Creating an Effective ESG Strategy
Twenty years ago, Kathy Varol joined the Peace Corps as a recent college graduate. She deployed to Morocco to work in small business development, planning to eventually get a masters’ degree in developmental economics. Her experiences, however, convinced her of the power of business to create systemic change. “Because what business is, at its most basic level, is making a profit,” she explained, “which means that it's sustainable in doing what it does.” In contrast, government and non-governmental organizations generally receive funds from businesses and individuals through taxes or donations.
After leaving the Peace Corps, Varol joined the business world. “I had a new objective, which was to become great at business and use that to support systemic change,” she said.
For the next two decades, Varol worked in the areas of brand marketing, strategy, and impact, at companies such as Adidas, MillerCoors, and Microsoft. At Adidas, Varol created the company’s global purpose strategy, which encompasses everything it does to positively impact people and the planet. In 2021, the global purpose strategy that Varol developed helped Adidas receive an ESG Evaluation of 85 from S&P Global Ratings, placing the company among the top 10 ever rated by the S&P.
Varol is now a keynote speaker, executive coach, and workshop facilitator. She uses her knowledge and experience to help her clients develop their companies’ purposes and create environmental, social, and governance (ESG) strategies to stand out in a competitive business environment, attract the best talent, gain consumer loyalty, and harness the innovative abilities of their employees. Her aim is to help companies skip the difficult learning period and go straight to strategies that work.
What Is ESG?
In the ESG acronym, “environment” refers broadly to sustainability and resource efficiency. “Social” refers to equality and human rights, encompassing issues ranging from modern-day slavery to fair work conditions to equal pay for workers of all genders and ethnicities. “Governance” refers to ethical practices, transparent reporting, and the governing structure needed to achieve environmental, social, and business objectives.
According to Varol, ESG strategies are becoming more important every year as expectations for companies change. Between 2011 and 2021, the proportion of S&P 500 companies reporting ESG information increased from less than 20 percent to 99 percent. “With the rise in transparency, the days of organizations not being responsible for the externalities of their business—the impact their business is having on society and the planet—are going away,” said Varol.
Some of this change is being driven by governmental regulation, but much of it results from a cultural shift among younger people who are “choosing companies with values that align with their own,” Varol said. According to the 2015 Cone Communications Millennial CSR Study, 91 percent of millennials in the United States—defined in this study as individuals who were then between the ages of 18 and 34—said they would switch brands to one associated with a good cause. As employees, younger Americans expect both to have sustainable livelihoods and that their work makes the world a better place. In coming years, it will be very difficult for companies that don’t offer meaning for their employees beyond a paycheck to attract and retain a skilled workforce.
Additional pressure is coming from investors who realize that ESG is good for business and are investing accordingly. Furthermore, members of the general public are now more concerned about companies’ effects on their communities and the planet. Varol stressed that in this era of greater accountability, companies must ask themselves difficult questions. For example, could they survive a public relations scandal if their products are highlighted in news coverage of plastic pollution in the ocean? Or could they survive if their competitor innovates a circular product approach that energizes their employees and that consumers feel great about? Developing an effective ESG strategy can help a company prepare its business for ESG related risks like these.
Varol’s work focuses on infusing companies with purpose. According to her, purpose and ESG are in a symbiotic relationship. “A purpose sets a north star for an organization,” she explained, “and an ESG strategy can be a framework to bring that purpose to life holistically across the company.”
Building an Effective ESG Strategy
Varol has developed a four-step process for creating an effective ESG strategy. The first step, “Evaluate,” consists of two components. In one component, you must determine what matters most to your company and establish your priority ESG topics. “One of the things that makes ESG complicated is that there are so many different areas you could focus on in each of the three categories,” Varol said. “And what's important is to identify what's relevant for your industry and your company.” Materiality assessments, discussed below, are critical for this component.
The second component of the “Evaluate” step is to understand where your business is at through baselining and benchmarking. This will allow you to gauge what’s possible for your company as you proceed to the next step.
The second step of Varol’s process is to “Formulate” your company’s ESG goals and chart a path to reach them. “What are your moonshots? What are you trying to accomplish in each of them?” Varol asked. “What are the milestones you're setting out along the way?” In this step, you’ll identify clear and measurable outcomes that will define your company’s success and determine how it will track key metrics and performance.
The third step is to “Integrate.” Effectively implementing an ESG strategy requires your company to integrate ESG into its core business strategy, practices, and processes. This step ensures accountability, sets in place a plan for implementation, and establishes a cadence to continuously evaluate goals, update data, and compare best practices.
Finally, your company must report what it’s doing. One reason why reporting is important is to ensure that the business is transparent and accountable to stakeholders. Varol added that transparent reporting also lets other organizations know what the company is doing, which opens the door for strategic partnerships.
Product Stewards’ Role in ESG
Because product stewards address the environmental impacts of products throughout their lifecycles, it’s clear how they fit in with the environmental portion of ESG. “But I think product stewards can also raise important questions across social and governance as well,” Varol said. “If you look at AIHA's mission of empowering and advancing those who apply scientific knowledge to protect all workers and their communities from occupational and environmental hazards, that really touches on the social, too.” For example, ensuring that a product doesn’t harm the health of human beings falls within the social category.
“I see these professionals as having a front-row seat across industries for problems that need to be fixed,” Varol said. “They understand what can go seriously wrong, where failures are most common, and what failures would be the most catastrophic.”
This information is vital to creating materiality assessments, which she describes as “the kickoff point for an ESG strategy.” The materiality assessment “identifies systems that are broken and highlights potential risks and opportunities that could affect your company's profit as well as its stakeholders,” she explained. “And it ultimately enables a company to create a shortlist of ESG priority topics that will inform the company’s business strategy.”
Reporting is another aspect of governance where product stewards may play a role. “Given the role of product stewards, they might be responsible for tracking and supporting a number of key metrics that would go into the overall ESG reports,” she added.
Above all, Varol stressed that every employee’s ESG contributions matter. Every employee must understand the company’s ESG goals so that they can point out opportunities and potential problems. An employee may need to speak up if they notice something that doesn’t fit with the ESG strategy or if they discover new processes that better support the company’s objectives.
Creating Positive Impact
Businesses exist to make money, but Varol pointed out that some ways of making money are better than others. She ultimately hopes for a world in which businesses measure themselves by their net positive contributions, which requires evaluating not only whether the business is making money but how it’s doing so, how it can minimize damage, and how it can leave the planet and society better off.
“I think that's the end goal—changing the way we look at business from a scarcity mindset of trying to make the most money in a siloed space,” Varol said, “to how we can be really intentional about the impact we're making and make sure that it's positive.”
Kathy Varol will give the closing keynote at PSX 2023 on Thursday, Oct. 19, 2023, from 10:45 a.m. to noon Eastern time. PSX 2023 will be held Oct. 17–19 at Westin Boston Seaport District in Boston. To learn more about the keynote sessions, view the conference program, or to register, visit the conference website.