Solving Environmental, Social, and Governance (ESG) issues have historically caused lost revenue for organizations. For example, higher costs associated with environmentally friendly packaging or emissions-free delivery vehicles have presented a conflict for CPG executives who strive for the highest margins possible. Gartner’s 2022 CEO Survey shows that ESG and sustainability are still top priorities for executive leadership, but there’s a gap between the strategy of becoming more environmentally conscious while continuing to grow the bottom line.
How can organizations develop strategies to solve ESG issues that build value and contribute to transformational change without cutting into margins?
“Evolving beyond individual actions to appear sustainable is key for organizations to become operationally sustainable. The most successful organizations are sustainable organizations. They have reinvented their operations around sustainable practices, ensuring that each part of their supply chain complies.” – Elena Morettini, Global Head of the Sustainable Business Studio at Globant.
Managers must adopt the stance that sustainability is not an add-on box to check; instead, it is a new way of doing business. An effective approach to this reinvention involves all facets of the business, including finance, operations, marketing, and human resources. Globant’s experts have outlined a four-pillar model to help organizations transition away from vanity ESG reporting measures into a model that is sustainable at its core.
Pillar 1: Assessing the materiality matrix: Identify ESG issues important to your specific business or industry, then set priorities to address them
Relinquishing modest changes and focusing on bold, transformational changes will have the most significant impact. However, understanding what a priority for your business and your industry is is crucial. When embarking on this journey, strategists must ask internal and external stakeholders the following questions, among others:
- What ESG issues impact my business, or my industry, most?
- In which climate and resource-conscious ways are my competitors acting, and how might we do it better?
- What are the capabilities of our suppliers? How can we encourage them to align with our sustainable goals?
- How do we best communicate our sustainable business operations to our customers?
- Which ESG material topics are key to our business, and which do we want to tackle now?
Some ESG issues become more impactful due to mandates such as governmental regulation. For example, in the United States, organizations today must consider and manage the most difficult metric to gather their Scope 3 emissions. Those emissions, defined by the EPA’s Center for Corporate Climate Leadership as “the result of activities from assets not owned or controlled by the reporting organization,” need interaction along the entire value chain, from upstream to downstream, from providers to customers and are the most difficult to calculate. Advanced tech, such as hyper-automation through digital twinning, can accelerate the major leap required to gain such engagement.
Pillar 2: Set responsible goals and actionable steps to achieve them
Setting an ESG policy is a logical step to transforming your organization into a sustainable one at its core. Buy-in from organizational stakeholders on goals and associated activities to achieve them must be set in stone. These targets must be specific, measurable, and ambitious, compared to a baseline metric established before the project begins. The goal statements you set may look like this:
- “We want to reduce our carbon footprint by 50% over the next 24 months.”
- By setting up a roadmap to net zero by calculating our energy-related emissions using one of the available CRM modules today.
- “We want to decrease our reliance on carbon credits by 30% over the next 12 months.”
- ‘We want our sustainability transformation to add $500,000 to our bottom line within five years and leverage our stance to improve our brand.”
- By gaining the competitors with respect to goals and ambitions, our brand will be the first to associate CO2 labeling with its products. Such a distinctive disruptive feature will provide a new way to compare products.
These goals should be integrated into every business decision, large or small, at the same weight that profit and capital expenditure is considered. As much as analyzing a financial budget and an EBITDA summary, we need to start analyzing the CO2 budget of any product or process, we need to make organizations familiar with the issue. Like carbon pricing and relative taxes. An outcome-based roadmap should then accompany each objective that details time-stamped roadmaps for measuring progress and success.
Additionally, national, regional, and local regulations may help guide your organization’s goals. For example, in the United States, the recently-passed Inflation Reduction Act sets milestones for corporate sustainability through 2030. In the European Union, the Carbon Border Adjustment Mechanism, part of the European Green Deal, sets limits on carbon emissions.
Pillar 3: Focus on the balance sheet and tangential benefit tracking
Reinvention without financial improvements is a non-starter for key organizational stakeholders and potential project sponsors. When embarking on fundamentally changing how an organization approaches ESG and sustainability, a business case must include improvements to the bottom line, plus an outline of the collateral beneficial effects of the approach.
For example, the financial services industry comes into play for many organizations that seek debt financing. As financial institutions embark on building a climate-resilient banking system, sustainable companies will reap the benefits, including lower costs to borrow.
Pillar 4: Establish accountability: executives, teams, and beyond
Bold reinvention is a journey that takes expert change management to reap its rewards. To ensure stakeholders are aligned, the value of sustainability must be clearly understood, and organizational accountability measures must be established. This long-term goal should be broken down into smaller, near-term attainable milestones that can be tracked and timed. Additionally, having a dedicated champion and project manager with the personality and given authority to hold all parties accountable is an effective way to maintain a constant cadence despite the status quo operating demands of the business.
“ESG has become an increasingly important consideration for organizations in recent years. This is because ESG factors are closely tied to an organization’s long-term success and can significantly impact its economic value. Companies prioritizing ESG factors are better positioned to manage risks, reduce costs, attract and retain talent, build brand reputation, and access capital markets.
Moreover, ESG practices can drive innovation and improve operational efficiency, improving financial performance over time. By integrating ESG considerations into their business strategies, organizations can create sustainable value for all their stakeholders and contribute to a more equitable and prosperous society.” – Juan Bertiche, Managing Director, Business Hacking Studio at Globant.
Whether your organization is going to take bold and swift action to change how it operates or if it is going to make those changes gradually over time, there is a clear strategy for building a successfully profitable organization that puts sustainability at its foundation.
Do you need consultation on what sustainability transformation could look like in your organization? Globant is here to help. The experts in our Sustainable Business and Business Hacking Studios help organizations do just that. Click here to learn about our services.