ESG is at a crossroads. Stakeholders have varying expectations, priorities, and requests. Standards are changing. Laws attempt to speak a single language but prescribe different activities and disclosures. Definitions of ESG vary among standards bodies, rating organizations, regulators, legislators, and investor stewardship groups. Some people advocate abandoning the term altogether in favor of other concepts such as sustainability, impact, or materiality. And there are those who say ESG is misguided–or even value-destroying.
However, ESG isn’t going away. Companies receive daily requests–and more recently, demands–for ESG information from investors, customers, regulators, and lenders. Speak to anyone advising corporate management, and they’ll tell you that the number of inquiries and requirements is increasing, not decreasing–and that the inquiries are becoming more insistent and the requirements more burdensome.
Institutional investors need information about ESG performance because their clients demand it. Customers need ESG commitments to achieve their own ESG goals. And based on research from MSCI and McKinsey & Company, ESG data may even get you a discounted cost of capital from your lenders.
Stakeholders want ESG information because they believe ESG drives value in concrete, demonstrable ways, affording advantages in the form of risk mitigation, access to capital, cost savings, innovation, securing new customers, retaining employees, and enhancing reputation. Expectations may change, standards may evolve, laws may multiply, and the terminology may shift–but the simple fact is that done right, ESG is good business.
Here’s the catch: An ESG program must align with the business and its strategic drivers. Otherwise, claims of greenwashing and corporate waste may be legitimate. To find solid footing, drive value, and manage anti-ESG sentiment, an ESG program must be right-sized and integrated with the business.
A guide for ESG at the crossroads
To help companies navigate a shifting ESG landscape, we have created an original, robust, practical, multi-stream ESG Maturity Model that is useful for any company regardless of business model or industry. Based on practical experience and informed by data, our ESG maturity model provides the blueprint for an ESG program that is tailored, targeted, and, above all, relevant to a company’s business.
Board governance
The ESG maturity model starts with board governance as the foundation–establishing oversight for a company’s ESG program and the use of this model. That typically entails revising board committee charters to include responsibility for ESG oversight as well as regular communication and review to ensure strategic alignment of ESG initiatives.
ESG priority assessment
The next step is an ESG priority assessment to identify topics relevant to the business, management, and stakeholders. The ESG priority assessment informs the board and management on the company’s overall ESG strategy through a careful review of relevant frameworks, peer and industry group benchmarking, and investor priorities. A retail company may identify sustainable products as a top priority, while an AI company may focus on responsible innovation or data center energy consumption.
Management oversight and ESG workstreams
The ESG maturity model calls for a management-level, cross-functional ESG Steering Committee to identify the programs, existing or new, to which the company should devote time and resources. A properly constituted ESG steering committee can unlock new synergies and opportunities. For example, providing the forum for a therapeutics company’s access and affordability lead to speak with the head of diversity, equity, and inclusion can yield patient-centered insights with real benefits for the business. Establishing an office of ESG with an executive lead to act on findings from the ESG priority assessment will support day-to-day operational advancement.
ESG goals, metrics, and data collection
At this point, the ESG maturity model turns to goals and metrics tied to business success. Companies begin by collecting relevant data or understanding where that data is kept. Then, companies can consider how to use that data, including whether to set targets with respect to greenhouse gas emissions, workplace safety, responsible sourcing, or other relevant ESG topics.
Stakeholders are putting more pressure on companies to set ESG targets. As of June 2023, of the 673 U.S. companies that had set or had committed to set near-term Science Based Targets initiative (SBTi) climate targets, 61% made this pledge in the prior 18 months, our research shows.
Reporting, evaluation, and iterative improvement
The model builds to consistent, accurate, verifiable disclosure with a reporting mechanism. It also envisions companies assessing the effectiveness of the program and iterating year after year, taking right-sized steps up the maturity curve to the level appropriate given each company’s business.
ESG is at a crossroads–and the next steps companies take are critical.
We created the ESG maturity model to help companies avoid box-checking exercises and instead focus on what is important to the business and how to drive long-term value in a practical way.
The model provides a roadmap for precisely what to say “yes” to when it comes to ESG. Just as importantly, it empowers a company to say “no” to ESG measures that are not tied to the business, don’t drive value, and don’t advance corporate strategy.
Jeff Levinson is SVP and General Counsel at NetScout Systems, Inc. and its Chief ESG Officer. Ashley Walter is Partner-in-Charge, ESG, at Orrick. The ESG Maturity Model was developed in partnership between Orrick and NetScout Systems, Inc.
More must-read commentary published by Fortune:
- Return-to-office mandates: Why tax breaks are not a reason for companies in states such as Texas, Utah, and New Jersey to force employees back
- Freakonomics author: ‘Objections to data science in K-12 education make no sense’
- America was the world’s largest producer of primary aluminum until recently. Now companies are warning the 2% U.S. market share puts the energy transition at risk
- The growing case for doing less: How harmless cancers are being overdiagnosed in America
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
