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by Megan Baxter 24th April, 2019
3 min read

How to define ESG best practice and assess a company against it

Our ESG Due Diligence reports for investors (and our ESG assessments for corporate clients) incorporate a gap analysis of the asset’s ESG performance, policies and governance against best practice in the asset’s sector. We also make practical recommendations to ensure alignment with best practice – and how to go further.

Why is it important for investors to undertake ESG best practice analysis – and how do we do it?

Best practice analysis is part of our Comply, Align and Lead model of ESG assessment. We take this approach because compliance should be regarded as the foundation of any well-run company; it’s just the starting point for market leadership.

Good companies align themselves with sector best practice around sustainability, quality and professional conduct. And outstanding companies lead by defining and promoting best practice within their sector, including shaping political and societal expectations.

Identifying best practice is also important because it means that our recommendations are oriented around clear and relevant benchmarks. It provides a reference point for alignment and a baseline to determine areas for market leadership (e.g. on workforce development or marketing.)

Defining best practice is heavily dependent on the sector/industry in question. In sectors such as retail, mining or apparel, ESG best practice is articulated and driven by well-established industry associations, including binding and audited industry codes of conduct, third parties (i.e. charities) and reporting frameworks and supply chain platforms such as Sedex.

In more fragmented and relatively immature sectors/industries, such as the vaping sector for example, it is more difficult to determine how best practice is effectively defined, promoted and monitored, let alone enforced across the industry. In such cases it makes sense to look outside the sector to sectors where there are similar ESG issues; for example, vaping, alcohol, food and soft drinks companies all have responsibilities towards issues of youth appeal, consumer information and product formulation.

We undertake gap analysis by comparing what the asset does against publicly available information on key competitors, industry and professional associations and credible external benchmarks, such as GRI (Global Reporting Initiative) or the ETI (Ethical Trading Initiative) or the UN Global Compact, etc. We undertake this with reference to the data room and through our in-depth conversations with key members of staff at the asset, e.g. C-suite but also compliance and HR managers and operational staff.

The aspects of ESG best practice that GK examines depends entirely on the asset and its sector, with a focus on what’s material currently and in relation to the future (e.g. growth plans for new geographies, customer groups or products). However, GK will typically examine the asset’s approach to ESG policy and processes, governance and risk assessment practice, ESG reporting, staff training, communication and engagement, and external engagement. Within these key core areas, GK will narrow down areas of importance for that particular asset.

We also recognise the need to make a compelling case for aligning with best practice or going beyond it. We think that investors and companies should take a risk and opportunity-prioritised approach. There is no point in presenting a non-prioritised menu of recommendations.

Many of the small to mid-cap companies we have reviewed have not undertaken any sort of benchmarking, preferring to forge their own path. This is understandable, particularly where the asset has been successful to date and already enjoys a good reputation in the marketplace. However, we have found that identifying best practice and prioritising what could make a material difference to market share, reduced complaints and operational efficiency, etc can persuade a company and its investors to pursue an ESG programme accordingly.

ESG best practice analysis can identify key areas of risk and opportunity for an asset and investors. It also provides a solid foundation to help an asset leverage its ESG credentials to win market share, improve its reputation and engage with stakeholders.

 

 

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