Today, most companies have committed to improving their environment, social, and governance (ESG) performance, reporting, and ratings to meet growing demands from investors, analysts, regulators, and customers. As a result, annual ESG reporting, assessment responses, and implementation is an ongoing priority for businesses of all sizes and sectors. But, if you're an organization that's newer to ESG and sustainability, where do you start? What are actionable steps you can take to improve your ESG ratings score?
For most organizations, we recommend following these general steps and action items to boost your ESG rating and reputation:
This playbook will guide you through an overview of how to work on increasing and improving your company's ESG rating.
First, let's define a few key concepts and terms.
ESG ratings are scored assessments of a company's ESG performance, risks, opportunities, and disclosure trasparency. ESG ratings are based on different environmental, social, and governance indicators, industry-specific factors, as well as your company's ability to produce supporting documentation and evidence to verify and substantiate your disclosure.
ESG ratings are more common for publicly-traded companies, but private companies and other assets can also have ESG ratings.
ESG ratings are typically scored by analysts and published by ESG ratings firms like S&P, Moody's, and MSCI Sustainalytics. There are also third party organizations that develop and provide supply chain and procurement-related ESG ratings, like CDP.
In most countries, sustainability implementation and ESG disclosure are voluntary, not mandatory. However, recent 2022 legal changes, announcements, and impending mandates in the United States, Canada, European Union (EU), United Kingdom, Singapore, Australia, and other regions are creating stricter disclosure obligations for many types or organizations - particularly publicly-listed companies - to measure and report their ESG performance. For example, in the EU, between 2024 and 2028 most companies with European operations will need to publicly disclose ESG and sustainability indicators to comply with the EU Corporate Sustainability Reporting Directive (CSRD)
Moreover, many investors and large companies - including Walmart, Disney, Nestle, and Proctor & Gamble - are increasingly asking their investments, vendors, suppliers, and partners to complete ESG and sustainability commitments, questionnaires, and disclosures. Employees, customers, and communities are also likely to advocate for larger and more impactful ESG commitments from brands.
Having a low ESG rating is a reputational problem for companies, and can create issues and risks related to access to capital, procurement consideration, investor proxy voting, and other material concerns.
An internal capabilities assessment is an important prerequisite for diving into ESG or sustainability. Does the company's board and senior leadership have ESG expertise? Is there an experienced ESG or sustainability lead to champion, manage, and steer internal efforts? Are other teams like HR, product, facilities, operations, and supply chain educated and bought in?
Building an ESG program that isn’t properly supported or resourced can be as much of a reputation risk as inaction. Investors, customers, and other stakeholders can easily identify low levels of ESG commitment and progress. If your ESG efforts aren't championed by an executive like the CEO, CFO, or Chief Sustainability Officer, and aren't actively managed by a capable, department-level leader, your organization needs to address ESG leadership attention and resourcing before progressing further.
Another important ESG self-assessment question is ambition. Do you have the type of brand, culture, and org structure where ESG principles and practices can catch on quickly? Or will ESG implementation require long-term education, integration, buy-in, and cultivation? Is your company willing to invest in what it takes to be a leader? Or is it more important to stay competitive and keep up with peers, trends, benchmarks, and rating? Does ESG require any type of re-org?
Most organizations advance along an ESG readiness and maturity curve, moving from mandatory ESG compliance and 3rd party ratings toward ESG excellence and sustainable innovation as a competitive differentiator.
Taking stock of your internal readiness will help identify important resource, culture, and capability gaps, so you can proactively address them to pave the way for the next series of steps to improve your company's ESG ratings.
While this step isn't required to improve your ESG rating in most cases, we strongly recommend it as a way to develop internal ESG consensus and strategy clarity.
Ultimately, your ESG approach should reflect your brand, business model, company size, industry, and value chain. For example, if you’re a manufacturing company, energy usage and greenhouse gas (GHG) emissions from sites and facilities should be a material sustainability priority within your overall ESG strategy. By comparison, a consumer goods company might focus on sustainable sourcing and procurement, social compliance, water stewardship, and Scope 3 emissions from its supply chain, because those are most material to its sector. Most companies should consider employee, management, and board-level diversity as a material social set of ESG metrics.
A materiality assessment is a project to identify, refine, and assess numerous potential environmental, social and governance issues that could affect your business, and/or your stakeholders, and organize them into a short list of prioritizable topics that inform company strategy, targets, reporting, and ESG ratings. Materiality is a powerful ESG tool because, when done properly, it creates both consensus and focus around your company's ESG efforts.
A thoughtful, thorough materiality assessment process can be a helpful initial step in designing ESG KPIs (all of which can be encoded into Brightest's ESG reporting software for easy data collection, performance tracking, and stakeholder communication)
Look at your company's business model, brand, and purpose: ESG should build off that foundation and be a vehicle for positive organizational, environmental, and social change and performance improvement. Your materiality market screen should analyze industry benchmarks, peers, and ESG standards, which will help provide an initial universe of KPIs to select from.
For more on ESG materiality, please read our guide here. Or feel free to contact us directly for materiality help or questions.
Successful ESG integration requires significant internal and external stakeholder collaboration. Don't overlook this step.
If your top ESG priority is to improve 3rd party ESG ratings, we recommend contacting and speaking to ratings firms and analysts directly when possible.
Investor and analyst perspective on ESG priorities and disclosure areas is important and can help steer you in the right direction. We always recommend engaging investors during your materiality assessment, even if you're a private company. If your company is publicly-listed, review your top institutional shareholders. What are their ESG portfolio criteria and methodology? Are there any dedicated ESG strategy funds? What ESG issues are they focused on?
Many larger institutional investors and fund managers like BlackRock, State Street, Fidelity, Vanguard and others post public information on their websites about their ESG criteria, voting approaches, and investment expectations. Be sure to review and familiarize yourself with that information.
The better you understand the ESG ratings methodologies that are being applied to your company, the better positioned you'll be to take steps to improve your score and de-risk your business.
Once you understand where you need to focus and how your ESG ratings are being scored and calculated, create an overarching strategic plan that clearly outlines your top ESG priorities, including who in your organization is responsible, how you're approaching ESG integration, and what your timeline is to complete each improvement phase. Developing a roadmap will further solidify internal consensus and visibility around your firm's ESG direction to ensure accountability and adequate resource allocation. Revisit the level of ESG and sustainability ambition you previously identified, and outline what it will take to deliver on those commitments.
Brightest helps hundreds of companies around the world prioritize, manage, measure, report, and improve ESG performance and reputation
Once you have a plan, it's time to start working on steps to improve your ESG rating. Work with different senior leadership and different stakeholders across your organization - finance, operations, supply chain, HR - to design a focused set of targets and KPIs to track ESG progress and performance related to key ratings criteria. These targets and indicators should be based on ESG or sustainability reporting standards, ratings methodologies, peer benchmarks, and operational feasability studies. For example, a leading global beauty brand tracks 40 top ESG KPIs across its business, with different department leads responsible for specific metrics. A smaller company or startup will likely want a narrower focus.
In many ESG areas, there are already established, industry standard KPIs and targets. In environmental sustainability, measuring greenhouse gas emissions (GHG) in Scope 1, 2 & 3 emissions of carbon equivalents (CO2e) generated is an established, material indicator. Emissions reduction targets can be set using the science-based targets methodology.
On the social side, EHS (Environmental Health and Safety), HR, CSR, and employee demographic data also have established KPIs. Common examples include:
Common ESG governance KPIs and targets should be set around issues and topics like:
Be sure select metrics and targets that are material and relevant to your company and its ESG ratings. For example, philanthropic giving can be an indicator for community impact, but likely not for ESG ratings performance. The more your ESG initiatives align with ESG rating methodologies and criteria, the stronger you'll be able to positively influence your 3rd party ESG scoring.
Similarly, rather than trying to boil the ocean or appease everyone, focus on setting (and measuring) a few priority targets, then build from there.
Once you've established your ESG approach and ratings strategy, you need to empower ESG action to improve your scores. Again, resource allocation should follow your top priorities closely.
A common (and unfortunate) theme we often see in ESG and sustainability is under-resourcing. The board and senior management commit to an ESG strategy, appoint a mid-level manager to lead the effort, maybe assign them an intern, and call it a day. This rarely leads to the level of ESG integration, progress, and performance companies hope for to achieve the ratings increase they're looking for.
ESG isn't a job title, it's a company-wide approach that needs to be developed and cultivated around a strong business or ROI case.
At a mimimum, where possible, we recommend designing a budget that supports:
ESG should be seen as a strategic set of business practices - and a major hedge against downside risk. Establish a strong business case for ESG and make sure your organization doesn't under-invest.
Long-term ESG success and investment requires governance, structure, and accountability. The optimal structure for governing your ESG efforts will depend upon the organization, but ESG needs to have active visibility, accountability, and mindshare within the C-suite and at the board level.
We've seen ESG efforts succeed where ESG is owned at the executive level by the CFO, a Chief Sustainability Officer, a head of ESG, or sometimes another senior leader like the Chief Communications Officer, Head of Investor Relations, or VP of Finance. Whoever owns ESG, it needs to be a core job responsibility, and that leader needs to be senior enough to marshall resources, promote the necessary internal collaboration, provide oversight, and move critical initiatives forward.
An example ESG governance structure from TD Bank. Source: TD Bank
Another critical ESG implementation step is developing smart, comprehensive ESG policies and guidelines. From your firm's code of ethics and conduct to labor, health, safety, procurement, and environmental practices, policy development not only helps integrate ESG into your organization's day-to-day operations, it's also an important indicator for many ESG ratings assessments.
Establish guidelines, policies, trainings, and resources around areas like:
And other important ESG themes. In each of these areas, it's important to understand whether or not a project, process, or policy already exists internally, and, if it does, has it been recently reviewed to be consistent with the firms ESG positions and strategy? If a policy isn’t public, should it be?
As your company moves forward with ESG ratings improvement, make sure to also establish clear decision-making and approval structures, accountability, visibility, and oversight. This should take the form of multiple committees or working groups at different levels of your organizaton:
To succeed in an organization, ESG needs both oversight structure, and operational integration.
Corporate ESG ratings are based on a company having reportable, repeatable, auditable, and high-quality data. Start by creating a data inventory that includes:
Most organizations don't focus enough on developing ESG data quality and collection workflows. Think about what's most needed in your organization, who you need to collaborate with, look for opportunities to improve, and engage your ESG reporting partners and stakeholders on best practices and ways they can support this.
Brightest automates ESG data collection from different departments, sources, and systems, including integrations, spreadsheets, and surveys to create a unified company-wide ESG dashboard
ESG improvement can be a complex process, particularly for larger enterprise businesses or organizations. For a lot of the same reasons why it's better to use dedicated accounting software like Quickbooks or Oracle Netsuite to produce corporate financial reports like a 10-K, manual and spreadsheet-based ESG reporting and data management is error-prone, inefficient, and has major visibility, collaboration, accuracy, and governance issues. It also just takes a lot more time.
Given that ESG disclosure requirements are being written into everything from SEC regulation to procurement contracts in 2022, this is information that needs to be accurate, consistent, structured, and easy to access - and shouldn't tie up all your time to collect and communicate.
Moreover, ESG reporting is a recurring annual obligation. It's much more efficient to use a system that's purpose-built for auditing, archiving, historical comparison, and benchmarking. Getting the right tools and systems in place early is immensely helpful for tracking performance, comparing past reports, implementing data best practices, and up-leveling your firm's ESG ratings.
Each company is unique, and ESG ratings improvement is an ongoing learning process. While there's no one-size-fits-all approach to ESG program design and ratings optimization, approaching it as a long-term, continuous improvement practice is immensely beneficial. Above all, ESG is certainly not a short-term trend. Issues like climate change, public health, social well-being, and diversity will remain top-of-mind for analysts, consumers, and business decision-makers for years.
While ESG ratings and reporting may feel like a burden or obligation, dozens of data and examples show strong, thoughtful, and strategic ESG performance is a competitive business advantage that delivers positive ROI. Many companies start ESG work due to compliance and investor pressures, only to find that as their ESG investments, maturity, and capabilities evolve, they begin to realize significant cross-company benefits and efficiencies.
Every company's roadmap to better ESG ratings will be slightly different - and ESG truly is a long-term, strategic journey for boards and management teams. Nonetheless, the benefits of strong ESG performance on brand reputation, employee talent, culture, operational efficiency, risk management, and access to capital are not only numerous - many are quantifiable.
Above all, we wish you all the best as you continue ahead with your ESG ratings improvement plans. If we can be helpful at all (at any step in your ESG journey), please get in touch. A central part of our mission and work here at Brightest is enabling better data-driven decision-making (and actions) to help companies achieve their full ESG potential.