Nowadays companies are increasingly facing the needs of their stakeholders, investors, and society more broadly in the field of ESG.
Stakeholder demands are shifting, they are more and more demanding the disclosure of a company’s sustainability efforts, legal demands are obliging businesses to implement practices that avoid damage but benefit the natural environment, and investors want companies to deliver hard metrics that demonstrate their sustainability efforts. The accompanying shift in society towards transparency and credibility comes with a clear shift towards sustainable investment decisions in the capital market. Corporate Social Responsibility and the capital market will therefore no longer be separable in the future, and sustainability and annual reports are increasingly merging. ESG links a responsible corporate attitude with investment decisions, so-called “socially responsible investing” or also known as “sustainable & green finance”. While fulfilling these demands, a company has to preserve ongoing social and legal approval within the local community and other stakeholders. Moreover, external shocks such as the COVID-19 pandemic and not at least the Ukraine war constitute a challenging and disruptive business environment.
It is becoming more and more evident that companies struggle with moving rapidly unless they have an ESG framework that is tied to, and intentionally promotes their strategy. The concept of Environmental Social Governance (ESG) expands the idea of Corporate Social Responsibility (CSR) to include the social responsibility of companies or the voluntary contribution of business to sustainable development – beyond legal requirements. Therefore, a robust approach on how to address ESG is becoming more critical than ever before. (Read more about ESG vs. CSR here).
ESG as a process
ESG ambition levels of companies show a wide spectrum in their stage of development. At the beginning, some companies only engage at the minimum level. They concentrate on mitigating risk and address minimum legal and social requirements. Advanced companies undertake substantive ESG efforts that occur mostly outside of their core business. A comprehensive sustainability policy is part of their overall strategy, and they target to comply with voluntary industry standards. One step further, highly motivated companies leverage sustainability into their core business. They fully integrate ESG practices into their core strategy and operations and regard them as a tool to differentiate from competitors.
Companies who want to implement ESG principles are advised to follow the DFGE process which can be divided into three main reinforcing steps:
1. Check of own company performance
Businesses evaluate how their specific business model and company activities match against each of the three ESG dimensions. Hereby, it is helpful to evaluate a business’ mission and vision to be able to clearly match ESG practices against these. Moreover, it is important to know what stakeholders, such as employees and customers, need and demand. Moreover, an analysis of which legal regulations come into place and what actions are necessary to comply with these, is crucial.
2. Micro- and macroeconomic trend analysis
A materiality analysis helps to identify a business’ most critical sustainability topics. For scanning developments and achievements in its environment a benchmark analysis is conducted.
3. Development of an ESG roadmap
An ESG roadmap answers guiding questions such as where the company should develop and how this development can be achieved. Such a roadmap contains the definition of an ESG vision, ambition, and governance reduction potential.
Communication is key
During this process companies are advised to carefully think about their communication. Stakeholders, investors, and regulators, call for in-depth disclosures. While regulations vary across countries and jurisdictions, the global trend goes toward more robust information. This should not only include communication efforts for the stake of announcements, e.g., for marketing, but to learn and improve as an organization. Announcements about more radical sustainability efforts can possibly break with what a respective company had been doing in the past and therefore might not always receive a positive echo by customers at first sight. But it was shown that standing behind a more radical opinion as a company can help to overcome such negative echoes and can even increase business success.
DFGE supports companies in building and adapting their business activities and structure based on an ESG strategy. If you have further questions about ESG, please contact us via or by phone at +49 8192-99733-20.
