Why Every Business Should Care About ESG and How to Overcome Barriers to Integration (2024)

Environmental, social, and governance (ESG) considerations have become increasingly important for businesses, with stakeholders demanding greater accountability for sustainable and responsible practices. However, many companies face significant barriers when trying to integrate ESG into their corporate strategy.

One of the key barriers to ESG success is a lack of awareness and understanding of ESG issues. According to a recent survey, only 15% of companies had a comprehensive understanding of ESG risks and opportunities, while 30% had only a basic understanding. This makes it difficult for companies to identify relevant risks and opportunities.

Inadequate data and analytics is another barrier to ESG integration. Companies need access to high-quality data and analytics to effectively address ESG issues. However, a recent study found that only 17% of companies were able to fully quantify the financial impact of ESG factors, highlighting a lack of resources and expertise in collecting, analyzing, and reporting on ESG data.

Another barrier to ESG success is a short-term focus and a lack of incentives. Many companies prioritize immediate financial returns over long-term sustainability, and the lack of incentives for companies to prioritize ESG can make it difficult to justify investments in sustainability. A study by the Harvard Business Review found that only 1% of executive pay packages were tied to ESG performance.

A fragmented regulatory landscape is also a significant barrier to ESG integration, with varying standards and reporting requirements across jurisdictions. This can make it difficult for companies to comply with regulations and report on ESG performance in a meaningful way. A recent survey found that 61% of companies viewed the lack of a global ESG reporting standard as a barrier to effective ESG integration.

Experts in the industry emphasize the importance of ESG integration. David Hunt, CEO of PGIM, stated that many companies still see ESG as a peripheral issue rather than something that is core to their business strategy. Jessica Ground, Global Head of Stewardship at Schroders, stressed that companies need to prioritize the collection, analysis, and reporting of ESG data to demonstrate their commitment to sustainability.

Fiona Reynolds, CEO of the Principles for Responsible Investment, highlighted the growing demand for companies committed to ESG, while Paul Polman, former CEO of Unilever, pointed out the difficulty companies face in making long-term investments in ESG without clear incentives and regulation.

Despite these barriers, businesses that prioritize sustainability and commit to addressing them can benefit from improved financial performance and demonstrate their commitment to responsible and sustainable business practices. As the global demand for sustainable and responsible practices continues to grow, businesses that prioritize ESG will be well-positioned to succeed in the long run.

Who Should Take Ownership of ESG within the Organization?

ESG integration requires cross-functional collaboration across the organization, as it touches on a wide range of areas such as operations, supply chain, finance, HR, and marketing. As such, ownership of ESG should be shared across various departments, with a senior executive or team responsible for overseeing ESG integration and reporting to the board.

In some organizations, this responsibility falls to the Chief Sustainability Officer (CSO) or Head of ESG, who is responsible for overseeing the development and implementation of ESG initiatives.

If there is no Chief Sustainability Officer (CSO) or Head of ESG within an organization, ownership of ESG can be shared across various departments, with a senior executive or team responsible for overseeing ESG integration and reporting to the board. The responsibility can be assigned to the Chief Financial Officer (CFO), Chief Operating Officer (COO), or Chief Marketing Officer (CMO) depending on the organization's structure and priorities. In some cases, a dedicated ESG task force or committee can also be formed, comprising representatives from different departments who work together to integrate ESG into the organization's strategy and operations.

Regardless of who takes ownership of ESG, it is important to ensure that there is buy-in and engagement from across the organization, and that ESG considerations are integrated into decision-making processes. This can be achieved by establishing clear ESG goals and targets, providing training and education on ESG issues, and regularly reporting on ESG performance to all stakeholders.

By taking a collaborative and inclusive approach to ESG, companies can successfully integrate sustainability and responsible business practices into their strategy and operations and demonstrate their commitment to creating long-term value for all stakeholders.

When selling ESG to a C-Suite/Board, it is important to emphasize the following five key points:

1. Financial benefits: Highlight the financial benefits of ESG integration, such as improved risk management, increased operational efficiency, and access to new markets and investors. Studies have shown that companies with strong ESG performance tend to have better financial performance over the long term.
2. Reputation and brand value: Emphasize the importance of reputation and brand value in today's marketplace, where consumers and investors are increasingly demanding sustainable and responsible business practices. Companies with strong ESG performance are often seen as more trustworthy and attractive to customers and investors.
3. Regulatory compliance: Highlight the importance of complying with relevant regulations and reporting requirements related to ESG. Failure to do so can result in reputational damage, legal penalties, and loss of business opportunities.
4. Talent attraction and retention: Emphasize the importance of ESG in attracting and retaining top talent, particularly younger generations who prioritize working for companies that are committed to sustainability and social responsibility. A strong ESG agenda can help companies attract and retain talented employees who share their values.
5. Long-term value creation: Finally, emphasize the importance of ESG in creating long-term value for all stakeholders, including shareholders, employees, customers, and the broader community. Companies that prioritize ESG are well-positioned to succeed in the long run, as they are able to adapt to changing market conditions and address emerging risks and opportunities.

Practical steps to integrating ESG into Corporate Strategy

Integrating environmental, social, and governance (ESG) considerations into corporate strategy can seem like a daunting task, especially for organizations where ESG is not yet a core part of their business strategy. However, the integration of ESG is not as complicated as it seems, and here are some practical tips to help companies get buy-in for an ESG agenda.

1. It's important to align ESG with the company's broader business strategy and demonstrate how it can contribute to long-term financial success. This will help to gain support from senior leadership and other stakeholders.
2. Educating employees on the importance of ESG and its benefits can help raise awareness and build support for ESG initiatives. Companies can do this through training, internal communications, and external engagement.
3. Accessing the right data and analytics are essential for effective ESG integration. Companies need high-quality data to identify and manage ESG risks and opportunities. The use of credible and transparent metrics is important to demonstrate the company's commitment to ESG and build trust with stakeholders.
4. Setting ambitious goals and targets for ESG performance can demonstrate the company's commitment to sustainability and provide a clear focus for action.
5. Engaging with stakeholders, such as investors, customers, and community members, can help to understand their perspectives on ESG and build support for ESG initiatives.
6. Regularly reporting on ESG performance and progress towards goals, using credible and transparent metrics, can help demonstrate the company's commitment to ESG and build trust with stakeholders.

By following these practical steps, companies can overcome the barriers to ESG success and demonstrate their commitment to sustainability and responsible business practices. Integrating ESG into corporate strategy requires engagement and support from across the organization, with ownership shared across various departments. With the right approach, companies can successfully integrate ESG into their corporate strategy and reap the benefits of long-term financial success and responsible business practices.

The importance of ESG considerations in corporate strategy cannot be overstated. While there are significant barriers to successful ESG integration, such as a lack of awareness and understanding, inadequate data and analytics, short-term focus, and a fragmented regulatory landscape, companies that prioritize sustainability and commit to addressing these barriers can benefit from improved financial performance, impact investment, reputation and brand value whilst demonstrating their commitment to responsible and sustainable business practices.