enterprises on employees, communities and consumers, e.g., employee welfare, product security and consumer satisfaction. In terms of governance, ESG takes into account the inner control system and management structure of the organization.
ESG implementation and disclosure can help enterprises improve their environmental, social and governance performance, and thus enhance its long-term competitiveness. As an emerging issue in the 21st century, ESG has gained a great deal of attention from consumers and investors, and can effectively enhance the resilience of enterprises in the face of crises, increase their sustainability, and improve their chances of securing investment and increasing revenue.
Why Enterprises Should Focus on ESG Goals
Sustainable Development
ESG stands for Environmental, Social and Governance (ESG), which represents how an enterprise is aware of the risks, the impact of its operations and the strategies to deal with them. If ESG is ignored, although it can reduce costs and create profits, it may face challenges such as regulation changes, climate change and changes in social values. The following are 3 examples:
- The law restricts the use of disposable plastic, resulting in the need for restaurants to find other options for tableware.
- The enactment of regulations on the increase of carbon tax on imports and exports will increase the demand for green energy from enterprises.
- The outbreak of food safety incidents at Chipotle restaurants in the U.S. led to the hospitalization of consumers, depressed stock prices from 2015-2018, and $25 million in damages.
All of the above examples demonstrate that ESG actions have a significant impact on business stability, and that these items are highly relevant to the business that the enterprise is engaged in, which is why setting ESG goals in a timely manner can help the enterprise focus its resources on the most important issues.
Investor Confidence
According to the Global Sustainable Investment Alliance’s 2020 biennial report, ESG investment has reached 36.1% of the total professional investment in 2020 and is expected to exceed half by 2024.
It is clear that ESG investment will be the future trend, and to get the attention of investors, it is urgent for enterprises to carry out ESG, and investors will pay attention to the ESG measures and strategies proposed by enterprises in individual industries, and setting clear ESG goals and implementing them is a key operational priority for enterprises.
1st Step in Setting ESG Goals – Identify Enterprise Material ESG Issues
ESG covers 3 aspects of environmental, social and governance. As each enterprise is located in a different industry, the corresponding material ESG issues are also different, and no industry needs to cover all goals at the same time.
e.g., Material ESG issues in the restaurant industry may include packaging materials used, waste generated, raw materials for food, water consumption, product security, labor management and providing nutrition and health opportunities, etc., and banks may include environmental impact finance, human capital development, consumer financial protection, privacy and data security, and access to finance.
Thus, it is only after clarifying the scope of the company’s current operations and selecting the disclosure framework that the ESG Key Indicators can be found to be in line with their own operations.
2nd Step in Setting ESG Goals – Selecting a Reporting Framework
The frequently used ESG international disclosure standards include GRI, SASB, TCFD, CDP, etc. In addition, there are also principle frameworks such as the UNGC, which is the original basis for ESG development, and the UN SDGs, which cover a wide range of goals for governments, enterprises, and citizens. The following will briefly introduce the features of each framework and how they are implemented, as well as how to use them.
GRI：Global Reporting Initiative
The Global Reporting Initiative is an independent international organization that provides the world’s most widely adopted sustainability reporting standard, the GRI Standard, to help organizations understand the full impact of their operations on ESG.
The GRI standard is a modular system that has been updated in 2021 into three concurrent projects: Universal Standards, Sector Standards, and Topic Standards, and Sector Standards are currently being developed and will be officially implemented in 2023.
Universal Standards help enterprises establish disclosure standards, identify stakeholders and determine materiality topics; Sector Standards help enterprises understand potential materiality topics for their industry, including topic management, subject matter guideline disclosures, and additional industry disclosures, using GRI Sector Standards or classification systems (i.e., GICS®, ICB, ISIC, and SICS®) to categorize their industry; and Topic Standards are subdivisions of each materiality topic disclosure, which enterprises must follow to produce a full report.
SASB：Sustainability Accounting Standards Board
The SASB is a non-profit organization established in 2011 and has been integrated into the ISSB in 2022. The ISSB plans to integrate other important current reporting standards and release a new framework for global use, including the financial impact of ESG.
Pending the release of the new framework, ISSB encourages enterprises to continue to use the SASB standards to help them communicate with investors in an accounting-oriented manner, including five main aspects, 11 industries (including 77 sub-industries) and 26 general ESG issues.
Enterprises can first use the Sustainable Industry Classification System® provided by SASB to identify their industry, and then download the corresponding industry-specific standards from the official website to produce an ESG report based on the contents, such as the Household & Personal Products industry, which discloses items including Water Management, Product Environmental, Health, and Safety Performance, Packaging Lifecycle Management, and Environmental & Social Impacts of Palm Oil Supply Chain, etc. The disclosure details requirements are also all in the standard.
TCFD：Task Force on Climate-related Financial Disclosures
The TCFD was established by the Financial Stability Board (FSB) in 2015 to help enterprises and investors understand the risks and opportunities they face in the face of climate change through the four core aspects of governance, strategy, risk management, metrics and targets, providing help on the financial impact of climate related risks and opportunities, the 11 suggestions for the core aspects are disclosed and the full report can be downloaded from the TCFD website.
CDP：Carbon Disclosure Project
The CDP is a non-profit organization that integrates the strengths of the supply chain of investors and brands, and uses the TCFD standard as a framework to provide disclosure on climate change, forestry, and water security in three aspects, differentiated by selected industries.
By filling out the questionnaire to assist enterprises to disclose, and according to the results of the questionnaire return evaluation, every year announced the A-rated enterprises in each industry.
How to Select and Use These ESG Criteria for Disclosure?
First of all, what are the targets of ESG disclosure, whether they are enterprise stakeholders, regulators, investment institutions or the public?
Depending on the targets, there are specific requirements for disclosure. If there is no such restriction, the selection will be made according to the features of each framework. In addition, the ESG frameworks mentioned above are not mutually exclusive.
Such as the CDP, which was created to be consistent with the TCFD framework, both of which focus on environmental items, and the CDP and TCFD can be added to enhance environmental disclosures when using the GRI or SASB framework. In the case of Apple Inc., the ESG disclosure is based on the GRI, SASB and TCFD simultaneously.
3rd Step in Setting ESG Goals－Setup Clearly Defined ESG Goals
With the ESG disclosure framework in hand, enterprises can integrate their business focus into the framework and find the issues that should be disclosed.
An example is a restaurant that would like to set ESG goals and select the SASB framework, which should be disclosed for Waste Management in Food Packaging Industry, focusing on food recycling, packaging reduction and recycling, etc. The most commonly used goal-setting approach, SMART, is that goals need to be specific, measurable, assignable, realistic and time-related, with individual steps to achieve large goals through a deliberate strategy.
The ESG targets and considerations set by SMART are likely to be: the complete reduction of non-recyclable tableware by 2023, and will reduce packaging waste by 35% in total compared to the same period last year, which will reduce the amount of waste generated per year by 3,500 kg for the enterprise and is expected to reach 100% compostable or recyclable packaging by 2026.
Currently, there are enterprises in the market that offer compostable tableware that meets the price and availability requirements, as Renouvo, which provides the Purchasing Dept. with the direction to implement and the opportunity to negotiate a stable partnership to achieve that goal in 2023.
How Can We Achieve ESG goals?
Having set ESG goals is only the first step in ESG, how to implement it is also a key issue for enterprises. The following are 3 suggestions:
1. Identify the Person Responsible for Implementation
ESG needs to be implemented with the cooperation of the organization. The enterprise can identify the unit responsible for the implementation of the indicator, set up a task force or personnel to determine the results of each ESG measure implementation, and build a bonus and reward system to motivate employees during the implementation process.
In addition, incorporating ESG goals into the core corporate concept and future vision, as well as having senior management endorse them, would help the organization’s employees recognize the ESG goals and build internal consensus.
2. Setup Timeline and KPI
ESG goals should be implemented together with a timeline, and the ESG results will be data-driven as much as possible, each goal can also be paired with multiple KPIs.
For an example, food packaging material waste reduction can be divided into two KPIs, i.e., increasing the proportion of compostable containers and reducing packaging. By planning for quantitative milestones, enterprises can track progress in implementing ESG goals and communicate more quickly with stakeholders when ESG disclosures are finally made.
3. Timely Adjustment of Implementation Direction and Timeline
Despite having well set ESG goals, there are still many variables in the implementation process that can cause changes in the progress and scale of implementation. Organizations should regularly confirm the direction and progress with the ESG team or people responsible for ESG, and if there are changes, clarify the factors for the changes and adjust the ESG implementation strategy in a timely manner.
If there is an uncontrollable situation, it is fine to revise the ESG goals, focus on the opportunity for the team or person responsible for ESG to achieve the goals, but the reasons for the change in progress need to be clearly explained to stakeholders in the final disclosure.
ESG Outlook
With society’s focus on ESG, many investors are seeking to build a sustainable future with their funds, and current standards will continue to be integrated. Whether it’s GHG emissions in the environment, worker rights or clear disclosure of corporate governance, it will be a core aspect of all enterprise operations and a purpose to assist in the stability of the enterprise.
The ISSB is currently integrating finance and ESG, which is a new standard-setting board (the International Sustainability Standards Board, ISSB) announced by the IFRS Foundation Trustees in Nov. 2021. In the future, enterprises may need to increase their financial disclosure from the original four financial statements to five financial statements (i.e., Noted To Financial Statements).
The green energy transition may be a threat to energy-intensive enterprises using traditional energy sources, but it is a huge opportunity for energy-saving and carbon-reduction-related industries, and the implementation of ESG will become the consensus of the business community.
Conclusion
The implementation of ESG can assist enterprises in sustainable operation and attract investors, it is suggested to set ESG goals by first sorting out the targets that enterprises would like to disclose, and then set the goals that are closely related to the enterprise with key issues by referring to ESG international disclosure standards include GRI, SASB, TCFD, CDP, etc., and implement them with timelines and KPIs. During the process, the implementation strategy should be adjusted timely to achieve sustainable ESG operations.