Quite a few my clients in investment and fund management are interested to learn more about how to set up an ESG framework and policy for their businesses. Whether you are an investor, investment manager or business-owner, it is now necessary to adopt a sustainability mindset and incorporate ESG practices into investment or business decisions.

Setting up and implementing an ESG framework and policy not only helps businesses, investors and investment managers to demonstrate commitment and compliance to sustainable practices and standards that are now becoming mainstream and increasingly mandatory, but also improves performance and risk profile of the businesses or investments.

Then the question is HOW. Some of my clients find the idea daunting. Despite the buzzing of ESG words, the practical applications are still relatively new to smaller or younger organizations who may not have in-house expertise in this area.

This series of notes (consisting of 5 parts) provides a simplified 5-step guide to setting up the ESG Framework and Policy, and for each step, a break-down of baby-steps and explanations on the application of key concepts involved. The entire Guide in PDF format will be published on The Green Bunny SG website on the 18th of January 2023 and be made available for free download.

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The 5-Steps, an Overview

The 5 steps essentially consist of the following:

1. Determine the Scope of the ESG Framework and Policy

2. Formulate an ESG Policy Statement

3. Identify and Assess the ESG Risks and Opportunities

4. Take Appropriate Actions including Engaging with Relevant Parties

5. Monitor, Report and Review

Generally speaking, the steps should be taken in sequence for organizations starting afresh, although, very often, Step 3 may be considered first by mature businesses or fund managers or investors with existing portfolios of investments, who would require a consistent ESG strategy that is applicable not only to upcoming but existing businesses and investments as well. This will be further discussed in the subsequent note on Step 3.

In this Note, we look further into Step 1 below and break it down into 4 baby-steps.

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Step 1 of 5 — Determine the Scope

This is perhaps the most fundamental step and presents itself as a challenging start. Swimming in a pool of ESG vocabularies, one could feel quite lost on where to start. Fret not! It is in fact quite easy if one just follow the following baby-steps:

Baby-step 1: Shortlist relevant ESG issues

There is currently no universal standard for assigning E, S and G issues. ESG factors are generally defined as follows:

Environmental Factors: Factors pertaining to the natural world, including the use of, and interaction with, renewable and non-renewable resources.

Social Factors: Factors that affect the lives of humans, including the management of human capital, individuals, animals, local communities.

Governance Factors: Factors that involve issues ties to countries and regulatory, or are common practice in an industry; as well as the interest of stakeholder groups.

For organizations who find these definitions too general, start by looking through lists of ESG issues provided by leading sustainability authorities and shortlist from there what is relevant. Many in Singapore reference the UN Social Development Goals. Agreed to by all UN member since 2015 and aimed at governments, the SDG goals are not directly applicable for businesses and investors but have nevertheless become a useful framework since. Note that organizations should look further at the specific targets of each goal when selecting what are relevant.

Investors and investment managers who are open to a more general and principled approach may adopt The Principles of Responsible Investment, and reference their example list of issues:

Another more investment specific list comes from the Sustainability Accounting Standards Board (now combined with the Integrated Reporting Framework and becomes part of The Value Reporting Foundation), which provides list of 26 sustainability issues classified according to the type of sustainability-related capital:

The SASB also provides a popular useful tool, The Materiality Map, which helps to map the issues across 77 industries for more industry-specific results, and this leads us to the next baby-step of conducting Materiality Assessment.

Baby-step 2: Conduct Materiality Assessment

With the shortlisting of relevant ESG issues, a Materiality Assessment helps to identify the ESG issues that are likely to have an impact on the organization’s financial performance.

The SASB Materiality Map may be a good starting point for automatically select the relevant ESG issues, but bearing in mind that each organization is unique, further assessment has to be performed on the shortlist to determine which issues are material.

Materiality is typically measured in both likelihood and magnitude of impact. When considering impact, both actual and potential impact (and linked with likelihood) should be considered.

Baby-step 3: Set Goals and Targets

After making the shortlist shorter by identifying the material ESG issues, it is time to establish clear goals and targets for these selected issues, taking into consideration the motivations, objectives and interests of various stakeholders as well as practical limitations and constraints.

It also helps to establish a clear understanding on how extensive and entrenched the ESG goals and targets are to the organization. In other words, how much profitability is the organization willing to trade off to attain its ESG goals and targets. Nevertheless, it is worth noting that profitability and ESG should not be mutually exclusive. In fact, they are complementary according studies which have shown that companies highly rated for ESG factors outperformed the market and that there is a strong correlation between ESG and financial performance for funds.

Baby-step 4: Establish Appropriate Methods and Processes

After the goals and targets are set on the selected ESG issues, it is time to think through the implementation in the organization’s decision-making processes and operations, i.e. how and what kind of ESG analysis will be used at different levels or aspects of the business, investment, or fund.

For example, in the context of supplier or investment selection, will the organization use negative screening of a particular concern, e.g. child labour, and/or set specific qualification requirements on certain ESG targets to be met, e.g. net-zero or carbon negative?

Again, depending on the goals and specificities of the organization, certain methods are more suitable and effective. The methodology and thinking would form a substantial part of the ESG framework and policy.

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If you have followed the above baby-steps, congratulations, you have completed the First Step! 👏👏👏 4 more steps to go and they become much easier. ✔✔✔

Download a FREE copy of the FULL Guide here.

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Disclaimer: The content of this note is informational only. Nothing in this note shall constitute legal, investment or professional advice.