This article was adapted from a piece by BDO USA, Starting Your ESG Journey: Pave the Way for a Sustainable, Resilient Future. We’ve revised the article to provide a Canadian perspective.
Each organization’s path toward sustainability is unique, but effective environmental, social, and governance (ESG) strategies and programs have something in common—they help organizations of all types and sizes better navigate uncertainty and cultivate resiliency.
The Government of Canada has committed to achieving net-zero emissions by 2050. As a result, we are starting to see various policies and regulations come into force to require Canadian organizations to participate in the achievement of this objective. Intentional planning for your ESG strategy and how to implement it over time is a demonstration of strong governance and a commitment to align with the Canadian government’s broader sustainable development goals.
A cohesive strategy can also help your business achieve benefits linked to ESG, such as improved operational efficiency and financial performance, more comprehensive risk management, enhanced stakeholder relationships, increased access to capital, and expanded market share.
As you begin your ESG journey, the volume of decisions and activities may seem overwhelming. The five-step approach below can help you navigate the complexity and develop a customized ESG strategy that delivers lasting impact.
The five-step approach identifies essential actions that provide value both on their own and when used to support actions in later steps. From initial information gathering to reporting on sustainability, this approach can help your organization pave the way for a more sustainable, resilient future.
Perform a readiness assessment
Perform a readiness assessment to evaluate your organization’s current practices and identify enhancements as you design your ESG strategy and program. A benchmarking exercise and gap analysis facilitate this understanding.
Benchmarking is conducted to assess current disclosures and sustainability maturity for your organization, your peers, and others in your sector. Regulations, voluntary ESG reporting standards and frameworks, ESG raters and rankers’ reports, and focus areas for stakeholders can all inform which topics to focus on during this exercise.
This research is used to conduct a gap analysis to identify how your organization’s disclosures and performance compare to your peers and the industry as a whole. These insights will help guide your future strategy and program development.
Understand your stakeholders and determine materiality
There is an increasing expectation for businesses to address the needs of not only shareholders, but all stakeholders. Stakeholder groups are unique to each organization, but often include investors, financial institutions, suppliers, customers, communities, and employees.
An ESG materiality assessment engages both internal and external stakeholders. It can help you understand which topics matter most to them and which ones are likely to have the most impact on your business.
Stakeholder engagement initiatives can be tailored to your organization’s available resources and program maturity. They can take the form of stakeholder surveys and interviews, or more robust engagements, such as roundtables and town halls. Insights from your benchmarking exercise and gap analysis can be used to guide these communications.
The results of your ESG materiality assessment should be formalized and include a materiality matrix, which visualizes topics by business impact and stakeholder importance.
Develop your ESG implementation roadmap
The information you gathered during your readiness assessment and the priorities you set during your materiality assessment are then used to develop your strategic roadmap. Your strategic roadmap will outline short and long-term milestones and your plans for achieving them.
Defining roles for the governance and implementation of your program is an important part of this step. The roles and responsibilities of members of the C-suite and the optimal level of input and oversight from the board of directors must be defined. To set a strategy and put initiatives into action, companies often choose to form an ESG leadership team and an ESG working team. The leadership team is made up of senior employees from multiple departments and is responsible for strategy. The ESG working team drives projects forward and provides ESG-specific training and expertise to the organization.
Setting goals and targets, and defining the key performance indicators (KPIs) to measure performance are also crucial parts of this step. The goal-setting process is an opportunity to realign with your business strategy, act on opportunity, and mitigate risk. Goal and target setting is becoming a must-have component of corporate disclosure and a necessary tool when communicating with investors, clients, employees, and other stakeholders.
The most effective approach is to set goals that are SMART—specific, measurable, achievable, relevant, and time-bound. Applying SMART criteria helps ensure that goals and targets are specific and actionable, rather than vague or generic, and can stand up to external scrutiny.
Here’s an example of a SMART version of a company’s goal to reduce its environmental footprint.
SMART goal: Minimize our environmental footprint by reducing company-wide absolute Scope 1 and 2 greenhouse gas (GHG) emissions by 45% by 2030, against a 2019 base year.
Collect data and establish controls
Once you determine the ESG metrics to track and disclose, take steps to implement controls for data accuracy and consistency. Doing so will enhance data integrity and accountability, as well as significantly reduce any reputational risks associated with greenwashing.
Examples of in-depth internal controls include:
If your organization operates in a jurisdiction where assurance over ESG-related data and metrics is required, then both regulators and public accounting firms will be focused on assessing controls. Even if not mandated for your organization, ESG assurance can be a competitive differentiator for your organization.
At BDO, we have developed an approach to help companies solidify internal controls and procedures for ESG metrics. It is important to note that this approach is not a one-and-done exercise. Controls will need to be routinely assessed to ensure they remain relevant and effective.
Prepare your sustainability reporting
Sustainability and ESG reporting is fundamental to an effective strategy and program. Annual reporting supports accountability, risk management, and transparency. Audiences for disclosure include investors, regulators, customers, employees, vendors, and the general public.
Your organization has several voluntary reporting standards, frameworks, and initiatives to choose from to help guide your reporting. The Sustainability Accounting Standards Board (SASB) Standards and the Global Reporting Initiative (GRI) Standards are two of the most widely used. The Task Force on Climate-Related Financial Disclosures (TCFD) framework and the U.N. Sustainable Development Goals (SDGs) may also be used to report on specific topics. The International Sustainability Standards Board (ISSB) has also issued its first two standards in an effort to establish global baseline sustainability standards for capital markets.
Emerging mandatory requirements may impact your organization’s compliance requirements. For example, your organization may be required to comply with the European Union’s Corporate Sustainability Reporting Directive (CSRD) and its associated European Sustainability Reporting Standards (ESRS) instead of the voluntary reporting standards, frameworks, and initiatives noted above. In Canada, starting in 2024, financial institutions regulated by the Office of the Superintendent of Financial Institutions (OFSI) will be required to publish a report that demonstrates how they are managing climate risk. The disclosures largely align with the recommendations of the TCFD.
Reporting also provides ESG rating organizations with information to score and rank companies on their ESG performance. Investors may consider these scores as they evaluate organizations. Ratings help determine whether a company is included in sustainability-focused indices and traded in the funds that track them. Prominent rating organizations include Institutional Shareholder Services (ISS), MSCI, Bloomberg, Sustainalytics, and RobecoSAM.
How BDO Canada can help
In today’s business environment, companies can look to ESG as a way of reducing risk, driving business performance, and improving corporate reputation. Taking the actions outlined above to create a new strategy and program, or incorporating these actions into existing structures and practices, can help enhance the value of your sustainability efforts.
Our team helps organizations build ESG strategies and programs that create long-term, sustainable value. Contact us to learn more about our practical solutions for a sustainable future.