Top 10 FAQs on launching an ESG strategy
By: Marimar Torreblanca
Tags: Consulting, Strategy, FAQ, Esg Investing, Esg

December 3rd, 2020

This week we would like to summarize the Top 10 Most Frequent Questions we get from organizations considering launching a new ESG strategy. We do this hoping it will help more companies and investors understand a bit of the process we follow with our clients and demystify what actually implies formalizing an ESG initiative. We will share brief answers for each question, but feel free to send me an email should you want to discuss any of this in more detail.

Why should I invest in having an ESG strategy?

There are many reasons why organizations do it and have done it for many years now. For us, two of these reasons are big enough on their own to justify the time and resources dedicated to this:

Because it has been proven in many studies (here are some 1 2 3 4) that having a solid ESG strategy makes organizations more resilient because they recognize risks and opportunities that otherwise could have been lost. Because investors are moving in this direction (there are more than 3,300 signatories of the UN’s PRIs and growing each year) and thus they will require more disclosure and better ESG strategies from the companies or platforms in which they invest. How long before I can say I am ESG compliant?

The bad news first: ESG compliance is not a “steady state”. The ESG world and its requirements evolve continuously, materiality is dynamic, and companies that want to have a good ESG performance must work on this consistently. This means that thinking of ESG compliance as a check list where once you tick all the boxes you are done, is a mistake in our view and puts you on the path of being seen as a green-washer.

Having said that, the good news is that Mexico is still in a stage of ESG development where what matters the most is that companies are actually working on their ESG strategy and taking it seriously. Companies that have spent more time doing this are obviously showing better results and are being recognized for it by the market, but even companies that are just starting with the intention of doing it right are being given enough leeway to get their strategy up to speed in the coming years.

It will usually take 12–18 months to go through an initial cycle of deciding the focus areas (ideally through a materiality analysis), exploring each focus area, setting up KPIs and KPI goals, integrating all of this into the organization, and being able to produce your first sustainability or integrated report and answer an ESG questionnaire. It will take much more than that to really have robust data, robust processes, and robust reporting. This is expected and the main goal is to be on the right path.

How difficult is it do a materiality analysis? Can I skip it?

It depends on the complexity of the company, but it is not difficult (and less so if you hire an advisor to help you through the process) and it shouldn’t be too expensive.

We do not recommend skipping it as it guarantees that you are really choosing the material topics for your organization that truly reflect what all your stakeholders want and need. It legitimizes your ESG strategy in a way, since it’s based on real data and not just unilateral decisions.

Even so, if you do not have time or money to do it, you can skip it at first and focus on industry materiality maps to start your work. But in our experience, each organization is unique, and its material topics reflect that.

Can I avoid one stakeholder group during the materiality analysis?

Ideally not, since the more people that answer your materiality assessment the closer you will be to what truly matters in your organization. Nonetheless, sometimes it is not practical to include a given stakeholder group in the process at one point in time (for example if you are in an ongoing process with regulators maybe you don’t want to deviate the conversation with them for the time being), and as long as you are transparent when you disclose how you are doing the analysis and who you are including, this should be fine.

Which are the indicators I must publish in my annual report?

It depends, and there is no one size fits all for reporting. We always suggest focusing on your material topics and disclosing as much information as you can on them. You can go above and beyond these material topics to align to other industry practices (many companies do this), but at least cover your material topics.

For companies that are publicly traded we also recommend including their sector’s SASB indicators and data on climate change since this has been publicly requested by Mexican institutional investors as we have discussed in previous blogs.

How do I convince the rest of the organization that ESG matters?

This is a tricky topic, but in our experience, there are 2 things that really help:

Making public commitments to ESG through transparent reporting (setting goals for your KPIs publicly, communicating your KPIs clearly, reporting consistently on what the organization is achieving and what it is not, etc.). Having a top management team who genuinely believes in ESG.

There will always be non-believers of the importance of ESG everywhere, and there will definitely be people who dislike the fact that they have some additional work stemming from the ESG strategy or even that their previous work is being a bit more scrutinized with better information management systems. But when the vision of the company is aligned with this principles and positive effects are seen in the implementation of the ESG strategy, generally these people will be convinced. The message from the top must be clear, and with no hesitation. ESG matters (see our arguments in question 1), and everyone will do better if everyone aligns with the strategy.

Do I need an ESG team inside my organization? And if so, who should oversee it?

It depends on the size of your organization, on the complexity of your strategy, and on how ambitious are your goals. If you will not have a team dedicated to it though, you should at least make it very clear who has the responsibility for the different initiatives, and how their performance will be measured.

For many organizations ESG is an independent business area which reports to the CEO. For others, it is part of the Finance division (reporting to the CFO, many times parallel to investor relations). For others, it is part of the Legal & Compliance division (reporting to the head of legal affairs in the company). There is no absolute best solution, each company needs to figure out what works best depending on what the ESG strategy will be all about. For public companies in particular, we recommend ESG closely coordinates with Investor Relations.

Do I need to become signatory of a recognized ESG initiative?

Not necessarily, but it does show commitment to certain topics. Depending on whether these topics are material for the organization or not, this commitment becomes even more relevant.

Should I get an ESG rating?

Not necessarily, but it does help if you are thinking about fund/debt raising in the upcoming years and want to open the doors to investors with ESG mandates, and it is part of the process of joining an ESG index (if you want to be part of an index).

Why are my ESG ratings so different/low?

We end the list with one of the questions that creates a lot of frustration in companies. It is not a trivial thing to answer since — as with many things — the devil is in the details, but let us just say that ESG ratings in general have a certain bias depending on who is doing the rating and what ESG topics are seen as the most material to that institution. Since different countries, different industries, and different companies have different circumstances, it is no simple task to make all this homogenous and produce an unbiased rating. Therefore, when analyzing your ratings, you first need to understand what is behind them and see whether it has to do with a lack of public disclosure, lack of publicly disclosed policies, gaps in the strategy, or just structural factors (like for example the lack of compensation data in Mexico for management teams given safety concerns). We are happy to help you figure this out.

I hope you found this interesting. As usual, if there is anything we can help you with, please reach out.

Best,

Marimar

Partner, Miranda ESG