Building a sustainable future: Aligning ESG strategy with business priorities

Guide | August 23, 2024

Setting the stage for ESG strategy and sustainability reporting

Environmental impact, social responsibility and transparent governance—known as ESG (environmental, social and governance) and sustainability have all become critical components of business strategies and enterprise IT architecture decisions. ESG and sustainability amount to a comprehensive ecosystem that influences all facets of an organization's operations, such as developing an ESG strategy, modeling and reporting mechanisms, corporate ESG scoring, sustainability programming, core system integrations, external data sourcing, and ongoing strategy adjustments. Many of these processes involve regulatory compliance, tax incentives and assurance requirements. Fulfilling these expectations meets stakeholders’ preferences for a well-run company that has a positive impact on the environment, employees and the community.

This guide details the multifaceted ecosystem of ESG and sustainability. It provides an in-depth analysis to foster responsible business practices consisting of strategies, technologies, processes and data.

Inside the guide:

• Policy/framework development
• Sustainability reporting
• ESG scoring and ratings
• Targeted sustainability programming
• Tax credits and incentives
• ESG integration into business systems
• External data sources
• Adjusting your ESG Strategy: An iterative process

Every component in this guide discusses a comprehensive sustainability-informed approach integral to brand reputation, stakeholder engagement and regulatory compliance for long-term profitability and value creation.

A robust approach to ESG helps businesses identify risks related to environmental issues, social concerns, governance factors and sustainability practices. By addressing these risks, a company can mitigate potential negative effects on its operations and financial performance, while improving its reputation with stakeholders.

To craft an impressive ESG strategy, align it with your company's overall objectives, mission, vision and values while addressing the needs of multiple stakeholders.

There are several crucial components to developing a strong ESG strategy, including:

Materiality assessment

Talk to your stakeholders, customers, employees, investors and the community to understand their ESG concerns and priorities. This helps to identify and prioritize the most important ESG issues with respect to sector, business operations, peers, regulations, and global standards and frameworks. The company can use the assessment results to set ESG goals, allocate resources and drive initiatives accordingly as well as minimize overall ESG risks. For example, an energy company may list greenhouse gas emissions as its material issue, while a technology company may identify data privacy as its key priority.

Maturity assessment

Evaluate your existing ESG initiatives, capabilities and processes in terms of how extensive, comprehensive and organized they are and identify gaps and opportunities for improvement.

For instance, a manufacturing company may find it has advanced initiatives for waste reduction but needs to improve its labor practices.

Benchmarking

Help understand where your organization stands with industry peers and globally recognized best practices. Identify areas of underperformance to learn from your industry peers, competitors or proven practices. For example, a retail company might compare its carbon footprint or supply chain practices with its competitors to assess how to improve.

Policy development

Implement transparent and actionable policies that document the organization’s approach to ESG issues and hold internal and external parties accountable. An overall ESG framework can also be formulated in alignment with standardized frameworks like the Global Reporting Initiative, the United Nations Sustainable Development Goals (SDGs) and the Sustainability Accounting Standards Board (SASB). These frameworks offer a set of guidelines, metrics and criteria that help companies and investors evaluate sustainability and ethical performance and help organizations measure business risks and opportunities. For example, a policy could specify targets for reducing carbon emissions, improving workforce diversity or ensuring ethical sourcing.

Greenhouse gas inventory assessments, modeling, and reporting

Calculate your greenhouse gas emissions and model future emissions based on your business activities. These calculations and models provide a road map for reducing emissions and transitioning to a low-carbon business model. The Global Reporting Initiative (GRI) and the Greenhouse Gas Protocol offer standards and tools to help companies with this process. Additionally, the ISO 14064 standards provide organizations with a complimentary set of tools to quantify, monitor, report and verify greenhouse gas emissions. For validating decarbonization plans and emissions reduction targets, Science-based Targets Initiative (SBTi) encourages businesses to set ambitious emissions reduction targets aligned with the latest climate science and assists to independently assess and approve these targets.

Vendor and supplier engagement

Engage with your vendors and suppliers to validate that they adhere to your company's ESG standards. Conduct supplier audits, provide training and incorporate sustainability criteria into your procurement decisions. Vendors and suppliers can also document their greenhouse gas emissions so you can measure your overall Scope 3 emissions.

• Scope 1 emissions are those direct emissions that are owned or controlled by a company.
• Scope 2 emissions are caused by a company indirectly through the energy it purchases and uses.
• Scope 3 emissions are not produced by the company itself and are not a result of activities from assets owned or controlled by them, but by those indirectly responsible up and down its value chain.

Stakeholder engagement

Let your stakeholders know about your company's ESG strategies, challenges and progress. This can be done in two ways: by adding ESG criteria to the existing vendor onboarding checklist and by conducting periodic supplier due diligence audits to assess their ESG performance. Thereafter, provide training and capacity-building workshops, and share ESG-related communications to incorporate sustainability criteria into your procurement decisions. Additionally, you can conduct surveys, distribute periodic newsletters and email communications on ESG-relevant days, and host ESG council meetings, town hall meetings and consultation sessions.

ESG goals and targets

Set measurable ESG goals and targets—ambitious yet achievable—based on the materiality assessment, benchmarking results and stakeholder feedback. Align these goals with external frameworks where relevant. For example, many companies align their GHG reduction goals with the GRI, science-based targets or SDGs.

Action plan

Develop an action plan outlining a detailed path to achieve your ESG targets. This plan should include specific actions, responsibilities, timelines and resources. It should be flexible to adapt to changing circumstances and stakeholder expectations by tracking, monitoring and reviewing progress periodically.

Internal controls

As sustainability and ESG reporting becomes mandatory, establishing internal controls and internal audit processes over this non-financial data is essential to accurate and reliable reporting. These controls help ensure that the data collected is accurate, reducing the risk of errors or misstatements that could lead to penalties, reputational damage and loss of investor confidence as these reports are increasingly scrutinized by regulators and stakeholders.

Developing a comprehensive ESG strategy requires incorporating multiple inputs from various functions within the company and external stakeholders. A well-crafted strategy can help a company manage risks, reduce operational expenses, seize opportunities, attract and retain employees, enhance brand reputation, build strong customer loyalty, and build credibility and trust with stakeholders.

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ESG or sustainability reporting is a process of disclosing information about a company’s environmental, social and governance impact and performance. Usually, these disclosures are made public. Companies often use the corporate sustainability report to communicate their sustainability efforts, progress and commitments to their stakeholders, investors, customers, employees and regulators. However, the reporting may be voluntary or nonvoluntary, depending on local laws, jurisdictional regulations and industry standards.

Sustainability reporting requirements across various regions and industries:

United States sustainability reporting

The U.S. Securities and Exchange Commission (SEC) on March 6, 2024, adopted a final rule that will require climate-related disclosures in registrants’ annual reports and registration statements. The final rule introduces new disclosures of the company’s GHG emissions; the governance and oversight of material climate-related risks; the impact of climate risks on the company’s strategy, business model and outlook; the company’s risk management processes for climate-related risks; and the company’s climate targets and goals. The requirements are subject to certain materiality thresholds, registrant applicability and an adoption phase-in timetable.

The final rule includes certain required climate-related disclosures within the registrant’s audited financial statements, which may require additional disclosures of risks, governance and emissions data in a registrant’s annual report or registration statement. For further information, see SEC issues final rule on climate disclosures.

California sustainability reporting

Recently passed legislation in California requires companies to disclose climate-related data by 2026 for 2025 data, with additional guidance to be released during the operationalization of the laws for other phase-in requirements, such as Scope 3 emissions in 2027 for 2026 data.

For entities incorporated in the United States and that operate in California, the new laws will have a broad impact based on the stated applicability thresholds:

• SB 253 will affect both public and private companies operating in California that have global annual revenue exceeding $1 billion.
• SB 261 will affect both public and private companies operating in California that have global annual revenue exceeding $500 million, with the caveat that companies subject to California Department of Insurance regulation, or conducting insurance business in other states, are exempt from SB 261.

Failure to file the mandated reports could result in administrative penalties of up to $500,000 per year for SB 253, and up to $50,000 per year for SB 261. The California laws are among the first of what could be many similar actions across the United States.

Canada sustainability reporting

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of Canada’s federal government that regulates financial institutions (FRFIs). As the climate crisis becomes an increasing concern for investors and regulators, OSFI has been prioritizing climate disclosure guidelines. In Canada, temperatures are warming twice as fast as the global average, contributing to the agency’s urgency for action and recent publications:

Guideline B-15: Climate risk management (March 2023)

• Companies are expected to consider physical risks and risks associated with the transition to a low greenhouse gas economy.
• High-level reporting areas:
  1. Governance
  2. Risk management
  3. Climate scenario analysis and stress testing
  4. Capital and liquidity adequacy
• Minimum mandatory climate-related financial disclosure expectations closely mirror the Task Force on Climate-related Financial Disclosures, or TCFD, recommendations.
• FRFIs will be required to calculate greenhouse gas emissions in line with the Greenhouse Gas Protocol.

S-211: Canada’s Modern Slavery Act

The Canadian government recently introduced new measures to combat slavery and other forms of forced labor in its supply chains with Bill S-211, The Canadian Modern Slavery Act (CMSA or Act). The Act introduces a reporting obligation on government institutions and specific nongovernmental private entities that produce, sell, distribute or import goods into Canada, or that control entities that do so. Although the Act does not directly require institutions or entities to make any changes to their supply chains, the purpose of the Act is to reduce the use of forced labor and child labor in the supply chain by increasing transparency. To do so, institutions will be required to disclose targeted information in a report on or before May 31 of each year. Key definitions contained within the Act are listed below.

The term “entity” is broadly defined as a business that’s either (a) listed on a stock exchange in Canada or (b) has a place of business in Canada, does business in Canada or has assets in Canada and meets at least two of the following conditions for at least two of its most recent financial years:

• Owns at least CA$20 million in assets.
• Generated at least CA$40 million in revenue.
• Employs an average of at least 250 employees.

Once any of the two application thresholds above are met, the entity must be engaged in one of the following activities to be subject to the annual reporting obligations contained in the CMSA:

1. Produce, sell or distribute goods in Canada or elsewhere
2. Import into Canada goods produced outside Canada
3. Control an entity that is engaged in 1 or 2

Bill C-59: Greenwashing

In November 2023, Bill C-59 was introduced to improve greenwashing regulations through the Competition Act. Amendments to the Competition Act were passed in June 2024.

Under the Competition Act, it is illegal to advertise or market something in a way that is false or misleading.

The changes strengthen the Competition Bureau’s ability to act against bogus discount claims and drip pricing by:

• Requiring that businesses be able to establish that their discount claims are genuine.
• Clarifying that it is misleading to omit mandatory fees from advertised prices, unless those fees are imposed by the government on purchases, such as sales tax.
  • Previously, some firms had interpreted the Competition Act as allowing them to pass their own business taxes and regulatory compliance costs onto consumers as mandatory hidden fees.

The changes also tackle unsupported environmental claims, commonly known as greenwashing, by:

• Requiring that claims about the environmental benefits of a product be supported by adequate and proper testing.
• Requiring that claims about the environmental benefits of a business or business activity be based on adequate and proper substantiation in accordance with an internationally recognized methodology.
• The bureau is assessing the impact of these requirements and expects to provide guidance, in due course, that will offer transparency and predictability for the business and the legal communities in the enforcement of the law.

European Union sustainability reporting

The European Commission adopted the European Sustainability Reporting Standards (ESRS) in July 2023 for use by all entities that are subject to the EU’s Corporate Sustainability Reporting Directive (CSRD). The ESRS requires a wide range of disclosures across environmental, social and governance categories. It includes two broad standards that cover general sustainability disclosures. It also requires 10 specific standards that specify disclosure requirements in various environmental, social and governance areas. These 12 ESRSs require companies to disclose information relating to strategy and governance related to material sustainability areas; impacts, risks and opportunities arising from such areas; and certain metrics and targets.

The ESRS also includes the concept of “double materiality,” which requires materiality to be assessed through both a financial and impact lens. It helps to provide stakeholders, investors and consumers with a clearer, more consistent view of a company's environmental and societal impacts, focusing on the importance of transparency in areas like climate change, resource use and social responsibility.

Asia Pacific Corporate Sustainability Reporting

Reporting requirements depend on legislation passed in the various jurisdictions within Asia. Companies are required to abide by Corporate Sustainability Reporting (CSR) rules and regulations of the respective countries’ latest regulations and make disclosures of the CSR spend in their respective sustainability/annual report. For instance:

• Singapore will begin mandatory climate reporting for companies listed on the Singapore Exchange beginning in 2025, with larger nonlisted companies beginning in 2027. Reporting requirements will be developed based on International Sustainability Standards Board (ISSB) standards and will include Scope 1 and Scope 2 emissions with a later phase-in of Scope 3 emissions.
• Bangladesh will also introduce climate reporting for banks and financial institutions, based on the ISSB standards. Such disclosures will be phased in over three years, with initial reporting in 2025.
• Hong Kong Stock Exchange will also require listed companies to adhere to ISSB standards. In India, the Business Responsibility and Sustainability Reporting (BRSR) core framework has been introduced by the Securities and Exchange Board of India (SEBI) on March 29, 2023, as a new regulatory framework for enhancing the ESG disclosures by India’s top 1,000 listed entities and is a subset of the wider BRSR framework that SEBI had launched in May 2021. Additionally, the corporate sustainability report rules require certain companies to spend at least 2% of their average net profits on corporate social responsibility initiatives and report these in their annual reports.
• Japan encourages companies to disclose their environmental performance. An electronics company in Japan might need to report on its waste generation, energy consumption and conservation, and recycling initiatives.

In addition to the above, there are several leading voluntary standards and frameworks that guide ESG data collection and corporate sustainability report creation, including:

Task Force on Climate-related Financial Disclosures

The TCFD issued recommendations in 2017. These provide a voluntary framework for companies to report on their climate-related financial risks, such as governance, strategy, risk management, and metrics and targets related to climate change. The recommendations are interrelated and include 11 disclosures that build out the framework through various activities, including issuing annual status reports through 2023. In October 2023, the TCFD disbanded, and the IFRS Foundation took over the monitoring of climate-related disclosures.

International Financial Reporting Standards

The International Sustainability Standards Board (ISSB) released its first two International Sustainability Disclosure Standards (IFRS SDS or the Standards) on June 26, 2023, that came into effect from Jan. 1, 2024.

IFRS S1: General requirements for disclosure of sustainability-related financial information

This standard has been developed to disclose all information about sustainability-related risks and opportunities that could reasonably affect a company’s future prospects.

IFRS S2: Climate-related disclosures

IFRS S2 has been developed to capture climate-specific requirements. The two standards have been designed to be applied together. The ISSB intends to work with jurisdictions and companies to support their adoption.

The Integrated Reporting Framework

The Integrated Reporting Framework and Integrated Thinking Principles are maintained under the auspices of the Integrated Reporting Framework (IFRS) Foundation and Integrated Thinking, a global nonprofit, public interest organization established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards used by companies in over 75 countries around the world. The Integrated Reporting Framework drives high-quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures, bringing together the information that investors need to assess a company’s ability to create value over time. The IFRS Foundation’s International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) are jointly responsible for the Integrated Reporting Framework.

While the Integrated Reporting Framework provides principles-based guidance for reporting structure and content, companies also need to use Standards to provide granular information. The tool mapping IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2) core content requirements to the Integrated Reporting Framework content elements shows one possible way to incorporate IFRS sustainability-related financial disclosures within an integrated report.

Global Reporting Initiative

The GRI is an international independent organization that has guided sustainability reporting since the late 1990s. The GRI standards provide a comprehensive framework to companies (irrespective of their size, sector or location) for reporting on multiple ESG topics, ranging from energy consumption and waste generation to labor practices and human rights.

Sustainability Accounting Standards Board

SASB is widely acknowledged for its industry-specific standards for disclosing material sustainability information to investors. For example, SASB's standard for the real estate sector provides in-depth guidance on reporting topics like energy management, water management and tenant engagement on sustainability issues.

International Sustainability Standards Board

Emerging as a consequential entity for voluntary sustainability reporting, ISSB was established to set globally consistent and comparable sustainability-related standards. ISSB does not have a new framework but references the SASB and TCFD framework and standards, highlighting the critical disclosures essential to stakeholders.

By fostering standardization, it aims to provide investors and other stakeholders with more transparent, reliable and consistent information about a company’s performance on ESG matters. Most financial and regulatory institutions recognize ISSB. It is a significant player in the convergence of how companies disclose (and stakeholders assess) sustainability performance.

Assurance levels

In the EU and the United States, public companies that meet a certain amount of turnover or revenue targets, conduct a set amount of business, or sell a certain amount or type of goods or services within the jurisdiction must undergo limited assurance as part of their reporting.

“Limited assurance” refers to an external auditor’s review of the company's ESG data. It typically involves engaging with a third party to conduct analytical procedures and inquiries to verify the accuracy and completeness of the reported data.

Under the SEC’s final rule, assurance for U.S. entities is applicable only to greenhouse gas emissions, and the phasing-in of this requirement is based upon the type of organization reporting the information. In some situations, large accelerated filers may be required to reach a level of reasonable assurance.

Under the ESRS, entities in the EU may be required to provide either limited assurance or reasonable assurance, depending on the circumstances. However, both the ESRS and the CSRD require assurance for all sustainability levels, and not just emissions.

The four key steps are the following:

Sustainability reporting demonstrates transparency and accountability and contributes to a value-driven ESG strategy. ESG reporting cultivates trust and transparency among key stakeholders. Validating ESG data bolsters a company’s credibility and aligns the organization with investors who rely heavily on such data to inform their decision-making process. Companies can ensure their ESG reports meet the regulatory needs and stakeholders' expectations by aligning with the specific reporting requirements in their industry and region.

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ESG scores and ratings are an increasingly important tool for investors to assess a company's sustainability performance and ESG-related risks and opportunities. They provide a standardized, quantified measure of a company's ESG practices, making it easier to compare companies and industries.

However, each scoring agency or company employs a unique methodology to derive its ratings. These methodologies often prioritize different factors and weigh them distinctively, based on the agency's perspective about what matters most in ESG performance.

Consequently, one should be cautious when comparing scores from different agencies as these can have multiple parameters based on performance, disclosure and risk. They may also present their findings in noncompatible combinations. Additionally, the choice of rating agencies depends on their specialization, reputation, depth of their research and methodologies.

Some of the most widely used ESG scoring systems and their mechanisms include:

MSCI

MSCI is a leading provider of ESG ratings. It assesses companies on an AAA (leader) to CCC (laggard) scale, based on their exposure to industry-specific ESG risks and their ability to manage those risks. The rating process involves identifying and analyzing significant material ESG issues across industries, using public disclosures and third-party data, and engaging with companies to validate findings. For instance, an automobile company committed to electrification and transparent reporting on safety issues might earn a high MSCI ESG rating.

Sustainalytics

Sustainalytics focuses on a company's exposure to material ESG issues and its management of those risks. Its ESG risk ratings scale ranges from 0 (negligible risk) to 100 (severe risk). For example, a clothing retailer with a robust supply chain oversight system and clear policies against forced labor might have a low Sustainalytics ESG risk rating.

Carbon Disclosure Project (CDP) scores?

A CDP score provides a snapshot of a company’s disclosure and environmental performance. They adopt a scoring methodology to incentivize companies to measure and manage environmental impacts through one or more parameters like climate change, forests and water security questionnaires. These disclosures are used for scoring companies from D- to A with A being the higher score. The scoring methodology is fully aligned with the Taskforce for Climate-Related Financial Disclosures (TCFD) and with major environmental standards, and therefore provides a comparable dataset across the market.

Institutional Shareholder Services group of companies (ISS)?

ISS assesses a company’s performance on various criteria, focusing on material ESG issues for each industry. Companies are rated on a 12-point scale from D- (worst) to A+ (best).

For instance, a technology company with strong data privacy protections and a diverse board might achieve a high ISS ESG corporate rating.

Ecovadis

Ecovadis assesses companies on a 0 to 100 scale based on their policies, actions and results across four themes: environment, labor and human rights, ethics, and sustainable procurement. The rating process involves analyzing a company’s self-reported information, supporting documentation and external sources. For example, a food producer with an impressive environmental management system and fair labor practices might receive a high Ecovadis sustainability rating.

ESG scores influence investors' decisions, stakeholder relationships and corporate reputations among customers, employees and the public. Institutional investors are increasingly using ESG scores to guide their investment decisions. Companies with high ESG scores can differentiate themselves as sustainability leaders, attract more capital, reduce the cost of capital, manage risks, enhance share price performance, attract and retain top talent, and build customer loyalty.

Companies can improve their ESG scores by enhancing their ESG practices. This can involve reducing carbon emissions, improving labor practices, strengthening corporate governance and implementing other sustainability initiatives.

ESG ratings also rely heavily on publicly available information. Therefore, enhancing ESG reporting by providing more detailed, transparent and reliable information is always advisable. Many companies engage directly with ESG rating agencies to understand their evaluation processes, provide additional information and challenge any inaccuracies. Companies can also invest in data governance and data engineering processes that enhance the quality of the information presented to ESG rating services.

The business case for achieving a favorable ESG score is compelling as it supports long-term business success and sustainability. By integrating ESG considerations into their overall business strategy, companies can ensure that their sustainability efforts are systematic, comprehensive and aligned with their business objectives.

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Implementing a sustainability program is a practical method for businesses to commit to ESG principles, demonstrate that commitment and improve their ESG scores. An organization can customize a program based on its industry, business size, and unique sustainability challenges and opportunities.

Each initiative aligns with business strategies and carries a strong business case, with potential benefits including:

• Cost savings
• Reduced risk
• Improved customer and employee engagement
• Innovation
• Differentiation
• Enhanced financial performance and shareholder value

Consider how following industry-specific programming examples aligns business strategy with sustainability objectives:

Industrials or consumer products

Sustainable product design

Consumer-centric product companies can focus on creating environmentally friendly products or incorporating sustainable design principles into existing products.

For example: Consumer electronics firms could design recyclable products using less energy or made from renewable or recycled materials.

The business case: Attract environmentally conscious consumers, reduce regulatory risks associated with waste and emissions, and potentially lower production costs through material efficiency.

Green supply chain management

Product-based companies can aim to ensure their supply chain is sustainable. They can select suppliers with strong environmental and social practices, implement a supplier code of conduct, or work directly with suppliers to reduce their environmental impact.

For example: A clothing brand might work with its textile suppliers to reduce water and energy use, improve labor conditions, and reduce harmful chemical usage.

The business case: Manage risk by avoiding disruptions caused by environmental regulations or labor disputes, maintain brand reputation, and potentially save costs with efficiency improvements.

Circular economy initiatives

Aligning with the principles of the circular economy, companies can implement programs that promote resource efficiency and waste reduction.

For example: A dairy company could collect and reuse their glass milk and cream bottles while collecting and recycling their plastic containers.

The business case: Circular economy initiatives appeal to environmentally conscious customers, help companies discover new revenue streams and reduce waste management costs.

Financial services

Green investing

Investment firms may integrate ESG factors into their investment decision-making process.

For example: A fund could screen out companies with poor ESG performance or actively seek out companies with strong ESG practices.

The business case: Green investing allows companies to manage risks (companies with poor ESG performance may face financial, regulatory or reputational risks) and capture opportunities (companies with strong ESG performance may outperform in the long term).

Green financing

Banks may offer green loans or bonds catering to environmentally friendly projects.

For example: A bank could issue a green bond to finance renewable energy projects or energy-efficient building construction.

The business case: Green financing attacts investors looking to make a positive environmental impact, expand their client base and potentially lower funding costs.

Sustainable insurance products

Insurance companies may develop products that encourage sustainability.

For example: They could offer discounts for energy-efficient homes or electric cars.

The business case: Sustainable insurance products are attractive to environmentally conscious customers, and they reduce risk given how consumers who value sustainable business practices often mitigate risk.

When building your ESG or sustainability strategy, think about aligning key issues relevant to your industry and integrating them into your core strategy objectives. This alignment will maximize impact and ensure relevance in addressing sector-specific ESG concerns—one of the first approaches when identifying ESG metrics to report against SASB. ESG framework reporting starts with industry alignment for better comparability between companies with the same type of operations.

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Incorporating tax credits and incentives into your sustainability strategy can help you finance programs and add value to your pursuit of sustainability initiatives. To that end, it’s crucial to incorporate tax perspectives into enterprise planning as early in the process as possible.

Many businesses focus on decarbonization strategies, and there are tax incentives to help them monetize benefits. They can significantly reduce the costs of implementing decarbonization programs and enhance the return on investment.

Here are three key steps to supporting your sustainability efforts with clean energy tax credits and incentives:

Identify

Identify tax credits, grants or other incentives available for sustainability initiatives you have planned.

This starts with an understanding of local, state, national and international laws and regulations. For example, many taxing bodies offer incentives for renewable energy projects, energy efficiency upgrades, electric vehicles, waste reduction and carbon capture technologies.

Align

Align sustainability initiatives with the availability of tax credits, grants or other incentives.

For example, a company planning to reduce its energy consumption might prioritize projects that qualify for energy-efficiency tax credits, such as upgrading to energy-efficient equipment, improving building insulation, or adding solar and energy storage technology.

Incorporate these tax credits and incentives into financial planning by calculating the project’s net cost and assessing the impact on the return on investment.

In some instances, businesses may also be able to purchase clean energy tax credits generated by other companies. These transactions not only reduce the purchaser’s tax liability but also apply to sustainability goals.

Consult

Consult with external subject matter experts to ensure you are accurately factoring tax incentives into your strategy and tactics.

Tax advisors, sustainability consultants or other specialists can support your initiatives by thoroughly analyzing tax matters, ensuring compliance with tax laws and optimizing financial benefits.

Tax laws and incentives often change, so it is crucial to regularly review your sustainability strategy and adjust your plans as needed. It’s especially important to stay informed about new or expiring incentives and evaluate their impact on your ongoing and planned projects.

Companies can engage with policymakers to advocate for tax credits and incentives that support their sustainability goals. It involves participating in public consultations, joining industry associations, or partnering with other organizations to influence policy.

Make sure tax leaders are included in strategic planning as early in the process as possible. They often have specialized knowledge of clean energy credits and incentives that other executives or C-suite members don’t. With that understanding, they’re able to recognize opportunities to align business objectives to tax breaks and assess how the business measures up to qualification criteria. By effectively leveraging tax credits and incentives, your company can enhance the business case for sustainability initiatives, making it more financially viable to pursue your ESG goals.

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Effective ESG programs and data management usually require deep integration into a company's core business systems. These core systems contain relevant ESG data crucial for measurable progress toward sustainability goals and act as a reference for ESG reporting and scoring. Organizations compile this data—which often comes from multiple systems—and place it into a data lake to run advanced analytics. This analysis spots trends, pinpoints issues and identifies what-if scenarios, among other tasks. The data team can use Microsoft's Cloud for Sustainability or other data lake platforms to perform this function.

Integrating ESG into core business systems, including:

Customer relationship management (CRM) systems

CRM systems are essential for understanding and managing interactions with customers and clients. From an ESG perspective, CRMs are instrumental in tracking customer feedback on sustainability initiatives, capturing data regarding their preferred sustainable products or services, and managing stakeholder engagements. Companies should analyze trends from this data to align their sustainability strategies with customer expectations and buyer values. Well-known CRM providers, including Salesforce and Microsoft, have built ESG modules to help companies manage their sustainability objectives more effectively.

Learn more about CRM systems

Enterprise resource planning (ERP) systems

ERPs manage core business processes and can hold a wealth of ESG data, such as energy and water use, greenhouse gas emissions, waste generation, labor practices, and supply chain management. Microsoft D365 and Oracle NetSuite ERP solutions provide many ESG-related functionalities and support reporting as per SASB and other standards. Within banking, the core platform contains project and company financing, inclusion metrics, ethical lending and anti-money laundering data.

Learn more about ERP systems

Procurement

Procurement systems help companies manage their supply chain sustainability by tracking supplier carbon emissions data, labor practices and business ethics. Vendors like Coupa and SAP Ariba offer procurement software that supports sustainable sourcing and supplier risk management.

Factory floor

Factory floor systems such as programmable logic controllers (PLCs) control and monitor machinery in manufacturing plants, thereby playing a crucial role in energy management, waste reduction and worker safety. They generate ESG data on energy use, waste volumes and safety incidents. Vendors such as Siemens and Rockwell Automation offer PLCs that can integrate with ESG management systems.

Human resources information systems (HRIS)

HRIS-managed data relates to social aspects of ESG: employee diversity, pay equity, training and development, health and safety, and labor rights. HRIS software providers such as UKG offer advanced analytics capabilities, helping companies monitor and report these concerns.

RSM’s compensation and benefits tax services focus on aligning executive pay with your company’s ESG goals, ensuring executives are motivated to drive these initiatives. By incorporating inclusive hiring and pay practices, we help companies connect compensation and benefits to their broader ESG objectives. This approach not only incentivizes executives but also demonstrates the value placed on all stakeholders, including employees. Visualizing this alignment enhances understanding and supports your company’s commitment to sustainable and equitable growth.

Vendor and employee engagement platform

These platforms manage data related to vendor sustainability performance and employee engagement in sustainability initiatives. For example, a company might track vendor compliance with its code of conduct or use an internal communication platform to survey and promote employee participation in its sustainability programs.

Internal audit and governance, risk and compliance (GRC)

Internal audit tools help companies review their ESG practices to ensure they meet their commitments and standards. Workiva and AuditBoard are popular vendors that offer audit management software to assess ESG processes. GRC systems help companies manage their risks, controls and policies related to ESG. For instance, Workiva, SAP GRC and IBM OpenPages GRC platforms provide a consolidated view of ESG risks across an organization and how they map to associated frameworks, controls and policies.

Learn more about GRC

Data protection and cybersecurity systems

These systems are crucial to protect sensitive data and ensure compliance with data protection laws. Cyberattacks often target personal, financial and health-related data, and such data breaches can damage a company's reputation and lead to legal penalties. Cybersecurity solutions and training protect data and systems and thus are crucial to a company’s ESG strategy.

Learn more about cybersecurity

Cloud services

Moving computing and storage to cloud providers can reduce energy consumption and enhance security. Most cloud providers offer tools for monitoring the carbon footprint of a company's cloud usage, helping to manage its digital carbon footprint. Google Cloud and Microsoft Azure provide detailed reports on energy use and carbon emissions associated with a company's cloud services. Such services can reduce power usage effectiveness and move companies toward a reliance on renewable energy.

Learn more about cloud services

Workflow automation platform

These systems help companies improve the efficiency of their operations, reduce their environmental impact and improve their social performance. For example, an enterprise could deploy workflow automation to optimize its supply chain and logistics approach. This optimization can lead to reduced carbon emissions from transportation sources and better alignment with sustainability and ESG goals.

Learn more about workflow automation platforms

To fully leverage these systems for ESG management, companies often need to improve their data quality, integrate their systems and enhance their analytics capabilities. This enables them to generate reliable, comprehensive and actionable ESG insights to drive performance improvement and effective reporting.

Data quality, accuracy and timeliness determine the authenticity of ESG insights. CRM systems—when appropriately optimized—can provide feedback on sustainability initiatives and preferences that are directly sourced from customers. Similarly, ERP systems and their array of operational data can offer insights into supply chain sustainability or employee practices that align with ESG objectives.

However, these systems often operate in silos, making data integration a critical step in the process. For example, companies can optimize production efficiencies and drive sustainability in real time by interlinking PLCs on the factory floor with ERP systems to monitor energy usage. Enhancing analytical capabilities is crucial to transforming integrated data into actionable insights. Companies can use advanced algorithms to predict future energy consumption or employ artificial intelligence to understand patterns in stakeholder feedback.

Companies can ensure reliable and comprehensive ESG insights by improving data quality, fostering system integration and amplifying analytical acumen, positioning themselves for continuous performance enhancement. In doing so, they establish a robust foundation for both daily sustainability-driven operations and transparent and effective ESG reporting.

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For a comprehensive ESG strategy, companies should integrate external data sources to complement their internal data. This enhances their understanding of ESG risks and opportunities, supports benchmarking and performance improvement, and facilitates accurate reporting.

ESG frameworks/standards

External ESG standards and frameworks, such as the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD) and the SDGs provide valuable guidance on the variances of ESG data that companies should collect and report.

For example, a company following the SASB standards would look to external databases, such as the U.S. Energy Information Administration's database for industry-specific information on energy use and emissions. This helps the company understand its energy efficiency relative to industry norms.

Some solutions, such as Workiva, have these frameworks embedded in them, so companies can easily map their risks and reporting metrics to ensure coverage.

Integrating external data sources to complement internal data

Benchmarking data

Benchmarking data enables companies to compare their ESG performance against peers, industry averages or best-in-class examples. Organizations like The Climate Service, Netbase Quid, Apex and Prequin provide extensive ESG benchmarking data.

For instance, a food manufacturing company might use water-consumption benchmarking data to compare its water efficiency with other companies in its industry. If the company finds it is using significantly more water than its peers, this can highlight an opportunity for improvement.

Vendor risk data

Vendor risk data provides insights into the ESG-related risks associated with suppliers, such as labor practices, environmental performance, business ethics and financial stability. Companies can obtain this data from platforms like Equifax, Prevalent and BitSight, which offer extensive data on supplier risks, including ESG risks.

For example, a clothing retailer can use Equifax Supplier Risk data to determine that a particular supplier that is financially sound may still pose a risk to the retailer's social performance and reputation due to the supplier's labor practices.

Material/product traceability data

Material and product traceability data helps companies understand the environmental and social impact throughout the life cycle of their products. These data include the sources of raw materials, the environmental impact of manufacturing processes, the working conditions in factories and the recyclability of products.

For instance, a tech company might use the Responsible Minerals Initiative Conflict Minerals Reporting Template to collect data from its suppliers on the source of their tin, tantalum, tungsten and gold. This helps the company ensure it is not contributing to any conflict or human rights abuses in its supply chain.

Similarly, the United States has imposed an import ban on products from the China Xinjiang Uyghur Autonomous Region for its forced labor practices. It has significantly affected products made with PVC from the region, and the U.S. Customs and Border Protection now requires traceability on these products back to the origin of the chlorine, carbon and ethylene raw materials before allowing the products to enter the country.

Companies can obtain end-to-end supply chain traceability data using platforms such as Sourcemap or Provenance, which help companies track both the source and the journey of their products. Organizations like the Forest Stewardship Council or Fairtrade provide certifications that guarantee certain environmental or social standards have been adhered to in the production of certified products.

Integrating external data sources into a company's ESG strategy provides a more holistic view of its ESG performance and risks, supports meaningful benchmarking, and facilitates credible and comprehensive ESG reporting.

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Creating a sustainability strategy is not a one-and-done process. It is an iterative cycle that evolves over time as companies learn from their performance, adjust to changes in their operating environment and respond to emerging sustainability trends and stakeholder expectations.

Consider a company in the electronics manufacturing sector. The company may focus its sustainability strategy on reducing its greenhouse gas emissions, based on a materiality assessment that identifies climate change as a critical issue for its stakeholders and buyers. However, after completing an ESG maturity assessment and benchmarking its performance against peers, the company might find that its supply chain practices include significant sustainability risks and opportunities that are missing in its current strategy.

Analyzing the internal ESG data and benchmarking it with external data and supply chain traceability data may lead the company to redefine its sustainability strategy. The company may focus on responsible sourcing and improving vendor engagement, informed by vendor risk data from external sources.

The role of guiding and coordinating this iterative process often falls to the chief financial officer, the chief sustainability officer or a senior executive tasked with ESG objectives. This leader plays a vital role in steering the company's sustainability strategy. They align the strategy with the company's overall business goals to create long-term value for the company and its stakeholders. The ESG leader collaborates closely across multiple departments, such as procurement, operations and human resources, to integrate sustainability into the company’s practices and decision making.

Middle market companies or those just beginning their sustainability journey might choose to outsource the development and management of their sustainability strategy to an external partner. ESG professionals bring specialized experience in sustainability and management, familiarity with proven practices and standards, and an outside perspective that can help companies identify and address sustainability risks and opportunities they might otherwise overlook. Additionally, ESG professionals help these companies develop their initial sustainability strategy and implement programming. They further support companies in achieving their sustainability targets and reporting progress.

Creating and maintaining an effective sustainability strategy requires a multifaceted ecosystem of activities, systems and data. This approach includes internal processes, such as ESG strategy development and implementation, and interactions with external entities, like regulatory bodies and ESG rating agencies. Data from diverse internal and external sources drives the process. This data offers critical insights to guide strategic decisions and drive continuous improvement.

Sustainability is a progression, not a destination. With each reporting cycle, the company reviews its progress, learns from its successes and failures, and adjusts its strategy as needed. Companies that approach it in this way—as an iterative, data-driven, integrated process of learning and improvement—will turn their sustainability commitments into meaningful actions while creating lasting impact and long-term value creation.

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This article was written by Alex Kotsopoulos, Jon Caforio, Trish Beltran, Anthony DeCandido, Deborah Gordon, Brandon Rubin and originally appeared on 2024-08-23. Reprinted with permission from RSM US LLP.
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