Having an ESG strategy is no longer an optional extra for companies. The subject of sustainability has become a strategic priority for firms around the world. It is how they identify ESG risks in their own supply chain.
Who sells the most cars or makes the biggest profit? These figures were what drove the automobile industry for decades. For a long time, it wasn’t important how high carbon emissions were or which type of energy was used to power a factory. Today though, automobile manufacturers like Mercedes-Benz are setting themselves different goals: By 2030, the company wants to halve its carbon emissions. The goal is part of an ESG strategy and is representative of the global shift towards a sustainable economy.
What ESG means
ESG stands for Environmental Social Governance. The issues associated with it, such as social responsibility, environmental awareness and sustainability, as well as transparent governance, are taken in context with the activities of the company. An ESG strategy consists of goals and measures in these subject areas. Large companies are increasingly focusing on identifying and reducing ESG risks not just within their own enterprises; they also focus on the ESG ranking of business partners. For example, according to the Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (LkSG), companies must check their own suppliers with regard to ESG risks.
The strategic approach is derived from the fact that these activities must be designed for the long term and in many cases also require a transformation of processes in a company.
Based on specific figures, companies worldwide have to prove how well they fulfil ESG criteria due to increasing regulatory requirements and increasing pressure from customers and investors.
Weighting ESG criteria individually
‘Companies today need an ESG strategy based on valid data. There are different requirements depending on size and industry and these have to be taken into account when setting up the strategy and weighting the various ESG criteria,’ explains Carsten Ettmann, Senior Business Consultant Risk & Compliance at Dun & Bradstreet.
While environmental aspects are weighted particularly heavily in a chemical company, the sustainability concept of a personnel service provider should focus on social components.
ESG criteria as the basis for sustainable corporate strategies
Measuring and evaluating sustainability, social responsibility and value-based governance requires defined criteria. These include aspects such as the amount of carbon emitted, the establishment of equal opportunities in the company or certification in areas like health protection or circular economy. Such factors are used to measure and evaluate sustainability in the company and compare against competitors.
Global ESG standards as orientation
‘There is currently a lack of standardised criteria and reporting standards. Companies, customers, policy makers and the financial sector define the term ‘sustainability’ very differently. The European Consultancy Group for Accounting (EFRAG) is working right now on a template that is intended to provide help with standardisation. Until this template is available, we recommend that companies orient themselves towards standard setters like the Sustainability Accounting Standards Board (SASB),’ says Ettmann.
What is the Sustainability Accounting Standards Board (SASB)?
The SASB is an independent non-profit organisation that defines rules globally for the publication of sustainability information. Standards have already been categorised according to the subject areas of environment, social and governance for 77 industries.
Dun & Bradstreet categorises ESG data into 13 subject areas
Based on the SASB and other international standard setters (GRI, TCFD, etc.), Dun & Bradstreet categorised its ESG data into 13 subject areas. Natural resources, greenhouse gas emissions and climate risks, environmental risks, environmental opportunities, human capital, products and services, customer loyalty, social engagement, supplier engagement, certificates, corporate governance and resilience of the company. These subject areas are further divided into subsections.
‘For the categorisation, we strongly oriented ourselves to legal requirements like the Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains and the EU Taxonomy. Companies today are required to obtain information on aspects such as the carbon footprint of their business partners, working conditions or social engagement, and with D&B ESG Intelligence, Dun & Bradstreet provides a solution that makes this data easily available,’ says Ettmann.
ESG ranking for greater transparency
The ESG ranking from Dun & Bradstreet expresses a company’s risk of being involved in an ESG compliance-relevant situation that could result in financial damage. A scale of 1 to 5 is used to measure the risk, with 1 being the lowest risk and 5 the highest. If a company has a supplier with an ESG ranking of 5, it can be concluded that the risk is very nigh.
Yet this also makes it possible to identify the area in which a company has a good ranking. For instance, there is an E-ranking focusing on the environment, an S-ranking for social issues and a G-ranking that covers governance aspects. In addition, industry comparison data and information on the source data used is available so that the risks can be assessed very accurately.
‘In this way, D&B ESG Intelligence supports companies in easily identifying business partners with high ESG performance in order to make the right business decisions and uncover risks such as damage to reputation, regulations or operations in the supply chain,’ says Ettmann.
ESG data on millions of companies around the world
Dun & Bradstreet draws on many different sources in creating the ESG rankings. These include government websites, annual financial reports, CSR reports, NGOs, watch lists, environmental certifications and a global media screening.
Dun & Bradstreet currently has ESG data on more than 73 million companies around the world. The data is updated weekly. Each day the number of companies for which ESG rankings can be generated grows.
There are various ways to obtain ESG risk data. The web-based solution D&B Risk Analytics offers the option of calling up ESG risk data very easily as a report. This tool also makes other compliance-relevant data and services available (UBO, screening, etc.). Plus, the tool enables comprehensive portfolio assessments and individual analyses. The D&B Direct+ interface makes it possible to call up the data automatically. It lets users integrate ESG data automatically into any IT system environment via API, in order to regularly monitor risks and increase the resilience of the supply chain.
ESG strategy as a success factor
‘Sustainability is no longer a niche topic and, as such, is highly relevant for companies. Refusing to address the issue means risking falling behind the competition in a complex and constantly changing market with many challenges,’ says Ettmann.
That’s why every company needs an ESG strategy. However, the requirements for such a strategy differ greatly and depend on industries, target groups, products, operating models and the size of the company. What is needed is an individual ESG strategy with specific goals and measures.
Such an approach covers all aspects important to the sustainable development of the company over the long term. What is important in a company in terms of ESG? What are the goals? Where are improvements possible? Which positive or negative side effects result from a transformation that centres on ESG criteria? The number of questions goes far beyond these aspects, however, and is very extensive. That’s why a strategy helps to structure all the complex issues and approach them in an orderly way.
Forrester conducted an in-depth survey of ESG-relevant challenges and goals with 268 decision-makers. Get tips on which measures you should take right now to set up your ESG strategy.