We have worked closely with over 50 companies on their ESG (Environment, Social & Governance) journeys, and have reviewed the ESG approach of hundreds more. What has become clear to us is that companies go through a very predictable pattern of evolving their approach over time; from infancy, to tactical, to strategic and finally, to excellence. There is no way to short-cut this and each stage has its value, as we describe below:
Infancy
During this stage companies are doing some environmental and social activities but not necessarily understanding or communicating them as part of their ESG approach. Typically, these are essential business-as-usual activities, such as health and safety practices in a manufacturing/construction company, or activities deemed to be the expected, or right, thing to do, such as charity fundraising or office waste recycling. Nearly always companies are doing more than they think but aren’t clear why they are doing it, or effectively communicating these as an ESG approach to their business stakeholders.
Tactical
The tactical stage is when a company is forced to advance their approach in response to a critical need from one or two stakeholders or stakeholder groups. Often this request comes from a large corporate customer or investor, who may require a certain ESG policy, data or certification to be in place.
Whilst initially trying to avoid responding to these requests, there comes a tipping point where action must be taken and the business starts to conduct more ESG activities but without any clear focus. They end up with a scattergun approach with data collected on some ESG issues, certificates achieved in others, and no understanding of why they are doing things other than to appease specific clients or investors.
During this phase internal frustrations can arise. Employees can become disengaged from ESG because they know the company’s commitment to ESG is not genuine. The leadership team can also become frustrated as they spend valuable resources trying to meet the needs of specific stakeholders with no understanding of how the work benefits their business in the wider sense.
Strategic
This stage is when there is a step-change in approach. The company goes from a scattergun tactical response to one or two stakeholders, to a considered and holistic approach to ESG that takes into consideration the views of all the company’s key stakeholder groups and its business impacts.
Typically to make this transition a ‘materiality assessment’ is conducted, whereby all key stakeholders (customers, investors, employees, suppliers and other relevant third parties) are systematically engaged with to gain a deep understanding of which ESG issues are important to which stakeholder group, and thus where the business should focus its efforts. An ESG strategy can then be developed around this (read more on how this is done here), which is why the strategic stage is characterised by a suite of activities and targets relating to a broad range of ESG issues. The company likely has extensive public information on their ESG approach and will have achieved some noteworthy accreditations, such as an EcoVadis rating or B-Corp.
Importantly, it is also at this stage when non-important activities are identified. We have seen an office-based company with low water use measuring their water use for years in response to a customer request. Only after conducting a materiality assessment did they understand that water was only important to that stakeholder, and not to the business operations or other stakeholders, at which point they finally had the confidence to stop this process.
A company can spend several years in the strategic phase, checking off the quick wins across a wide range of ESG issues, but there then becomes a point when the initial business motivation for ESG begins to wain as it becomes more costly and difficult to achieve better performance. Commercial decisions become impacted, and the company struggles to understand when and when not to invest in ESG activities. It is at this point that a company can take a step backwards, disengaging from their strategy, going back to tactical responses and losing the business value of the good work done to date.
Excellence
The excellence phase occurs when a company that has been in the strategic stage phase for a little while realises they simply cannot do it all, and that the reason sustainability is about long-term challenges is because it is hard. Companies in the excellence phase re-visit their ESG strategies and reprioritise ESG issues. They take a bolder look at what they don’t need to do (i.e. because they’ve already put in place processes and systems to adequately address that ESG issue for a company of their size/industry), and they reassess the ESG priority topics, picking one or two to be a point of differentiation. It’s now that the company’s ESG strategy becomes more unique, more exciting and more visionary with an aspiration to have a long-term leadership position on a particular ESG topic. This is where ESG doesn’t become something that has to be done, but rather becomes part of the overall business strategy and unique selling proposition.
Companies in this phase will commit to investments now that will pay back in the medium-longer term, for example by funding research and development on new solutions to ESG issues. They will be engaging with a range of other organisations – NGOS, universities, suppliers and customers – to collaboratively tackle issues that are too challenging to address by themselves. They will set demanding targets in their priority areas and will be confident to have relatively underwhelming targets on other ESG topics. They will no longer focus their ESG communications on the ESG achievements of their business but instead will communicate on the ESG challenges facing their industry, and the world at large.
Going through the journey to excellence reinvigorates the workforce on ESG and makes difficult commercial decisions easier. It doesn’t even necessarily take more resources, but rather refocuses resources on the areas that will add most value to the business. Getting to this stage is not easy, but the business value now becomes exponential as the companies brand becomes in part defined by their ESG priority. Patagonia is now world renowned for their focus on the circular economy, and despite doing everything they can to encourage customers to mend, repair and reuse their purchases they continue to grow and sell more than ever.
Don’t make the mistake of missing a stage
At Rawstone, we support companies through these stages and we’ve witnessed first-hand what happens when companies try to skip them.
When companies go straight from infancy to strategic, they often become overwhelmed. Whilst the tactical stage seems unfocused, it’s during this phase that many of the ESG basics get put into place – policies written, data collected, legislation understood. When companies move straight to the strategic phase, this tactical work that frankly takes time to produce but doesn’t actually change how sustainable a business is, has to be included in the strategy. The strategy then becomes too large and demanding, and companies become overwhelmed, leaving the strategy on the shelf to present to stakeholders as needed but without any focus on delivery in the business. Inevitably this situation can only go on so long until employees, customers, investors and other stakeholders realise the business is disingenuous in their aspirations. Not only is this not making the company more sustainable, but it can also be damaging to their reputation.
When companies go straight from tactical to excellence, they narrow their focus so quickly that they miss some of the broader foundations of ESG best practice that are licenses to operate for some customers/investors. ESG issues that are not appropriately addressed can detract from positive favour received from areas of excellence. For example, whilst Amazon receives praise for their efforts to reduce packaging waste and commitments to Net Zero, the negative press on labour pay and conditions diminishes the overall perception of Amazon being a sustainable company.
Authored by Caroline Johnstone.