How to Create ESG Policies & Programs

The "NYU Stern Center for Sustainable Business: Practitioners' Guide to Embedding Sustainability" offers a comprehensive roadmap for integrating sustainability into business strategy. The guide is structured around five key areas:

Designing Your Corporate Strategy: The guide provides insights on how to incorporate sustainability into your overall corporate strategy, ensuring it aligns with your business goals and values. It emphasizes the importance of meeting with finance and other stakeholders to standardize an approach for assessing the financial returns of sustainability initiatives.

Creating a Culture of Sustainability: It discusses the importance of fostering a culture that values sustainability, including strategies for employee engagement and education. The guide highlights the role of ethics in building trust and credibility with stakeholders and the importance of addressing employee relations and diversity, equity, and inclusion.

Governance and Organizational Structure: The guide explores how to structure your organization to support sustainability, including the roles of different departments and the importance of strong leadership. It discusses the role of the Chief Sustainability Officer and the rest of the C-suite, and the importance of tying executive compensation to ESG KPIs.

Communications and Reporting: It provides advice on how to effectively communicate your sustainability efforts, both internally and externally. It also covers how to report on your sustainability performance in a way that is transparent and credible, and the importance of stakeholder engagement.

Navigating Barriers: The guide offers strategies for overcoming common obstacles that businesses face when trying to implement sustainability initiatives. It also discusses the importance of communicating expectations to suppliers and defining performance incentives.

NYU Stern Center for Sustainable Business: The Road to Responsible Private Equity

This whitepaper assists private equity firms and their portfolio companies in being more responsible and sustainable. Section 1 provides an overview of the responsible investing framework. Section 2 dives into a case study on private equity and successive bankruptcies. Section 3 covers an in-depth responsible investment framework. And, Appendix 1, catalogues numerous DEI standards, tools, and coalitions in the private equity space.

Section 1: The Responsible Investing Framework Overview: In private equity firms, the framework is divided into the following categorizations: (1) Sustainable and Responsible Investment Policies, (2) Management & Human Capital, (3) Strategy & Innovation, (4) Fund Management, and (5) Societal Impact. In portfolio companies, the framework is divided into the following categorizations: (1) Management & Human Capital, (2) Strategy & Innovation, (3) Financial Engineering & Leverage, (4) Reporting Transparency, and (5) Societal Impact.

Section 2: Case Study: The white paper discusses a case study involving the closure a paper mill and examines various factors, including the role of private equity, that contributed to that result.

Section 3: In-Depth Responsible Investing Framework:

Private Equity Firms:

1. Sustainable and Responsible Investment Policies: consider purpose, scope, and measurement & revision.

2. Management & Human Capital: consider industry & ESG credentials, diversity, equity, and inclusion (DEI), pay inequity, company culture.

3. Strategy & Innovation: consider a long-term approach—perpetual funds, deal sourcing, and responsible exits.

4. Fund Management: consider including context with public market equivalences (PMEs) and transparency with subscription credit facilities and fees.

5. Societal Impact: consider embedding sustainability, having formal and informal ESG commitments, detailed reporting, and B-corp certification.

Portfolio Companies:

1. Management & Human Capital: consider board credentials, C-suite composition, incentives, and turnover, and employee relations.

2. Strategy & Innovation: consider operational management, sustainable capital investments, and mergers & acquisitions.

3. Financial Engineering & Leverage: consider debt-loading and asset-stripping.

4. Reporting Transparency: consider ESG reporting, valuation, and return on sustainability investment.

5. Societal Impact: consider embedding sustainability and tracking company impacts and stakeholder engagement.

The AON: Five Tips for Creating an ESG Investment Policy article discusses ways to integrate environmental, social, and governance (ESG) issues into one’s investment policies. ESG integration involves evaluating material ESG risks alongside financial metrics, driven by factors such as demographic shifts, positive performance impact, and regulatory trends. The tips suggest that ESG investment policies:

1. Start with a Position on Responsible Investing: Clearly define the intention and desired outcomes of ESG integration to avoid confusion and gain widespread agreement, considering various responsible investing techniques.

2. Spell Out What ESG Means To You: Develop a concise belief statement that defines ESG, emphasizes materiality, and illustrates how ESG risks and opportunities impact financial performance in the short and long term.

3. Describe ESG in the Investment Decision-Making Process: Create a flexible framework for applying an ESG lens to investment decisions, customized for different asset classes and managed portfolios, while emphasizing ongoing compliance and reporting.

4. Consider Active Engagement and Proxy Voting: Encourage active engagement with investments to enhance long-term value through effective ESG policies, addressing issues like corporate governance, diversity, and workplace safety. Clearly articulate criteria and guidelines for external investment managers' engagement and voting practices.

5. Define Roles and Responsibilities: Establish a responsibility matrix for all stakeholders, including investment staff, trustees, investment managers, consultants, and other service providers, to ensure a clear understanding of their roles in implementing the ESG Investment Policy. Regularly review and adapt the policy as new risks, standards, and opportunities arise.

ESGAUGE & The Conference Board: Linking Executive Compensation to ESG Performance is a report which looks into linking executive compensation to ESG performance—specifically, lessons learned and steps to take going forward.

Big Ideas: Companies should incorporate ESG goals because they are linked to the company’s strategy and can drive meaningful change. They may want to build ESG goals into their business plan for a few years before incorporating them into compensation programs. Additionally, companies should assess how they can incentivize executives to effectuate change across the organization’s value chain and industry.

Current State of Play: The percentage of S&P 500 companies that have adopted ESG performance measures continues to grow steadily, and companies generally use an approach within one of four categories: (1) ESG is considered as part of an executive’s individual performance rating; (2) ESG goals are assessed on a broad scorecard of ESG or nonfinancial business priorities; (3) ESG is incorporated through specific metrics; or (4) ESG can be used to adjust the financial performance rating, the overall rating, or the payout under a plan.

Laying the Groundwork for ESG-Based Pay: Companies should be aware that it takes time to incorporate ESG into executive compensation. It can take six to eight months for a board to decide whether and how to do this, but the process should begin much earlier—ideally having ESG goals one to two years prior. It also takes time to develop the ability to measure and report ESG performance, especially with a broader employee base or international presence.

Steps For Linking Executive Compensation to ESG Goals: Companies should first identify ESG goals that are material, durable, and auditable. They should assess what peers are doing in this area and make performance measures accordingly in both short and long term horizons. Then, they should examine the extent to which ESG should affect the compensation of executives and employees beyond the C-suite. Lastly, they should ensure the type of metric reflects the firm’s corporate culture, and look for feedback to re-evaluate goals.

The Global ESG Disclosure Standards for Investment Products is a comprehensive guide developed by CFA Institute. It aims to provide voluntary standards for how an investment product assesses ESG issues in connection with its objectives, investment strategy, and stewardship. It focuses on: (1) fundamentals of compliance, (2) investment product ESG disclosures, and (3) recommended ESG terminology.

GIIN: Institutional Asset Owners: Approaches to Setting Social and Environmental Goals

Based on qualitative surveys, interviews, and desk research, this brief (1) identifies key challenges in setting impact priorities, (2) provides approaches for setting targets, and (3) offers next steps for investors to routinely define their ESG priorities.

Setting Impact Priorities: The most common impact categories include climate, real estate, energy, infrastructure, and diversity & inclusion—both internal capacity and stakeholders (internal) as well as investment opportunities (external) influence the prioritization of categories. Key factors include (1) senior leadership and culture, (2) investment beliefs, (3) internal expertise, (4) regulatory environments, and (5) external societal and environmental drivers.

Setting Targets: Some choices to consider when setting targets include (1) degree of specificity, (2) qualitative or quantitative (environmental targets are generally quantifiable and specific, while social targets may be more qualitative and broad), (3) time frame, (4) reference points such as science-based targets, and (5) investment/company level, portfolio level, and/or organizational level. Two common target-setting strategies are a top-down approach starting at portfolio level and a bottom-up approach set at an investment level.

Next Steps: Important next steps include (1) aligning with fund managers to identify, select, and/or track appropriate impact metrics; (2) aggregating targets up from company or investment-level targets to theme-level targets; and (3) using impact data and standardized metrics to inform targets and integrate impact into the investment process

PRI: Writing a Responsible Investment Policy - Guidance for Asset Owners

This guide helps asset owners develop a responsible investment/ESG integration policy.

Getting Started: Before drafting the policy, it may be helpful to consider the following tasks: (1) undertaking a peer review; (2) reviewing your statement of investment beliefs and core principles; (3) creating a plan to develop the policy; and (4) familiarizing yourself with ESG and asset owner specific legislation, responsible investment and stewardship terminology, regional and international ESG-related standards, and recent ESG debate.

Writing Up Your Policy: The policy should generally include the following sections: (1) an introduction, which sets the stage and could include motives, background, reference to existing policies, and more; (2) definitions of key terms like ESG and responsible investment; (3) your core responsible investment guidelines, which could include ESG standards for investee companies, asset classes, and external managers (these will vary from organization to organization); (4) responsible investment approaches your organization will implement—for example, positive and negative screening, ESG integration, and themed investing; (5) voting and engagement guidelines if you do not already have a separate policy; and (6) reporting practices.

The guide ends with an appendix listing examples of asset owner policies.

Hughes Hubbard & Reed: How to ESG: A Resource Guide for Establishing an ESG Program for your Company offers insights on climate risk, stakeholder interests, and corporate transparency. The guide emphasizes cross-disciplinary cooperation and provides comprehensive advice on ESG program development, sustainability, and compliance. It covers such topics as:

1. Defining ESG for the organization

2. Building the ESG team and defining their role

3. Current and potential ESG regulations

4. ESG issues for borrowers and lenders

5. ESG issues for operating companies

6. ESG issues for advisers and funds

7. Potential ESG program topics

8. ESG regulatory investigations and enforcement

We Mean Business Coalition Just Transition Resource Platform

The We Mean Business Coalition, working with BSR and the B Team, have put together a variety of resources to help companies promote a just transition to net zero. A just transition involves integrating climate goals with social inclusion to address the impact of climate action on workers, communities, and vulnerable groups. The platform provides information and resources on how firms can: (1) participate in social dialogue, (2) engage with affected stakeholders, (3) develop a just transition plan, and (4) implement their just transition plan. The platform also provides resources relating to corporate advocacy and accountability.