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While ESG is likely to evolve both in substance and name in the coming years, its underlying impulse is here to say. Here’s how companies can take a more systematic and rewarding approach to ESG.
The ‘how’ of a company’s environmental, social, and governance (ESG);proposition starts with recognizing what companies should be solving for: maintaining and reinforcing their social license to operate, in the face of rising externalities. Rising scrutiny of how companies address ESG means that a robust approach is more critical than ever, irrespective of whatever name one may choose to give to the attempt to address these externalities, whatever contours one may define for them at a given point, and whatever organizational or governance construct one may put in place for them. Indeed, we believe one may be agnostic to the term ESG but not to its underlying concerns.
Not all aspects of “E,” “S,” and “G,” however, are priorities for all companies, and it is unrealistic to expect that companies do not have to make hard trade-offs within and among ESG dimensions, or that they can lead on every topic. It is therefore instructive to observe companies that approach ESG in a rigorous, strategy-driven, socially attuned way. We call these organizations “forward-looking companies.” They make ESG intrinsic to their strategy by defining, implementing, and refining a carefully constructed portfolio of ESG initiatives that connect to the core of what they do. Forward-looking companies also contribute to a competitive landscape where good corporate citizenship is marshaled against existential challenges, not least—but not only—climate change.
When a company determines the dimensions of ESG where it wishes to be good and where it wishes to be excellent, it is making important decisions, with broader second- and third-order consequences. Forward-looking companies approach ESG decisions by seeking to gain a deep, evidence-based understanding of their own business and its broader potential effects. Since by now every major company has begun to embark on an ESG journey, and many have significant programs already under way, it is helpful to consider ESG progress in the context of a maturity curve. The ESG practices of today’s large companies generally cluster along three levels of ambition (Exhibit 1).
Exhibit
Being forward looking in ESG necessarily calls for considering the needs...