One Critical Mistake Companies Make When Setting Their ESG Strategy

Two roads diverged…

The Critical Mistake

Its always interesting to ask ESG leaders about their aspirations and how they define their strategy. Some are motivated by improving their rankings, some view it as a compliance effort, while others fully integrate ESG into their broader corporate strategy.

Regardless of the aspiration, the pattern I keep seeing for setting ESG strategy is a sequential process to understand what matters to stakeholders followed by figuring out how to tactically report against the metrics that matter.

On the surface, this makes logical sense — it is voluntary reporting, so a scope needs to be defined and an approach designed to capture data, author and publish.

The problem here is not the tasks, but the chronological order of these tasks. Most companies make these strategic choices sequentially, not simultaneously. In other words, they define the scope of their reports without fully grasping if they currently have, or can reasonably build, the capabilities necessary to improve the performance of and report against their agreed upon metrics.

What Does it Mean to do it Simultaneously?

Take a look at the Strategy Choice Cascade, developed by Roger L. Martin and A.G. Lafley to help organizations set their corporate strategies and notice how the arrows flow back and forth between each strategic decision — they mutually reinforce one another.

To summarize, in Martin’s words:

No meaningful Where to Play choice exists outside the context of a particular How to Win plan…The only productive, intelligent way to generate possibilities for strategy choice is to consider matched pairs of Where to Play and How to Win choices

The lower performing ESG programs I talk to look at Where to Play and How to Win in silos. They sometimes start with selecting their frameworks (as the Where to Play, which is a different sequencing issue), then conduct a materiality assessment to figure out what matters to stakeholders and then go down the path of figuring out how to collect the data and then Frankenstein the data they’ve managed to collect to tell whatever story seems feasible.

What Happens if We Don’t?

It is early days for most ESG programs, so the “let’s start somewhere and figure it out” approach is totally understandable. However, this approach does lead to a number of avoidable negative consequences:

  1. ESG reports end up disconnected and cacophonous, making it harder to educate stakeholders on commitments and progress
  2. Instead of focusing on the highest priority metrics that matter to stakeholders, time and effort is spent chasing down low yielding metrics or submitting to raters/rankers with a low ROI
  3. Data or narratives with questionable auditability are scrapped at the very last minute by Internal Audit or Legal crushing team morale and creating gaps in the overall story
  4. Sections of the report are scrapped at the very last minute because teams did not execute against their commitments/targets creating gaps in the overall story
  5. ESG teams are relatively young in most organizations and are looking to build trust and credibility with their multiple stakeholders. Any missteps in the early days around scope or process destroy trust and credibility

OK, So What Should It Look Like for ESG?

Here’s an adaptation of the Strategy Choice Cascade for ESG:

Keep in mind the arrows flow back and forth between boxes, and it is quite self explanatory.

Couple things to keep in mind:

  1. The cascade should start with understanding what matters to stakeholders first, not picking frameworks. Listen to Harvard Business School professor, George Serafeim explain why framework selection is really an outcome of defining the overall strategy
  2. In the early days, the ESG environment is data-poor, which means gaps will exist. Its critical to do an honest gap analysis while defining the strategy to set expectations around data quality
  3. In some cases, high quality data may be available, but there may not have been enough work done to improve performance in the current period. It is worth assessing whether it makes sense to report these metrics in the current report, or to keep it qualitative, focused on policies and commitments and report tangible data in the following year
  4. Once the strategic choices have been made in planning, its important to storyboard the ESG report to ensure it is telling a cohesive story. This will mutually reinforce the decisions upstream and may guide to different choices.

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