Note: This is part of a series about how companies can integrate sustainability into their core business strategies. The previous articles in the series describe how to assess your company’s sustainability strategy, how to identify material ESG factors and stakeholders and how to engage those stakeholders.
Once your company has completed its materiality matrix by identifying which ESG issues and stakeholders should shape its business strategy, here are the next steps to develop, benchmark and activate your sustainability strategy.
First, brainstorm what risks and opportunities might be associated with the material ESG issues you have identified and then explore how you might tackle them. Let’s assume that water use is a big challenge for your business. You will first need to understand where the risks are in your supply chain and explore potential solutions. For instance, if you use a lot of water in manufacturing facilities in regions with water quantity and quality issues, and local water supplies in those regions are threatened by extreme weather events and poorly managed water withdrawals, then you should explore strategies such as watershed conservation and protection, as well as technologies and procedures that reduce your own water footprint. Levi Strauss, for example, set 2025 water use targets for manufacturing based on local water stress to increase the number of products made in facilities that recycle and reuse water.
Brainstorm what risks and opportunities might be associated with the material ESG issues you have identified and then explore how you might tackle them.
You must then define the future goal that you would like to achieve and how you can get there through defining milestones and objectives. What is your baseline — how much water are you using now? How much water reduction is necessary to be truly ambitious relative to peer standards, how much is feasible, and what is your action plan? Are you developing the opportunities as well as tackling the risks? For example, the development of a new water-conservation technology might provide a competitive advantage with customers or become a product that you sell to competitors. To seize that opportunity, you must understand your current water-use performance, benchmark against competitors, explore technologies that can reduce water use, and reach out to key stakeholders such as NGOs, community groups and regulators that are working on water issues in your operating regions. Using the previous example, Levi Strauss set a goal of reducing freshwater use in manufacturing by 50 percent in high water stress areas by 2025 from a 2018 baseline.
Third, build the ESG goals and strategies into your business plan. Continuing the example of water use in your factories, you will likely have overall goals related to the optimal functioning of those factories, including operational costs, quality of goods produced and capital investments planned. Improving those factories’ performance on water should become part of your overall goals associated with manufacturing. Investing in better water management can reduce costs (less water in, less wastewater out, thereby reducing the likelihood of factory shutdowns due to lack of water) and improve performance (better community reputation and relationship with regulators, etc.).
Map your industry’s strategies
Each industry has a set of commonplace and cutting-edge sustainability strategies as well as a set of practices associated with each strategy. Across the value chain for each strategy, there will be a set of practices that a company can pick to drive better societal and financial performance. Companies can identify varying levels of effort for different strategies; they may wish to perform in the middle of the pack for an issue they see as table stakes, but take a leadership role that drives innovation in an area ripe for competition. For example, a meat company might decide to meet minimum industry standards for animal welfare, while leaning into innovative ways to scale regenerative agriculture. Because the type of strategy and related practices will vary for each industry and company, mapping your industry’s strategies and practices will be a very helpful exercise.
Establish organization-wide key performance indicators
Most reporting and disclosure standards have process-based key performance indicators (KPIs). That may be acceptable for reporting, but to improve management and performance, companies must develop outcome- and impact-based KPIs. To help explain the difference, let’s say a company aims to improve diversity and inclusion. To do so, it may hire a diversity officer, which is an input; publish a diversity, equity and inclusion policy, which is an output; and train 50 people in diversity and inclusion, also an output. The outcomes are the results of these inputs — 20 percent managers of color, 100 percent pay equity. Assessing the impact of those outcomes will require the company to determine what state it must achieve for it to be diverse and inclusive, and drive better results such as increased productivity and creativity.
Companies can identify varying levels of effort for different strategies; they may wish to perform in the middle of the pack for an issue they see as table stakes, but take a leadership role that drives innovation in an area ripe for competition.
Organizational sustainability KPIs should tie back to the business strategy and provide accountability for executive leadership as well as rank and file. For example, companies are beginning to tie compensation to sustainability performance and financial performance. The KPIs should focus on material ESG issues and avoid complexity or tackling too many issues. It should be possible to assess and track them. A common waste management KPI that can be assessed and tracked is percent of landfill diversion rate.
Develop and implement action plans for meeting sustainable business goals
Having developed your KPIs, you should now develop an action plan to operationalize them, including timing, resources and activities. How many years/months will it take to meet your goals? What are the interim dates? What types of activities must you implement? What human resources are needed? What technological and financial resources do you require? What type of internal reporting and oversight is necessary?
As sustainability tends to require execution across an organization, multidivisional engagement is key to designing those work plans. For example, many companies set public goals for significant carbon reductions. Some have already thought through how they will achieve those goals, while others set goals in line with what science recommends without having figured out how to get there. In both cases, the step after making those commitments and determining KPIs is to develop action plans.
You will need to assess the following: How do your goals translate into quantitative and qualitative targets, and what are the required steps to meet them? Who are the stakeholders that need to be involved to design and implement an actionable plan? How do you ensure that individuals who do not report to a sustainability lead will effectively implement sustainability initiatives? Your organization’s structure is critical to achieving sustainability goals.
How many years/months will it take to meet your goals? What types of activities must you implement? What human resources are needed? What technological and financial resources do you require?
Who in the organization is translating ESG topics into the language of sustainable business? For example, defining who will translate the issue of climate change into supply-chain disruptions, operational continuity and raw material prices will help the organization get behind the implementation of your plan. In your role in sustainability, you can start these conversations and build the internal bridges needed to collect and analyze this data, including bringing in the finance team.
In summary, just as with any form of business planning, well-researched and grounded sustainability KPIs, backed up with the appropriate resources and implementation plan, will be key to success. Most critically, sustainability KPIs should integrate with the broader business KPIs and help the business manage the material ESG risks and opportunities for its sector.
The “Practitioners’ Guide to Embedding Sustainability,” created by the NYU Stern Center for Sustainable Business, offers additional guidance. Our next GreenBiz installment will cover creating a sustainability culture at your company.