Kezia Farnham

Senior Manager

ESG policy: What it is, why it’s vital, & best practices

As ESG (environmental, social and governance) issues move top of mind for business leaders in all sectors, the need to set clear ESG policies becomes paramount.

Organizations pursuing modern governance must prioritize ESG policies to operationalize its environmental, social and governance aims. But what is an ESG policy? What should they look like, and what should they include?

What is an ESG policy?

An ESG policy is a document that outlines an organization’s approach to ESG. If your ESG strategy is the bedrock of your ESG ambition, your ESG policies are the building blocks you use to achieve it.

Setting ESG goals is one thing; devising a strategy to achieve them is another. But it's via your processes, procedures and policies that ESG comes to life. A strong ESG policy will consider each of the three pillars of ESG and clearly explain the policy's purpose and expectations for key stakeholders.

While this may sound simple, creating effective policies is critical. As with any other business area, policy management is vital to good governance — a characteristic ESG depends upon.

ESG policies versus ESG frameworks

Alongside ESG policy, there is much talk of ESG frameworks. Are ESG policies and ESG frameworks the same? Not quite. ESG policy is the term used to describe your documented approach to ESG issues. The ESG framework tends to apply to reporting your ESG performance, referring to standardized frameworks like the Global Reporting Initiative, the United Nations Sustainable Development Goals (SDGs) and the Sustainability Accounting Standards Board (SASB)'s ESG standards.

Why do you need an ESG policy?

ESG, as a relatively recent addition to the business lexicon, may be lagging behind some other areas when it comes to setting, documenting and measuring compliance with corporate policy. But that's all the more reason to prioritize ESG policy setting.

A corporate ethos that prioritizes ESG is:

• Recognized as being the right thing to do
• Increasingly acknowledged as sound commercial sense, with investor pressures and trends towards ESG disclosures and risk scores setting the agenda
• In line with an increasingly ESG-focused business landscape

Today, ESG considerations drive investment decisions (sustainable investments now total $35.3 trillion, accounting for roughly a third of all global assets under management) and corporate direction. A dedicated strategy for tackling your ESG challenges and evidencing your progress is vital.

Organizational leaders know vague aspirations and ill-defined aims don't lead to tangible success. You need to set clear and measurable objectives and implement an ESG policy that defines and guides the path to success.

Components of an effective ESG policy

Once an organization realizes the need for stated ESG policies, the question “How do I write an ESG policy?” swiftly follows. ESG is a broad concept, incorporating a wide range of considerations.

When crafting your ESG policies, consider:

1. Environmental factors: Your ESG policy should govern activities or operations related to your environmental impact. This may include corporate use of pollutants or renewable energy, the carbon and sustainability reports you produce, or increasing sustainability in your supply chain investment strategies.
2. Social factors: Don’t overlook policies that benefit your organization’s social impact. Consider your approach to inclusion and diversity, your pay and rewards policies, executive compensation, and how you impact the communities in which you operate.
3. Governance factors: Crafting governance-related ESG policies may be less obvious but essential to a comprehensive ESG strategy. Supply chain risks, transparency around corporate reporting like TCFD, and documenting your GRC strategy are all examples of activities that warrant clear policies.

ESG policy examples

While ESG policies make sense in theory, it can help to see a comprehensive policy in practice. Many organizations publish their ESG policies, sometimes used as a reference point for what an ESG policy should look like.

Some successful ESG policy examples are:

• Vanguard ESG policy: Its policies focus on ESG investing and explain how it approaches ESG when recommending investments for its fund holders.
• Blackstone ESG policy: Its policies address both investments and operations, detailing how it integrates ESG into everything they do.
• Indeed ESG policy: As a popular job search site, Indeed focuses on how ESG impacts the hiring process. Their policies emphasize transparency and measurable impact.

How to write an ESG policy

Writing an ESG policy is both an art and a science. Each policy should be backed by ESG data and a clear vision for ESG issues so it results in action — not talk.

Above all, a good ESG policy is concise and clearly explains how your organization will implement ESG. Write something you can stand behind, as the ESG policy should be published on your website.

To write an ESG policy:

1. Assess your ESG impact: How do your operations impact the world around you? Dig into your ESG data to understand your impact so you can write policies that mitigate it.
2. Get clear on your vision: What do you hope to achieve through ESG? Once you understand your impact, identify how you can do better. Your policies should be a roadmap to that improvement.
3. Set an objective: Be specific about the ESG areas you’ll emphasize, and pick an impact you can measure. This also becomes an internal and external accountability tool.
4. Emphasize compliance: There are likely regulations you have to follow. List those, but clarify that while compliance is critical, your ESG policy will go even further.
5. Specify actions: Most organizations need to change some aspect of their operations to truly live out ESG. Be concrete about what those are — is it your hiring practices? Your emissions? Your waste?
6. Include review periods: ESG isn’t set, and forget it. Mention in your policy a schedule for monitoring and improving your ESG efforts bi-annually or annually.
7. Monitor and adapt: While an ESG policy is a good start, it’s important to acknowledge that you’ll improve over time. Most policies include a pledge to monitor the policy and make changes as needed.

Best practices for strong ESG policies

Several recognized best practices in policy management can be applied to ESG policies as neatly as to any others. If you want to demonstrate best practice ESG policy management, you need to:

1. Set clear policies. A systematic and inclusive approach is the key here: involve the people responsible for managing the process in question and work through the stages to identify pain points and essential steps to capture.

2. Bring diverse views to the policy-making table. If your policy-makers are at risk of groupthink due to limited diversity, consider drawing on insights from individuals outside the group. It's valuable to bring individuals from various races, genders, sexual orientations, beliefs, cultures, socioeconomic strata, etc. Here are two things you can do about it:

• Consider implementing reverse mentoring. On Brené Brown's Dare to Lead podcast, Patrice Gordon explains that, unlike the traditional setup, reverse mentoring is "a practice that sets up a junior team member, often a member of an underrepresented group, to mentor senior staff." Reverse mentoring can help your executives avoid groupthink and hear new perspectives to improve your ESG policies. However, this program isn't an alternative to building diverse boards. Instead, it should support your DEI goals and recruitment strategy.
• Consider your hiring processes. Does this usually happen through word-of-mouth or long-term acquaintances? Many people find they inadvertently hire people similar to themselves, reducing the diversity of thought. Broadening your network with diverse, talent-ready individuals can break this cycle and produce lasting change. The Director Network is a great way to take this next step.

3. Document your policies. This can be neglected, especially in start-ups or smaller enterprises, where people underestimate the need for rigor in process and policy management. Similarly, with newer concepts like ESG, organizations can be slow to capture policies in a formal document.

But if you want people to buy into and comply with your ESG policies, you need to ensure they are clearly understood, measurable and transparent. In terms of scope, they should include the types of issues outlined above alongside any other ESG-related areas that are of particular relevance in your organization. For instance, if you work in a historically polluting sector, you may want to prioritize setting policies that impact climate and communities.

4. Review and reassess policies regularly. ESG is a rapidly evolving construct; as your approaches, priorities and success measures advance, your stated policies should change in tandem. External regulatory and legislative imperatives will likely develop quickly; your policies need regular reviews to keep track.

Take a best practice approach to corporate ESG policy

ESG isn’t a bandwagon that organizations can jump on. Organizations must give ESG significant effort and attention to move the needle. That begins with ESG policy.

At the same time, creating a truly effective ESG policy is intensive. It depends on understanding ESG and shareholders — particularly what motivates their investment decisions and how to adapt to them.

Doing so can and should be a data-driven process. Unlock the latest ESG insights directly from Forrester, complete with the latest intel on using ESG strategies to drive growth. Download the report to learn more.