Using the “5×5 ESG Framework” to figure out business strategy

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Here’s a note from Harald Walkate:

I often hear this from corporate managers:

“People keep telling me we have to do more about ESG. Now, I already consider my company to be a responsible business, and myself to be an ethical person, but of course we can always do more. But: can please someone help me figure out what we then actually need to DO?”

I can understand this – in my experience ESG people are really good at pointing to all the big problems in the world (climate change, biodiversity, plastic, poverty, inequality), or pointing to the big aspirations (SDGs, “Paris”, an inclusive society). But sometimes they are not so good at figuring out how all this relates to a particular business. Or at advising executives on whether they actually can, or should, do something about these issues.

This is where the 5×5 ESG Framework can help (see the note for a graphic illustrating the framework).

It sets out 5 ESG ‘Themes’ that are likely to have implications for businesses across a large number of industries: Climate, Diversity, Supply Chain, Waste/Plastic and Governance.

And it lists 5 ‘Signals’ that managers can track to determine to what extent there are opportunities, and/or expectations from society, to act. The 5 Signals are: Government/Regulation, Ligitation (not necessarily litigation involving the company, but litigation in the industry or on a specific theme), Customers, Employees/Investors and Society/Activism. The Signals are listed in order of ‘scrutability’ – Regulatory signals tend to be much more clear and unambiguous than Society/Activism, for example.

Then it’s basically a simple process of monitoring the Signals, and checking off where society’s expectations rise, or business opportunities arise, and defining plans or activities to act on them.

Obviously this is an extreme simplification of what in practice is still usually a very nebulous, iterative and never-ending process. However, this tool has a number of benefits:
– It helps managers zoom in quickly on issues that directly link to their business.
– It helps managers ask the right questions and prioritize the Signals.
– It shows that not every company needs to address every ESG issue, though sometimes it can make sense to act proactively, rather than waiting for concrete signals, such as regulation.
– By looking at ‘signals’ rather than ‘stakeholders’ it takes into account the fact that not all stakeholders are created equal, and that the loudest voices should not always carry the day.

Of course going through this matrix can be no substitute for a thorough process to assess materiality, also because every company is unique and should do its own rigorous analysis. But it can be a conversation-starter or a useful cheat-sheet.

Or just something managers can pull out the next time someone tells them “you should do more ESG”. Then they can respond, “Yes we should. Now, help me out – where should we start, what should we do and why should we do it?”