Setting challenging ESG goals that create value
Setting challenging ESG goals that create value
Current trends indicate that investors progressively favor companies that implement ESG practices and goals. Globally, the percentage of both retail and institutional investors that have implemented ESG (Environmental, Social, Governance) practices to at least a quarter of their portfolios jumped from 48% in 2017 to 75% in 20191. While investing based on an organization’s values has been around for decades, discussions between advisors and their clients about ESG investing are becoming more and more commonplace.
Setting precise, achievable, and impactful sustainability goals can help companies attract this expanding network of existing and new ESG investors. Asset owners want to easily identify the benefits of their investments. Goals with clear metrics best accentuate these benefits. Investors, however, have expressed concern that the ESG sector lacks these tangible goals and indicators. According to respondents of a 2017 Morgan Stanley survey2, three of the top four challenges to ESG investment were related to information gaps or uncertainty. These challenges included finding data that significantly links ESG to positive financial performance, obtaining adequate and accurate sustainability data, and improving knowledge about sustainable investing.
Effective ESG goal-setting practices will overcome these challenges. Thought leaders have developed a number of methods for goal setting. The SMART goal methodology3, one of the most popular, uses an easy to follow acronym for goal development: Specific, Measurable, Achievable, Relevant, and Timely. We recommend using the SMART method to develop clear and reachable goals. However, this method somewhat sidesteps impact, a crucial aspect of ESG. ESG should work to build the most value for your company financially, socially, and environmentally. So, ESG needs goals that place your company on solid footing for positive outcomes and value creation.
Two organizational psychologists in the 1960’s, Dr. Edwin Locke and Dr. Gary Latham4, conducted field studies that observed higher performance by individuals, 90% of the time, for specific and challenging goals as opposed to easy goals. The sense of accomplishment associated with meeting challenging goals significantly motivated individuals. Locke and Latham established five principles to setting specific and challenging goals. We believe ESG actors can and should meet all five principles with their goals.
1. Set clear goals
ESG goals should avoid generic and broad objectives. For example, a commercial real estate company that wishes to increase their holdings of green certified buildings should create goals more specific than “construct more green buildings”. The company can use SMART principles of Specific, Measurable, and Timely to improve this green construction goal by specifying time deadlines and quantitative targets. So, you can reword “construct more green buildings” to “Certified green buildings will make up 50% of our company’s real estate portfolio by 2025” or “Our company will add 10 green certified buildings to our real estate portfolio by 2023”.
2. Make sure goals challenge your company
Strong ESG performance creates value in many ways such as lowering operational costs or increasing investor loyalty. Your company needs to develop challenging, but realistic, goals to foster strong ESG performance. ESG benchmarking and certification standards such as LEED, WELL, GRESB, and others can help your company form challenging goals. These standards use trends and issues in the sustainability and ESG investment sectors to outline realistic value creation opportunities for your company. They label these opportunities as credits, organize them into categories, and assign a point value to each credit.
Companies have the choice to pursue the credits they wish. This could arguably cause companies to set unchallenging goals, but standards counteract these actions. LEED, for example, has prerequisites for each credit category that prevent companies from certification if not met. One of the prerequisites is that a building must reduce its indoor water use by 20% below the baseline. LEED, also, has different certification levels of LEED Certified (40-49 points), LEED Silver (50-59 points), LEED Gold (60-79 points), and LEED Platinum (80+ points) that may motivate increasing the difficulty of goals more than prerequisites.
3. Secure team commitment
Goals that do not match with the values of your investors, employees, and customers will miss the mark on performance. Stakeholder priorities will help determine Key Performance Indicators (KPIs)5 or the most important targets to measure and incorporate in goals.
We recommend emphasizing stakeholder engagement in KPI development, because it best ensures your KPIs match with the motivations of actors who determine the long-term success of your company. Stakeholder engagement involves interviewing, meeting, and surveying your current investors, employees, and customers.
After receiving insights from stakeholders, existing research on ESG trends and values can tailor KPIs to better meet the expectations of stakeholders. The European Federation of Financial Analysts6 outlined nine KPI topical areas for ESG of energy efficiency, GHG emissions, staff turnover, training & qualification, maturity of workforce, absenteeism rate, litigation risks, corruption, and revenues and new products. Meanwhile, Private Equity International7 determined that investors prioritize 10 ESG metrics of ESG policy, assignment of ESG responsibility, corporate code of ethics, presence of litigation, people diversity, net employee composition, environmental policy, estimation of CO2 footprint, data and cybersecurity incidents, and health and safety events.
4. Welcome feedback
The priorities of your stakeholders, and even the stakeholders themselves, can change in the future. Stakeholders’ sense of ownership and commitment to ESG goals could decrease as their values change, which will naturally impede progress on your goals. To regain this sense of ownership and commitment, your company can establish policies and programs that actively welcome stakeholder feedback. This feedback helps monitor progress on ESG goals and determine if the goal targets are still achievable, challenging, and impactful. If not, you should consider adjusting the goal targets or, in extreme cases of stakeholder priority changes, replacing the goals altogether. Organizing annual, quarterly, or monthly ESG evaluation meetings and surveys allows for the best collection of stakeholder feedback.
5. Consider task complexity
Companies need to ensure that they have the staff expertise, resources, and/or data to implement their ESG goals. If your company prioritizes achieving carbon neutrality by 2050, you should respond by creating the proper infrastructure to track and act on that goal. Steps to take could include training staff in greenhouse gas (GHG) inventories, creating an accessible database of business operations that produce GHG emissions, or investing in ESG reporting software.
Takeaways: Make specific & challenging goals, but don’t overdo it
Locke and Latham’s five principles will help set ESG goals that challenge your company to perform better financially, environmentally, and socially. However, setting unattainable or an overwhelming amount of goals could overextend the capacity of your company and demotivate your stakeholders. To avoid this scenario, focus your time and energy on meeting a couple of KPIs for your company. In the future, you can add to your ESG goals as you progressively meet key targets.
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report your current state and outline what future initiatives will focus on. Learn what an ESG materiality assessment is, what the benefits for your organization are, how the assessment supports sustainable investment strategies, and how Goby can help support your ESG materiality assessment process and provide strategic benefits for your organization.