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ESG strategy is high on the list of priorities for all businesses, but it needs to be embedded throughout the organisation.
- Delivering a robust internal ESG strategy means communicating with each employee to identify their role and empower them to support the company’s ESG ambitions
- Failure to communicate your strategy will not just undermine implementation but could lead to missed opportunities
- ESG performance will be crucial in the war for talent when millennials and Generation Z dominate the global workforce – because these generations place greater emphasis on the alignment of their employer’s values with their own
Alongside the rise in impact investing, the funds industry is recognising the need for an internal environmental, social and governance (ESG) strategy. Tailored to the requirements of a fund and its stakeholders, it’s a business benefit and, increasingly, a regulatory requirement.
All of this means it is now vital for businesses to demonstrate their commitment to being responsible corporate citizens, says Aztec Group’s chief client officer, James Gow: “With growing awareness and increasing regulation, both clients and employees expect to see ESG issues high on the board agenda. Developing a robust framework around ESG practices, products and services is an opportunity to put values into action.”
But an ESG policy is only as authentic as its uptake, explains Bradley Davidson, ESG lead at RBS International: “Delivering a robust ESG strategy is not down to a single team or function: it must utilise expertise across the business. A well-communicated strategy should allow each employee to identify their role and empower them to support the company’s ESG ambitions.”
While achieving buy-in from senior stakeholders is crucial in order to create standard bearers across the business, every staff member needs to understand how they can support your ESG strategy on a practical level. So, how can businesses create an internal communications strategy to bring their staff on board? How do you create a business case for senior managers? And how do you ensure that every team member is delivering on your strategy, not just paying lip service to it?
The risk factor
Success lies in alignment, believes Alastair Pickering, co-founder of stakeholder intelligence firm Alva. “An ESG strategy is a prism through which different parts of the business view their role and make decisions.,” he says. “As with any well-articulated strategy, there is benefit in people understanding how to act in different circumstances.”
Conversely, failure to communicate an ESG strategy will not just undermine implementation, but negatively impact risk management and lead to missed opportunities.
Says Davidson: “Funds that have engaged their staff with a proactive approach to ESG will be better able to adapt to shifting investor preferences and regulatory demands. Those that haven’t will face increasing financial risk.”
There is also a reputational risk in not embedding ESG policy throughout the business, says Pickering. “As the ESG agenda has become more prominent, so have accusations of firms ‘green-washing’ – saying one thing while doing another. This gap between ‘said’ and ‘done’ is the root of most reputational risk. While there is risk associated with doing nothing on ESG, it can be more damaging to talk a good game and then fail to live up to expectations set.”
Hitting all touch points
To succeed, ESG strategy must be integral to the business model, with consistent internal messaging. ESG considerations need to flow through an organisation’s mission, values and purpose. “Communication of ESG strategy should form a central pillar for policy,” says David Postlethwaite, sustainable finance lead at Jersey Finance. “There needs to be a clearly articulated direction of travel through channels such as HR policies, the design of incentives, updates on results and risk management.”
The wider the dissemination of the ESG strategy, the better its uptake, agrees Gurpreet Manku, deputy director general and director of policy at the British Private Equity & Venture Capital Association (BVCA). “This could be through dedicated intranet pages, internal emails or training sessions. It could also be communicated at interview stage for new candidates. As all team members have a role to play, it’s beneficial to discuss the ESG strategy with all potential hires.”
The transformation required to integrate ESG considerations needs both a top-down and bottom-up strategy, believes Davidson. “We look to senior leaders to demonstrate the importance of ESG to colleagues and stakeholders, but the reach of ESG across a business means we must empower all colleagues to support our ambitions.”
Engaging the influential
While all staff must be engaged, key stakeholders will drive the ESG agenda internally. The senior management team are instrumental in the cultivation of a firm’s culture, says Manku. “If they actively champion an ESG strategy wherever they can, this will permeate the firm.”
“A well-communicated strategy should allow each employee to identify their role and empower them to support the company’s ESG ambitions.”
Bradley Davidson, ESG lead, RBS International
Postlethwaite agrees that leaders need to view ESG considerations as essential to the fund’s resilience. Senior management needs to articulate a clear vision of how ESG interacts with the business model to create long-term alignment – but building an ESG business case for senior managers requires education, including an element of myth-busting, he adds. “Having an internal champion, an ESG officer who understands the business and can translate global trends into relevant information is central to securing buy-in.”
Indeed, the growing demand for ESG-focused portfolios has made investment managers experts in the issues and therefore ideally placed to promote internal strategy. “Investment teams, tasked with identifying ESG opportunities and managing ESG risks, are crucial to a successful ESG strategy,” says Manku. “They should be upskilled before the strategy is implemented to ensure they know what they need to do, and the best way to achieve it.”
Case study: Liontrust
Already a signatory to the UN Principles for Responsible Investment (PRI) and the Task Force on Climate-related Financial Disclosures (TCFD), in 2020 asset management firm Liontrust established a Sustainability and Stewardship Committee (SSC) to drive the adoption of sustainability, resource its ESG responsibilities, and embed a positive message across the company.
Liontrust encourages staff to develop their knowledge in all areas of sustainability, supporting them in gaining CFA ESG certificates and post-graduate qualifications in corporate governance, international ethics and sustainability. Employees can attend relevant conferences, such as those arranged by the PRI, Responsible Investor and the UK Sustainable Investment and Financial Association. Tools and training are provided to empower investment managers to consider ESG risks and opportunities in their decision-making.
Reflecting a commitment to ESG issues at every level of the business, the Liontrust Remuneration Committee has also set explicit sustainability and diversity goals in the performance targets of the firm’s executive directors.
Motivation and performance indicators
Internal communication includes measuring and reporting on its uptake. “Embedding ESG into investment and reporting processes will ensure team members are monitoring the strategy regularly to achieve overall goals,” says Manku.
To be measurable, strategy must be translated into an action plan with internal deliverables, aligned to external benchmarks. ESG KPIs therefore need to cascade down into every area of the organisation, says Postlethwaite. “To achieve this, firms need to be investing in training, re-thinking incentives and compensation, giving team members a voice in shaping the strategy, and ensuring senior leaders ‘walk the talk’.”
A well-articulated strategy allows staff to combine their personal priorities with their professional duties. “The nature of the topics covered by ESG makes it an extremely motivating force for employees,” says Pickering. “Linked to a higher purpose beyond financial returns, there’s evidence to suggest that a genuine, well-embedded ESG strategy can help attract, retain and motivate staff.”
And ESG performance will be crucial in the war for talent when millennials and Generation Z dominate the global workforce. “These generations place greater emphasis on the alignment of their employer’s values with their own. A basic CSR policy is no longer enough,” points out Postlethwaite. “The ability to retain and nurture talent will rest on a genuine ESG strategy that is demonstrably doing good.”
Manku believes a well-communicated policy will attract candidates who then put it into practice, creating a virtuous circle. “A clear ESG strategy highlights a firm that wants to ‘do good by doing well’ and will draw candidates who are motivated to make a real difference to broader societal and environmental goals.”