August 21, 2023 | Supply Chain Strategy
Any business that’s looking to gain competitive advantage has a key priority today – becoming sustainable.
Existing customers, new customers, long-term investors and regulatory authorities – everyone wants to see a sustainability tag with your business.
Don’t forget potential employees. They will work for a business that is intent on becoming sustainable.
Clearly, the stakes are high.
Not surprisingly, most businesses across industries now have a well-organized sustainability program.
But is having a program enough?
How do you know if the program is on track and going in the right direction? How can you track the performance metrics? And how can your customers and investors know the performance of your sustainability initiatives?
Here is what you can do in this endeavor.
Get a sustainability rating.
Let’s understand this in detail.
Sustainability ratings offer insights into a company’s environmental, social and governance values and performance. Designed in response to growing concerns over global warming, environmental crisis and ethical considerations, sustainability ratings provide an in-depth evaluation of a company’s sustainability practices and social responsibility.
Sustainability ratings are designed to help organizations, investors and individuals better understand performance in key sustainability metrics and make informed decisions about who they do business with, what they buy or where they work. These ratings typically consider a wide range of factors such as carbon footprint, greenhouse gas emissions, waste management, energy efficiency, water usage, working conditions and labor practices.
High rating on a major sustainability index validates a company’s commitment to all aspects of sustainability. This makes the company popular among new and existing consumers and reassures the investor community. For example, leading retail brands that have consistently achieved high sustainability ratings have succeeded in increasing their customer base over the years.
Sustainability ratings are generated by third parties based on business disclosures in different ESG categories. These disclosures are made in the company’s annual report or sustainability report. An accurate, up-to-date report can first be shared with a sustainability consultant who can take a closer look to assess business performance. It can then be shared with a sustainability ratings provider who will further review the report.
Leading sustainability rating agencies include S&P Global, Morningstar Sustainalytics, MSCI ESG Research, ISS ESG and EcoVadis.
The ratings provider takes some time to review the report and may at times award a rating on a rolling basis. It may also ask the company to prepare an action plan and do more work before assigning a sustainability rating.
The amount of money that companies are spending to get a sustainability rating proves how crucial this is for businesses today. A recent survey by sustainability consulting firm ERM suggests that companies are spending up to half a million dollars a year on ratings-related costs.
Companies must understand specific parameters and scoring systems used by rating providers who may look at several areas to work out a rating.
Here are some of the key focus areas in this process:
Rating providers will take a close look at the initiatives taken by a company to minimize its environmental impact. For example, it will check the steps taken to reduce carbon footprint. It may also check recycling activities and the use of renewable energy in business operations.
Social impact can cover a wide range of issues such as workplace diversity and equality, a fair working environment and ethical business practices. For example, companies working hard to improve diversity in the workplace by employing people of different ethnicities are sure to fetch a high score. Likewise, their scores will improve if they have a whistleblowing policy in place and employees’ opinions are heard.
Rating providers will also look at governance policies and procedures. They will establish if the management and the board have a firm understanding of environmental and social responsibility and employ appropriate governance procedures.
Supply chains have increasingly become an area for focus for sustainability rating providers. They will check how a business monitors its supply chain operations for environmental, social and ethical standards. For example, does the business engage in responsible sourcing? Does it oversee how suppliers operate and working conditions in their facilities? Does the business have a supplier code of conduct or related guidelines in supplier contracts? These are some aspects that are likely to be investigated by rating providers.
Rating providers will also check if the business engages in a community program that promotes sustainability. For example, a business that supports local events, charities and NGOs will fetch a high sustainability rating.
Companies that are pursuing sustainability merely to get decent ratings are not likely to succeed in the long term.
With increasing transparency and data availability, customers (as well as investors) can easily discern if a company is making disclosures simply to chase scores and boost sales. They can navigate through tall claims and differentiate businesses that are genuinely pursuing sustainability from others that are greenwashing or merely using it as a marketing ploy.
The true objective of businesses today should be to understand the significance of sustainability and why they must pursue it. The more quickly their stakeholders realize this, the more focused would be their efforts in this direction. And when they are truly committed to the program and weave sustainability into the DNA of business operations, their sustainability ratings will eventually improve.
Know how GEP can help your organization effectively measure and report its ESG performance.