5 Tips to Develop Your ESG Program When Resources are Tight, and Time is of the Essence
Starting an ESG program often can feel overwhelming and intimidating. This is particularly true for small-cap companies that must make do with fewer resources and less team members than their larger counterparts. Nonetheless, as we outlined in our prior ESG briefer, ESG disclosure is only growing in importance for investors, regardless of your company’s size.
At the very minimum, companies should be prepared to communicate their ESG strategy in their proxy statements – one of the most important shareholder communications for any public company. And with the 2023 Proxy season right around the corner, the pressure is on!
As with many things in life, the enemy of getting started in ESG often is diving into the more complicated areas too soon. Instead, we typically advise clients to start with mastering the fundamentals. After this is accomplished, we can move to more advanced discussions on reporting, ratings, and the like.
Over the years, we have found that companies often already have all that they need to start building their ESG “muscle.” It’s just a matter of understanding the critical areas, identifying strengths, and owning your narrative.
Are you one of those small cap corporates working to get started? Here are five tips to help you improve your ESG disclosures when resources are tight, and time is of the essence.
Tip 1: Build a cross-functional ESG team
If you don’t have an ESG task force already in place with representation across your organization, this is where you will want to start. Ideally, this group will include members from your investor relations, communications, legal, HR, finance, operations, and procurement departments, as well as your key business segments.
One common challenge we hear from clients is that some of their colleagues are more eager than others to join such teams. When forming the team, it can help to highlight the career development benefits. ESG is expected to present huge career opportunities in the years ahead, making ESG task force participation an excellent resume builder (consider this Fortune article, for example).
Tip 2: Get started with a gap analysis & peer benchmark
A gap analysis consists of analyzing your current practices against industry benchmarks, existing frameworks (like SASB and TCFD), ratings agency reports, and peer disclosures. It also involves understanding your existing and target investor priorities. These can be found in annual stewardship priority documents published by many of the larger buy-side organizations, such as State Street, T Rowe Price, Vanguard and Wellington, for example.
In our experience, conducting a gap analysis is the fastest and most effective way to identify and gauge progress against your most material ESG issues. Remember, the best ESG programs are built around the topics that are most material to your business, so you do need a baseline understanding of these specific areas before you can make any meaningful progress.
While gap analyses are effective, materiality assessments are the gold standard in identifying a company’s most critical ESG issues. However, they are also much more resource intensive, requiring more costs via third-party consultant fees, as well as your valuable time to engage with the consultants and a broad set of internal and external stakeholders.
For these reasons, many small cap corporates may be better served by executing a gap analysis initially. As you progress along your ESG journey, you can execute a lengthier materiality assessment to drive further program development.
Tip 3: Conduct an internal audit to identify where you already shine
After you have your list of potential material ESG issues, conduct an internal audit to uncover what you are already doing well.
Below are several examples of practices companies often are engaged in prior to specifically identifying them as part of their ESG programs:
- Encouraging eco-friendly business practices
- Helping customers reduce their environmental footprints through products or services
- Ensuring employee health, well-being, and safety
- Providing essential services that support families and communities
- Cultivating a corporate culture that promotes DEI (diversity, equity, and inclusion) through initiatives such as employee resource groups (ERGs)
- Implementing IT best practices for data security
- Enforcing governance policies that go beyond SEC requirements
- Establishing ongoing risk analysis and mitigation
- Assigning Board oversight of ESG strategy
As you can see, ESG disclosure covers a broad range of business areas, further driving home the importance of cultivating an internal ESG team composed of individuals from different departments in your organization. With initial supporting information in the form of metrics, case studies, and established goals, you will be well-prepared to build out the foundation of your ESG narrative.
Tip 4: Prioritize “light-lift” ESG tasks
Through this internal audit, you also will likely identify the areas of ESG where your organization is lacking and/or may need to be further advanced. To simplify this process, for each ESG task that you identify, ask yourself if they are “light” or “heavy” lifts.
“Light-lift” ESG tasks typically can be addressed immediately and already are in your wheelhouse. These are areas that you are familiar with, have existing traction in (like established internal policies that can be easily disclosed), or, perhaps, are something that your peers are doing that you could easily replicate. Importantly, these “light-lift” wins can be key to building the necessary momentum for driving internal consensus early on.
“Heavy-lift” ESG tasks typically require longer planning cycles and more resources to operationalize. We strongly advise that small-cap teams do not overcommit themselves to these areas until they have a clear plan in place, along with the necessary support at the executive and board levels.
Of course, for the most critical tasks, such as establishing systems to capture GHG emissions, you cannot wait too long to get the ball rolling. As part of this balancing act, we suggest being strategic about what you are prioritizing through the identification of your most critical ESG areas and working to advance those while you book the early wins.
For all tasks, you will want to assign ownership and set clear timelines and KPIs for measuring success along the way.
Tip 5: Begin integrating ESG into your corporate narrative (slowly)
Congratulations, you now have all the necessary pieces to start integrating ESG into your 2023 proxy statement and broader investor communications! After completing the above steps, try answering the following questions to outline your foundational ESG narrative.
- What do we stand for? (ESG strategy articulation)
- Where are we focused? (Identification of key ESG areas or pillars)
- Where are we strong, and where do we have more work to do? (Highlights your accomplishments, goals, and commitments)
As mentioned at the beginning, we recommend including a section in your Proxy report that articulates your ESG strategy and pillars. This is increasingly becoming table stakes for investors.
Next, consider creating an ESG page on your IR website, with an ESG factsheet available for download. If you are ready, you can include a simple matrix that discloses ESG data across select frameworks, like SASB or TCFD. Where you don’t yet have metrics to report, share a qualitative explanation on why or what actions you are taking to prepare to report such metrics in the future.
How about earnings? Earnings occur four times a year, making them fantastic opportunities to share your long-term goals and provide regular updates to the investment community on the progress you are making.
Finally, it’s worth noting that your ESG messaging also is of increasing importance to other key audiences, including your employees, customers, and partners. Make sure to incorporate your ESG narrative into your public relations and corporate communications activities to show these stakeholder groups that you are being proactive.
Let the Journey Begin!
As the wise Simon Sinek once said, “The hardest part is starting. Once you get that out of the way, you’ll find the rest of the journey much easier.” These five steps should help you do just that – get a running start on your ESG program in preparation for the 2023 Proxy season and leverage that momentum to continue driving progress on these key areas going forward.
At Sharon Merrill, we help companies advance their ESG journeys to enhance long-term value, reduce risk, and drive societal progress. For a full overview of our ESG counsel offerings, please click here. Contact us to set up an appointment and find out more about how we can help your company build further momentum in ESG.