Across industries, sustainability has become a strategic priority for achieving competitive advantage in business. Environmental, social, and governance (ESG) targets reflect the sustainability goals of organizations, regarding factors such as providing a living wage across the supply chain, increasing diversity, reaching a net-zero carbon target, and improving equity.
However, making commitments of this magnitude does not guarantee follow-through in achieving environmental, social, and governance targets. For successful ESG sustainability and ESG management, organizations must have effective and targeted corporate mobilization. Across industries, there are several common pitfalls and ESG risks that organizations need to anticipate and mitigate for effective ESG strategy.
The first aspect of ESG transformation is creating goals, initiatives, and commitments for a more sustainable organization. However, without a forward-thinking plan incorporating accountability, meaningful results and effective transformation will stall. This is a common pitfall for those organizations that have less mature sustainability incorporation and may lag behind on the maturity curve compared to their competitors.
A common strategy for businesses at a less mature stage of sustainability is to allocate accountability to a core leadership group. This means that organization-wide sustainability targets’ accountability hinges on a core group of individuals within the organization, and clear accountability and incentive across the organization is removed. Sustainability measures and goals must be tied into incentives and performance measures across the organization for long-term sustainability and ESG impact to be consistently prioritized, and allocation of accountability to a small group of leaders removes this widespread incentive.
An organization at an advanced stage of sustainability, using sustainability as a core pillar to significant competitive advantage, will instead break down and target the larger, organization-wide ESG standards and sustainability goals into clear KPIs. This results in near-term targets that are clear, decisive, and quantified at the business level, and lead to organization-wide sustainability goals across all aspects of the supply chain. Core sustainability targets are then successfully weighted and incorporated into employee and department compensation. This allows incentivization for sustainability metrics to be effective at all levels of the organization instead of just at the executive level. This gives all employees an in-depth understanding of how their area of work has the ability to impact organization-wide sustainability.
When sustainability is not embedded into day-to-day decision-making and processes across all levels of the organization, the mindset of the workforce may continue to view sustainability outcomes as not being a company-wide responsibility. This mindset divide will limit employees’ ability and willingness to align their daily decision-making and processes with long-term sustainability goals due to the perception that only the sustainability team or core leadership group is accountable for this. Organizations with mature ESG transformations identify key business processes that produce the largest sustainability impact, allowing a focused change in areas such as procurement, product development, capital expenditure, and business planning.
It is essential to integrate sustainability criteria and ESG governance so that sustainability goals are closely linked to overall business goals. Sustainability should be discussed and evaluated in the same format as business progress. This process involves the reconfiguration of business reviews to incorporate sustainability KPIs in addition to financial KPIs. Incorporation of sustainability KPIs allows leadership teams and organization executives to have regular insight into ESG progress.
A key determinant for the efficacy of ESG transformation is the strength of the commitment made to long-term sustainability by senior leadership. Lack of management support at the top level is a key barrier to organization-wide sustainability progress. It is not enough for leaders to personally believe in sustainability commitments; external engagement is necessary to produce a consistent message of commitment to all levels of the organization.
There are a number of ways in which senior leadership can effectively demonstrate commitment. Within the organization, this can be demonstrated internally by frequent discussions with employees regarding sustainability outcomes and KPIs. When an effort is made to have these conversations consistently, connection of sustainability to business value, organization mission, and long-term success or compensation can be demonstrated.
Many executives for organizations that incorporate sustainability as an effective key pillar will choose to become thought leaders in the areas of ESG sustainability and ESG governance, by producing publications or giving talks on these topics. This allows sustainable change to be influenced not just within the organization, but externally, both within the industry and across industries.
Transforming toward environmental, social, and governance sustainability criteria require follow-through by appropriate workforce talent and organization capabilities to create ESG impact. Across industries, demand for sustainability skill sets in talent is set to become higher than supply. This puts organizations who have not already recruited or invested in sustainability skill sets at a competitive disadvantage, but organizations may find it challenging to identify the skill shifts that are necessary for ESG strategy.
Incorporating new business models and ESG-driven changes to services, processes, and products requires an often-significant change in skill set, which may not be possessed by the existing workforce. This pitfall can lead to stalling of sustainability strategies and reduced effectiveness of ESG management.
To overcome this ESG risk, organizations must begin with a focus on their sustainability agenda and then work backward. Once targets are clearly defined, organizations can then pinpoint the relevant skill sets required to meet ESG targets. With clear parameters of desired skill sets in place, leadership teams can evaluate skill gaps across the organization by carrying out a targeted capability assessment. With gaps identified, strategies to fill these gaps can be implemented via the acquisition of new talent to acquire more specialized skill sets, external partnerships, or upskilling of the workforce to build capabilities.
Sustainability goals require cross-functional coordination of business units and the central sustainability team if they are to be achieved effectively and completely. A complex organization is a significant barrier to sustainable business strategy if sustainability efforts are not well-organized and centralized. Without a clear definition of the roles and responsibilities of teams and departments within the organization in ESG strategy, progress becomes slow and inefficient and execution is confused. This in turn drives a negative workforce mindset and reduced commitment across the organization.
Definition of roles and responsibilities in transformation for ESG can be improved by establishing a team consisting of experts in the design and execution of sustainability initiatives. Frequent collaboration and consultation with experts in these areas allow business units to consult freely regarding sustainability initiatives, reducing inefficiency and improving sustainability strategy. Correctly utilizing a center of expertise via a defined interaction model allows a sustainability lens to be applied to decision-making across all levels of the organization.
Early on in an organization’s sustainability strategy, the use of a central sustainability leadership team who works alongside executive leadership allows collaboration on ESG goals and targets. The central sustainability team is able to coordinate initiatives, goals, and incentives across the business, creating an organization-wide strategy that is coherent and centralized. With the increased maturity of an organization’s sustainability efforts, the sustainability team can then be divided into satellite groups across different levels of the organization, with a smaller central sustainability team remaining as a center for support. Primarily, the central team will focus on data management, communications, partnerships, and sustainability initiatives, as well as working alongside the leadership team to set and implement an ESG strategy.
Industry leaders are aware that environmental, social, and corporate governance is a key component to cutting-edge advantage across all industries, as well as medium- and long-term sustainability. Transforming for ESG allows sustainability to be harvested as an advantage across all industries and drives the movement of the organization across the sustainability maturity curve. Avoiding these common ESG risks ensures that organizations follow a streamlined and efficient path towards meeting ESG targets and successfully realizing sustainability strategy.
Changing economic trends and volatile geopolitical forces have always had a deep impact on the fortunes of businesses, posing challenges that are hugely situational and yet have the capacity to affect growth and output.