ESG - Creating a healthy company foundation

Climate change is widely regarded as the greatest societal challenge of the 21st century, one in which it is important for everyone to make a contribution⁠—both individuals and companies. Once a company reaches a certain level of public awareness, simply going about its business without giving any attention to societal or environmental topics is no longer an option. These days, customers want to know where products are coming from and where the company stands on specific social issues. Calls for sustainability, equal pay for all, and plenty of other topics are growing stronger and stronger, making it so that companies can no longer afford not to position themselves or improve their position in this regard. This theme can be shortened to ESG, or Environmental, Social and Governance. In this article, we will tell you what it is, why it is important for companies and how OKRs can help you successfully implement it.

Content

  1. What is ESG?
  2. Why is ESG so important for companies?
  3. What are the biggest challenges with ESG?
  4. How can you develop an ESG strategy for your own company?
  5. Can OKRs help you with ESG strategy development?
  6. ESG and OKRs: FAQ

What is ESG?

ESG stands for Environmental, Social and Governance (in the sense of good company governance). With these criteria, ESG covers a wide range of topics a company should address throughout their existence.

E, or Environmental, deals with the impact the company’s use of resources has on nature, such as its carbon footprint.

S, or Social, focuses on the social, human aspects of a company, such as equality within the company, pay and diversity. Internal factors are also included in this category, such as human rights compliance within the company’s delivery chain.

G, or Governance, touches on the internal guidelines of the organization, leadership style and the applied practices at the management level.

For some companies, ESG measurement is also influenced by external standards and specifications, such as those from their business partners or even customers.

By meticulously addressing these topics, working on them transparently and publishing ESG indicators, companies can continue to develop and create trust among the general public, their target groups and potential investors.

A company’s ESG rating is generally determined by an external agency. These agencies vet the companies using their own set of criteria and deliver the final ESG rating.

Why is ESG so important for companies?

The reason it is important for companies to be addressing their impact on these ESG criteria is because, regardless of size, organizations are being held more accountable when it comes to societal and environmental issues. Actually, not just on a societal level, but also in regard to their own future financial situation.

Companies that already consider factors such as reduced CO₂ emissions, protection of non-renewable resources and human rights in their production will have much stronger advantages over their competitors when facing stricter regulations in the future.

This means every organization is inevitably linked to ESG relevant aspects—from SMEs to global corporations. And this does not just begin with the company’s public image. The issues addressed with ESG are often already intertwined within internal processes, making it essential to deal with them, identify overlaps and optimize them for the company as best as possible. If a company wants to improve its sustainability (Environmental), for example, this will also have an effect on the Social and Governance parameters.

  • Where can we reduce our carbon footprint?
  • How will this affect the daily work of our employees?
  • As a leader, how can I set a good example and ensure everyone follows my lead?

These are three questions on the same topic, each relating to E, S and G.

Today’s ESG boom

In recent years, many organizations have already started recognizing the value of ESG, leading to a boom in ESG-oriented investments. Both customer groups and a large part of society care if their well-known brands are focusing on and positioning themselves in regard to social and environmental issues. As a result, $30 trillion are invested worldwide in ESG-related issues.

Not only can these immense investments have a positive impact on social status within the population, these decisions also bring positive environmental effects with them.

According to research from the consulting firm McKinsey & Company, investments in ESG can have a direct impact on five aspects of a company’s cash flow.

  1. Top-line growth
  2. Cost reductions (e.g., by eliminating equalization payments due to a company’s low CO₂ emissions)
  3. Reduced regulatory and legal interventions
  4. Employee productivity uplift
  5. Investment and asset optimization

This always depends, however, on which levers each individual company applies and to what extent changes are initiated. 

A positive ESG rating can also have a big impact on external investors. For start-ups in need of new capital, for example, the ESG rating now plays a central role in the evaluation of the respective company. Investors are looking forward and want to invest in companies they believe will continue to bring them profits in the future.

What are the biggest challenges with ESG?

First and foremost, a big challenge is properly understanding the term. The abbreviation ESG may be clear, but not what topics it encompasses. Some companies may not even know they are working with ESG criteria when they are taking steps to improve work conditions for their employees, for example.

In addition, there are a variety of other standards, frameworks and general legal regulations relating to a company’s ESG reporting. For example, there is the TCFD framework that, among other things, deals with a company’s carbon footprint. But this is not just about a company’s use of resources and the resulting effect on the world’s climate. In fact, it has a lot more to do with the opposite case—the effect climate change has on a company and the resulting financial risks it poses to the organization.

In view of the financial market, possible investments and their own future management, companies can no longer ignore TCFD recommendations, otherwise this could have a negative impact in the future.

These risks and uncertainties clearly demonstrate how important it is for companies to be agile when it comes to constantly changing influencing factors and to create fundamental social and environmental framework conditions. This is especially true for large companies and corporations with longer processes, as these bigger structures require more time to implement changes. At the same time, it is essential not to lose customer focus, which is why a large-scale change in thinking is necessary.

If you would like to know how OKRs can help you implement ESG criteria and how they can contribute to your KPIs, you can read more here.

Differing ESG rating criteria

An additional aspect that can pose a challenge is differing ESG rating criteria. With the ongoing ESG boom, more and more rating agencies are coming onto the scene, all of them with different requirements for companies to follow and some of which with completely different analysis processes altogether. That is why it is best to take time to get to know the ESG market yourself and compare the various agencies. Each agency’s reputation can also be helpful when making a decision.

A list of potential ESG criteria
Potential ESG criteria

General criteria from the rating agencies may include:

  • Equal opportunity within the company
  • Climate change strategies
  • Executive salaries

How can you develop an ESG strategy for your own company?

Before prematurely implementing any ESG strategy, it is important to ensure the strategy fits to your company. The establishment and implementation of such a strategy need to suit the individual needs of each organization. Current legal requirements also need to be taken into account. There is nothing more frustrating than implementing a strategy that unknowingly disregards important legislation and has to be revised.

It is then necessary to create a plan with measures and goals that a company can define for itself. This can be done step by step and does not have to be done all at once. All in all, it is about social responsibility when it comes to the environment, social life and other factors. In this regard, companies can always do something. Most important is to be able to identify and implement suitable measures. A positive ESG rating is purely a type of official recognition.

Can OKRs help you with ESG strategy development

If you choose to start an ESG project for your company, it is important to define a certain framework for various ambitions as well as intermediate and end goals. One framework that has stood out for years as a holistic goal-setting method is OKR (Objectives and Key Results).

With help from OKR, you and your entire team have the opportunity to define your goals and results transparently and across departments. The Objectives create value propositions for internal and external customers. In turn, the Key Results are the measures used to determine if the value propositions have been met. Finally, initiatives are developed based on the Key Results and explain the actions that need to be taken in order to reach the defined goals.

ESG goal: How OKRs can help improve sustainability

Since OKRs are a goal-setting method particularly suitable for executing strategies, they can also be a helpful tool when implementing an ESG strategy. How this can look in relation to a sustainability goal is shown below.

Possible Objective:

  • We manage to lower our average CO₂ emissions by reducing delivery and packaging as well as through internal employees.

Possible Key Results: 

  • Our supply chain’s CO₂ emissions have decreased by 10 percent.
  • X percent of our suppliers have agreed to and signed a zero-percent plastic deal.
  • The estimated average CO₂ impact of our employees from commuting has decreased by X percent.

Let’s say a logistics company wants to work on the issue of sustainability and has set a goal for itself to reduce its carbon footprint.

This goal assumes that the company can already use and track the KPI “CO₂ emissions.” Since most companies are unable to track their CO₂ emissions, this issue needs to be approached in stages. In the first cycle, the team can concentrate on the CO₂ emissions from delivery and a goal of reducing these emissions by 10 percent can be set. If it is also not possible to measure this, reducing driving distance or improving vehicle efficiency could be used as the focus of the possible Key Results.

Ultimately, it is about finding metrics that impact the KPI “CO₂ emissions.” This process can help formulate target measures that can modify the Key Result. In the case above, recalculating delivery routes or switching to bicycle couriers could be possible initiatives.

The principle of breaking down the overarching strategy goal and respective KPI into short-term subgoals and then breaking those down into concrete initiatives or tasks allows for more efficient implementation.

Questions about integrating OKRs into your ESG strategy?

The examples listed above are, of course, not tailored to your company and may not fit to your goals and intentions. If you have questions or need help with integrating OKRs into your ESG strategy, feel free to read more about “Objectives and Key Results” in our magazine or contact us directly. We look forward to helping you with the implementation.

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ESG and OKRs: FAQ

What is ESG?

ESG stands for Environmental, Social and Governance. E, or Environmental, deals with the impact the company’s use of resources has on nature, such as its carbon footprint. S, or Social, focuses on the social, human aspects of a company, such as equality within the company, pay and diversity. G, or Governance, touches on the internal guidelines of the organization, leadership style and the applied practices at the management level.

Why is ESG important for a company?

Regardless of size, companies are being held more accountable when it comes to social and environmental issues. It does not matter how big a company is. Much more important is a company’s attitude in regard to issues associated with ESG.

What are the biggest challenges of ESG?

For those new to the topic, understanding the term and what issues ESG encompasses is the first challenge. There are also various rating agencies, all with differing criteria for evaluating companies, which can lead to confusion from the get-go. This makes it all the more important to have a critical look at the market and respective agencies if an official rating is desired.

How can OKRs help create an ESG strategy?

Creating a successful strategy requires a specific framework with targeted goals and ambitions. The goal-setting framework OKR can help, as it can be used to define and organize future goals. The Objectives create value propositions for internal and external customers. In turn, the Key Results are the measures used to determine if the value propositions have been met.