Corporate stakeholders, including investors, customers and employees are increasingly requiring that companies "walk the talk," by taking action to fulfill their environmental, social and governance (ESG) commitments and market expectations. As a result, business leaders are increasingly turning their attention towards operationalizing their companies' ESG policies and procedures, by integrating ESG considerations into their product design, supplier choices, hiring practices, executive compensation decisions, investment and lending criteria and other operational matters. These leaders understand that, to unlock the value of ESG and strengthen sustainability, ESG must become part of a company's DNA. But how?
Operationalizing ESG can appear daunting for corporate executives tasked with turning commitments into tangible outcomes. However, at the same time, operationalizing ESG presents a tremendous opportunity for redefining an organization's culture and creating longer term value by harnessing the energies of its varied stakeholders on matters engaging their values and aspirations. To unpack these challenges and opportunities for businesses, on November 25, 2021, McCarthy Tétrault virtually hosted Strategic insights of C-suite leaders on Operationalizing ESG - Roadmap for Success.
Robert Richardson, Partner in McCarthy Tétrault's Business Law Group in Toronto and Co-Lead, ESG and Sustainability, moderated the session. He was joined by a panel comprising three prominent business leaders:
- Alanna Boyd, Senior Vice President and Chief Sustainability Officer, Sun Life
- Norie C. Campbell, Group Head and General Counsel, TD Bank Group
- Mairead Lavery, President and Chief Executive Officer, Export Development Canada
The panellists shared some of the learnings and insights gained from their efforts in helping lead their companies' ongoing ESG and sustainability transformations. This blog post highlights some of the key questions and takeaways from this discussion.
Beginning to Walk the ESG Talk
- How do you even get started in guiding a huge organization like yours towards Walking the Talk? Where do you begin?
A) Articulating Purpose and Core Values
Recognizing that there is no one-size-fits-all approach to ESG, the panellists shared that their organizations began by thinking critically about their corporate purpose and identifying their stakeholders' (particularly employees') core values. The exercise of defining and articulating a corporate purpose, derived from stakeholder values, can help anchor and guide an organization's subsequent ESG efforts. For the panel, this exercise was instrumental in generating enthusiasm and momentum required to begin embedding ESG into their operations.
The ESG efforts that result from the exercise of articulating purpose and values are necessarily unique to each firm. However, each panellist noted that, when beginning to walk the ESG talk, it was vital to engage with stakeholders openly and authentically, to lead cultural change and support behaviours that align with ESG principles. In their view, implementing and sustaining ESG efforts will not be possible unless you also build a culture conducive to its success. On this front, the repetition and reinforcement of key themes was vital for building the momentum behind an ESG-Sustainability (r)evolution.
The panel observed that most seasoned organizations have likely undergone institutional transformations at some point in their history. It would be wise to reflect upon and leverage the successes and institutional knowledge gained from these past experiences to think through how necessary changes may be made in furtherance of ESG and sustainability.
B) Engaging Relevant Stakeholders
Finally, the panel noted that there is a broad set of stakeholders that should be engaged early and often in this process. In particular, they recognized the enthusiasm for action on ESG among more junior colleagues, who can be an excellent resource to rely upon when attempting to shift your institutional perspectives and culture. Clarity around organizational goals and targets, and what is necessary to achieve them, can help channel their energy towards ESG-related successes. Conversely, any failure by leadership at the top to walk the talk may risk losing the motivation of more junior colleagues otherwise invested in these initiatives.
Considering Operational Success in the ESG Context
- What does "success" look like? Do you have a particular vision of how your company might look different when it has more fully developed its ESG strategy?
Three different scales were used by one panellist's organization to measure success and establish its vision of ESG implementation: global, national, and internal. As one example of an application of these three critical lenses, global warming of 1.5°C is what the organization thinks about when it considers a global framing of its relevant ESG challenges. At a national level, this organization considers success through the ability of Canadian businesses to transition to a low-carbon economy. It is possible to gauge organizational success for operationalizing ESG at these macro scales because many ESG-related issues can extend beyond any one organization or state. As a result, what success may look like can vary across several levels within an organization. No matter what level, however, it is important for goals to be in alignment with the purpose and values of your organization.
One panellist shared that their vision of ESG-related success is one where ESG and sustainability is "embedded" into the organization's culture and operations. It is important to have accountability, transparency, and measurement to gauge whether embedding is truly occurring. Further, communicating successes to stakeholders is important to maintain the enthusiasm and belief in your organization's efforts.
Another panellist shared that their organization measures success by focusing on select UN Sustainable Development Goals. By identifying and focusing on a few significant measurable targets, an organization can subsequently recognize where it is having meaningful success that is aligned with its purpose.
- What are some of the factors that can contribute to success?
A) Leadership, Accountability, and Belief
The panel shared a view that leadership, accountability, and belief are three foundational factors that may drive success in an organization's efforts to operationalize ESG. Leadership can nurture an enterprise-wide ESG commitment. Accountability allows an organization to identify where and how it is succeeding or struggling in its ESG efforts. Belief can be a powerful motivator if stakeholders believe their actions in respect of ESG are having an impact in and beyond the organization.
B) Transparency, Reporting, and Culture-Building
The panel observed that governance and process are required to provide the structures necessary to facilitate organizational accountability on ESG. Further, the panel noted that transparency and reporting are crucial to ensuring that commitments and targets are set and communicated to relevant stakeholders. This facilitates accountability. The panellists went on to emphasize the importance of honest reporting where organizations have experienced setbacks or failures, even if it feels uncomfortable, because it serves as a learning experience and identifies areas for future improvement. Similarly, it is vital to build a culture that is conducive to nurturing the success of your ESG initiatives. For certain stakeholders, culture is the source of connection to the organization and is thus required for their buy-in to succeed at operationalizing ESG.
C) Partnerships Can Offer Tremendous Value
The panel also emphasized the value of partnerships. Collaboration and cooperation may be necessary in certain instances to achieve objectives. Organizations would therefore be well-advised to identify where partnerships can provide the speed or scale to achieve ESG successes. Further, organizations should consider a pool of stakeholders beyond financial partners when they think about ESG-related partnerships. For example, civil society organizations and technical experts may be powerful allies for certain initiatives.
- To what extent can outside counsel or other external consultants assist a company in operationalizing ESG?
Building upon the previously stated benefits of partnerships, the panel thought there were significant opportunities for external parties to assist company efforts to operationalize ESG. The panel noted that there may at times be inherent tension between an organization's purpose-centred ESG efforts and the views or accountability expected by external stakeholders. External parties may have a role to play in particular where such tensions arise. Further, the panel observed that the significant legal risks that exist in the area of ESG mean there is an opportunity in particular for legal counsel to provide value. As this space continues to develop, insight from informed counsel may be invaluable.
ESG as a Reality in your Executive Compensation
- Does your company take into account ESG/Sustainability considerations or targets in making its executive compensation decisions? If so, can you describe generally how that works?
Each panellist shared that their organizations take ESG and sustainability considerations into account in making their executive compensation decisions. Linkages to ESG for senior executives have been established where it is possible to clearly communicate ESG expectations and to also measure them. Data and metrics are vital to this end. The panellists shared that it is important for leadership to be engaged with ESG in this way because it can propel top-down discussion about what action the organization must take. Linking ESG to compensation also provides an opportunity to signal across the enterprise that certain strategic or cultural pivots are underway, according to the panel, which may cause stakeholders to think about what they can also do to align themselves with this effort. The panellists did acknowledge, however, that quantitative metrics can be a challenge in ESG and that this would be an area ripe for development as the ESG movement progresses.
Navigating the Challenges of Operationalizing ESG
- Have you experienced setbacks in operationalizing ESG? If so, how do you deal with them?
The panellists shared that setbacks are inevitable in embracing any purpose driven cultural change and that leading the process of operationalizing ESG is no different. They encouraged the audience to think about operationalizing ESG as a journey that will require humility and thoughtful consideration of issues as they arise.
A) Difficulties with Data
As one example, the panellists discussed the difficulties associated with data in this space. One panellist described data as the foundation of decision-making, which then poses issues where ESG-related data is either difficult to collect and measure or difficult to leverage.
B) The Absence of a Standard ESG Reporting Framework
Another example of an ESG-related challenge that was raised was the selection of a standard for ESG-related reporting, as there are several prominent yet voluntary frameworks used at this time. The panellists noted that a lot of time and energy may be required to identify an ideal framework for your organization before beginning to meet its criteria. McCarthy Tétrault has reviewed the latest national and international developments in sustainability and climate-related disclosures in a series of recent blog posts, which may be found here and here.
Education was the third example raised by the panel, which noted that stakeholders requiring ESG up-skilling may find certain content difficult to engage with due to its scientific rigour.
In light of these examples, the panel encouraged the audience to expect and plan for the inevitability of setbacks. They encouraged the audience to consider where they should focus their operationalizing efforts and where support from other stakeholders or external resources would be of benefit on this journey.
Thinking about the "Return" on your Organization's ESG Investments
- Are you aware of, or do you have recommendations, for financial benchmarks for spending to ensure cost-effective initiatives? Have you considered cost-benefit models for ESG-related expenditures?
Although expenditures are inevitable when moving ESG policies into action, the panellists encouraged the audience to consider how their organization's efforts could be self-sustaining and yield multiple benefits. The transition to paperless operations was provided as an example. The initial costs to implement this initiative would be followed over time by not only the environmental benefits from reduced paper usage, but also the associated cost savings. This example served as a reminder that the whole point of ESG is to improve enterprise sustainability, by creating value over the longer term.
The panel, as a parting thought, also shared a challenge to the premise underlying this question. The panellists encouraged the audience to not think about their ESG and sustainability efforts as traditional "ROI" investments, but as efforts also yielding significant social impacts that may not be easily captured in risk-return equations.
To view the original article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
