Suggested 3-Step Process
I have gone through the exercise of selecting my ‘top 24’ KSIs – ones I think every company should seriously consider. My selection is based mostly on 30+ years of working inside 200+ major corporations globally from the boardroom to the shop floor.
In this section we offer specific guidance – built around three questions:
- WHAT are the key “E” and “S” issues that pose a material risk? (~20%)
- HOW does the company manage both ESG risks and opportunities? (~60%)
- WHERE can the company capture growth from ESG? (~20%)
STEP 1: WHAT (environment and social) issues represent the most material risks? (~20%)
Key Point: Every company has only between one and 3-4 of these issues! That’s why this represents only ~20% of my ‘top 20’ KSIs.
The best source for identifying these is the German Environment Ministry’s SD-KPI Standard – that has been around for years. SD-KPI provides the top three issues for each of ~60+ industry sectors and sub-sectors.
As a footnote, given the dominance of climate change as the overarching ESG issue of our time, every company should know where across its full value chain its major GHG impacts are – and then select the appropriate KSI representing Scope 1, Scope 2, or Scope 3 GHG emissions.
STEP 2: HOW does a company manage both ESG risks and opportunities? (~60%)
Key Point: It’s all about Governance and Leadership.
Think of governance as simply “the way things get done around here.” There are lots of formal definitions – about organization structure from the board down; key business processes; etc. But it all comes down to how the company actually works: leadership from the board and C-Suite; organization and culture; goals and metrics; disclosure and reporting. And it all starts with corporate purpose.
Often, we understand the importance of governance in situations where there is utter failure of leadership: Volkswagen (diesel emissions scandal); Wells Fargo (creating invalid customer accounts); Pacific Gas and Electric (failure to maintain equipment resulting in major California fires); Vale (Brazilian mining company dam failure).
I conducted a detailed analysis of ESG Navigator rating criteria and data when writing “Beware the 80/20 Governance Trap: Focus on the “G” in ESG — Lessons from the PG&E Bankruptcy Filing,” published by The Conference Board, May 2019.
Figure 2 in that article lists the “top 10” KSIs I selected at the time – specifically related to Risk Management (as that was the focus of the article). Below is a version of that table with references to the current (2020) KSI numbers.
STEP 3: WHERE can the company capture growth from ESG? (~20%)
Key Point: Many of the KSIs in the table above relate to how a company manages both risk and opportunity. Thus, when adding the ‘opportunity lens’ to the list above, we only need to add a few more KSIs.
I was invited to speak on the topic of “Corporate Governance – Measuring What Matters” in front of a group of ~60 leading investors (2/3) and corporate leaders ((1/3) at The Aspen Institute’s Business and Society Program meeting in NYC December 3, 2019. For that meeting, I added the “opportunity lens” to the table above.
In the table below, you will note many of the same KSIs overlap; however, there are also several others added related to innovation and growth:
- (#3) KSI 10.1 – Posture and Interaction with Customers Regarding Sustainability
- (#6) KSI 8.1 – Corporate Sustainability Positioning and Strategy (ESG tied to business strategy and plans)
- (#7) KSI 11.1 – Product, Service, Solution (PSS) Value Proposition