It’s time companies started to reap returns on ESG investments

Organisations are under pressure from stakeholders to develop and adopt a cohesive ESG strategy

The broad demand for ESG adoption reflects the pressure organisations are now under from stakeholders who ultimately want a good global citizen. Getty Images

The imperative for responsible investing is becoming mainstream and that applies to the environment, social and governance (ESG) segment.

The broad demand for ESG adoption reflects the pressure organisations are now under from stakeholders who ultimately want a good global citizen.

However, developing an ESG strategy — one which evaluates and addresses issues that affect an organisation’s operations and practices and potentially its value — is still proving challenging.

In a survey conducted by Abu Dhabi Sustainability Week, hosted by Masdar and Harvard Business Review to understand how businesses are enacting ESG strategies, 83 per cent of respondents indicated their organisations will increase investments in ESG initiatives over the next 12 months.

However, when questioned about the status of their ESG activities, 27 per cent said they had no formal strategy in place, with a further 10 per cent admitting they were not working on improving ESG at this stage.

The most desired outcome from investing in ESG is to enhance brand reputation, cited by 61 per cent of respondents, although only 55 per cent believe they have done so to date.

The results reflect the stage many organisations are at in their ESG journey. Though recognised as an important criterium for meeting the expectations of stakeholders, the process of identifying the priorities and developing a cohesive ESG strategy is still in its infancy.

Early adopters now have a first-mover advantage to capitalise on the opportunity by potentially attracting new partnerships, talent and investment, demonstrating quicker returns than those who lagged behind.

Identifying the right person to lead a successful ESG strategy is critical, with 33 per cent of respondents saying it’s the responsibility of the company’s chief executive to drive success. Twenty-three per cent of those surveyed believe it should be a cross-functional, ESG-dedicated team.

In the short-term, a chief executive or another member of the executive team is likely to be responsible for driving a company’s ESG strategy. It begins at the top.

Over time, we may see companies creating “chief ESG officer” positions, with experts in evaluating and addressing issues across an organisation filling the role. These people will be able to bring their ESG expertise from different industries and enact tried and tested activities that will deliver the most impact.

External agencies will also play an important role in providing independent consultancy, but delivering results will require a leader from inside the organisation.

Consultancies are likely to play a significant role in the validation and measurement of an organisation’s ESG performance. The survey showed that measurement is already a concern, with 42 per cent of respondents citing it as the greatest challenge they faced in carrying out the company’s ESG efforts.

The issue of measurement and demonstrating value could be addressed by taking a standardised approach to how ESG activities are measured, which would activate a form of gamification as companies begin to measure their success against those of their competitors.

This could be done by replicating processes that organisations already undertake, which would constitute some form of an independent audit.

By working with independent, third-party sources on a periodic basis, organisations can potentially receive ESG scores, providing stakeholders across the board with more clarity on efforts to be a good global citizen.

Strong scoring could be a powerful quality for organisations to position themselves within the market.

Independent verification would also provide feedback loops, where companies have the opportunity to gain deeper insights into which elements of their strategy are working and where they still need to improve.

Combine this approach with a dedicated chief ESG officer, and an organisation’s ESG strategy will quickly become more efficient, leading to greater brand value and a better perception among stakeholders.

Stakeholders demand an ESG strategy; it’s now time to make adoption work for an organisation.

Mohamed Al Ramahi is chief executive of Masdar