Pitfalls Organizations Should Avoid While Transforming Towards Environmental Social Governance (ESG)
Sustainability has become a strategic priority for achieving competitive advantage in business. Environmental, social, and governance (ESG) targets reflect organizations' sustainability goals, 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.
Lack of Accountability and Incentives
The first aspect of ESG transformation is creating goals, initiatives, and commitments for a more sustainable organization. However, meaningful results and effective transformation will stall without a forward-thinking plan incorporating accountability. This is a common pitfall for organizations with less mature sustainability incorporation and may lag behind 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 incentives across the organization are 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 allocating 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, leading 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 can impact organization-wide sustainability.
Failure to Incorporate ESG standards in the Day-To-Day
When sustainability is not embedded into day-to-day decision-making and processes across all levels of the organization, the workforce's mindset 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. Organizations with mature ESG transformations identify key business processes that produce the largest sustainability impact, allowing a focused change in procurement, product development, capital expenditure, and business planning.
It is essential to integrate sustainability criteria and ESG governance to link sustainability goals to overall business goals closely. 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. Incorporating sustainability KPIs allows leadership teams and organization executives to have regular insight into ESG progress.
Insufficient Commitment by Senior Leadership
A key determinant of the efficacy of ESG transformation is the strength of senior leadership's commitment to long-term sustainability. 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.
Senior leadership can effectively demonstrate commitment in several ways. One is by frequently discussing sustainability outcomes and KPIs within the organization with employees. When an effort is made to have these conversations consistently, the 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 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 and across industries.
Limited Workforce Capabilities
Transforming toward environmental, social, and governance sustainability criteria requires follow-through by appropriate workforce talent and organization capabilities to create ESG impact. Across industries, the 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. Still, 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 the existing workforce may not possess. 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 pinpoint the skill sets required to meet ESG targets. With clear parameters of desired skill sets, leadership teams can evaluate skill gaps across the organization by conducting a targeted capability assessment. With gaps identified, strategies to fill these gaps can be implemented via acquiring new talent to acquire more specialized skill sets, external partnerships, or upskilling of the workforce to build capabilities.
Poorly Defined Roles and Responsibilities
Sustainability goals require effective and thorough cross-functional coordination of business units and the central sustainability team. 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 organizational commitment.
Establishing a team consisting of experts in the design and execution of sustainability initiatives can improve the definition of roles and responsibilities in transformation for ESG. 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 in an organization’s sustainability strategy, a central sustainability leadership team that works alongside executive leadership allows collaboration on ESG goals and targets. The central sustainability team can 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 and work alongside the leadership team to set and implement an ESG strategy.
Industry leaders know that environmental, social, and corporate governance (ESG) is a key component to cutting-edge advantage across all industries and medium—and long-term sustainability. Transforming for ESG allows sustainability to be harvested as an advantage across all industries and drives the organization's movement 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.
