Big or small, you need an ESG strategy

Sam Chakraborty
Carlos Tellez
February 19, 2024

Defining the ESG strategy for your company

In the evolving business landscape, integrating Environmental, Social, and Governance (ESG) principles into a company's core strategy is not a burdensome box to check but rather a natural extension of existing practices. This piece underscores that ESG integration, far from being a complex initiative reserved for industry giants, is an accessible and value-generating path for businesses of all sizes and highlights the United Nations' 17 Sustainable Development Goals (SDGs) as a guiding framework.

When considering ESG, we must contemplate the three scopes outlined in the Greenhouse Gas Protocol (GHG) Protocol, which must be assessed in a business:

  1. Scope 1 emissions are greenhouse gas emissions from sources directly owned or controlled by a company.
  2. Scope 2 emissions are indirect greenhouse gas emissions arising from the generation of purchased electricity, heating, cooling, and steam.
  3. Scope 3 emissions are other indirect greenhouse gas emissions from activities across the value chain. These sources are not owned or controlled by the company.

In 2023, Walmart's ESG strategy was recognized by private and public institutions alike. The United States Environmental Protection Agency (EPA), named Walmart as the number one retailer in its Green Power Partnership. Despite challenging efforts to realign its business, the company’s ESG strategy demonstrates that integrating ESG considerations into business operations can improve financial performance while addressing broader societal challenges. Specifically, embedding ESG into the company’s processes ultimately supports the bottom line by reducing costs, managing risks, enhancing brand reputation, attracting talent, securing capital, driving innovation, and ensuring regulatory compliance.

While large public companies may feel pressure from proxy advisors such as Glass Lewis and ISS, smaller public companies and private companies may want to move quickly in implementing ESG strategies. In many cases, there will be a realization that ESG-friendly practices are already in place and simply need policy and process formalization that will not only appease those in the supply chain but, over time, make ESG accretive to the bottom line.

The material impact of adopting ESG strategy

  1. Cost Reduction through Sustainability: A company can significantly reduce its operational costs by implementing energy-efficient technologies and renewable energy sources. For example, investing in solar panels and wind energy can reduce electricity costs. Optimizing supply chain logistics for efficiency reduces carbon emissions and lowers transportation costs.
  2. Risk Management: ESG initiatives help the company mitigate various risks. Environmental strategies reduce the risk of regulatory fines and penalties related to carbon emissions and waste management. Social governance, including labor practices and community engagement, mitigates reputational and legal risk. This comprehensive risk management approach protects the company's bottom line by avoiding costs arising from negligence or non-compliance.
  3. Brand reputation and customer loyalty: Consumers increasingly favor companies committed to sustainability and ethical practices. A company’s ESG efforts enhance its brand reputation, attracting customers who prioritize environmental and social responsibility. This can increase customer loyalty and sales, contributing positively to the bottom line.
  4. Attracting and retaining talent: A strong ESG record can also make Walmart a more attractive employer. Many employees, especially millennials and Generation Z, prefer to work for companies that share their values on sustainability and social responsibility. By attracting and retaining talented employees, the company can ensure a more engaged and productive workforce, which is crucial for innovation and long-term profitability.
  5. Access to capital: Investors increasingly consider ESG factors in their investment decisions. Companies with strong ESG practices often have better access to capital at more favorable terms. For the company, this means it can finance its operations and expansions more efficiently and profitably.
  6. Innovation and market opportunities: A company’s commitment to ESG can drive innovation and develop new products and services that meet emerging consumer demands. For instance, offering sustainable products or creating more efficient supply chain solutions can open new markets and revenue streams.
  7. Regulatory compliance and incentives: By proactively addressing ESG issues, the company can stay ahead of regulatory changes, avoid penalties, and benefit from incentives for sustainable practices. This proactive approach can lead to cost savings and operational efficiencies that positively impact the bottom line.

Opportunities for companies of all sizes

Industry giants do not operate alone. Ultimately, these leaders rely on entire networks of collaborators and suppliers. Many small and medium-sized enterprises (SMEs) that already perform tasks aligned with ESG principles often need explicit recognition. These activities range from employing local community members and engaging in local issues to implementing energy-saving measures. The key is recognizing these efforts as part of a broader ESG strategy, thereby harnessing their full potential. By consciously framing these actions within an ESG context, companies can communicate their commitments more effectively, gaining tangible benefits regarding recognition, reputation, and differentiation in the market.

Environmental responsibility, for instance, often already exists in the form of energy-efficient operations or waste reduction measures. Formalizing these efforts under an ESG strategy enhances a company's environmental footprint, reducing costs in the long term, and signals to stakeholders the commitment to sustainability. This can open doors to new markets, improve investor relations, and meet the growing consumer demand for environmentally responsible businesses.

The social dimension of ESG is where many companies have an inherent advantage, especially those with strong community ties or those that prioritize employee welfare. Deliberately aligning these practices with an ESG framework can significantly boost a company's standing in the hearts and minds of its customers and the public. It transforms routine activities into powerful narratives about a company's positive social impact, enhancing brand loyalty and employee engagement.

In governance, the ethical practices and transparency that many businesses adhere to can be further leveraged under an ESG strategy. By explicitly incorporating these practices into their governance structures, companies strengthen compliance and risk management and enhance their appeal to ethically minded investors and customers. Consistent with the theory underlying Michael Porter’s five forces, SMEs can harness the force of supplier bargaining power by outperforming their competitors through managerial styles focused on ESG principles, which cut expenses in the long term. SMEs can further benefit from local and federal tax breaks, more efficient operations, reputational gains with the community, and becoming the suppliers of choice for industry leaders.

The broader picture

Recognizing and formalizing existing ESG-aligned activities allows all businesses to articulate their value proposition more clearly. This leads to differentiation in a crowded market and a preference among customers who increasingly favor companies with firm ESG commitments. Additionally, a well-defined ESG strategy can unlock collaboration opportunities that further enhance a company's sustainability efforts and market position.

The journey of defining an ESG strategy is not always about starting from scratch; rather, in many instances, it’s about recognizing, formalizing, and building upon existing practices. By aligning their operations with the SDGs and consciously adopting an ESG framework, companies of all sizes can achieve sustainable success and a distinguished position in the market. This deliberate approach to ESG is not just a business strategy; it's a commitment to a sustainable and equitable future, resonating powerfully with customers, investors, and the wider community.

Our team can help your company achieve a clear, pragmatic, and actionable ESG strategy. Contact us to explore how we can help you.

Sam Chakraborty
Managing Director
schakraborty@socorropartners.com
+1.917.914.2784
Carlos Tellez
Senior Strategy Consultant
ctellez@socorropartners.com
+57.315.355.3101
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