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VILROS and a quick primer on strategic ESG integration
3 April 2022

I’m belatedly back to blogging with a post on strategy, a perennial for practitioners. It should help you develop a framework to improve strategic integration of ESG at your company.

First, a red flag: if your sustainability strategy aims primarily to improve ESG ratings, you’re targeting the booby prize. The real prize is resilience in the face of escalating ESG pressures. More adaptive. Anti-fragile. However you see it, this requires better decision-making at your organisation’s interface with ESG issues. That’s the purpose of the framework that should emerge from this process.

The ESG interface is – as the C-suite is realising – everywhere and complex. We make better decisions in complex environments when we consider genuinely diverse views. A simple-as-possible sustainability framework with a few memorable focus areas (three is the rule of thumb) will allow more people to contribute their perspective. We have to solve for the right three though. What do we need to do this?

In our experience, three things:

  • Honest reflection on how much ESG matters, where we are now and which way is forward (aka direction)
  • Sufficient agreement on how far and fast we want to go (aka ambition)
  • Intelligent allocation of energy – attention, finance, effort – in pursuit of our ESG ambition.

Too many organisations rush this. They tend to skip over points one and two to jump into quantitative ESG commitments and milestones. It can take them years to realise that the first two elements were not as obvious or expendable as they thought. Years they didn’t have. We’ve looked for shortcuts over the years and I don’t think they exist.

Here’s a five-step strategy primer to avoid this costly detour:

  1. Align on the general way forward by identifying the trends

From megatrends to local mutterings, intel on ESG trends is freely available and expanding by the hour. A good place to start is this overview of macrotrends and disruptions developed by thinktank Volans for the WBCSD. Context matters more than anything. Talk to execs, staff and stakeholders to get local angles and make things real. Ask if you can quote them. How might these trends impact your business model: not at all, potential game-changer or something in-between? We’ve been running trend processes for about two decades and have seen opinions on that question shift 180 degrees. Use concise statements, images and quotes to make this more digestible. If decision-makers haven’t worked out how real this stuff is by now, they probably never will.

  1. Do ‘The Waves’ to reflect on where you are

Use Incite’s ESG capability spectrum (‘The Waves’) to reflect on your organisation’s current capabilities in relation to ESG trends and pressures. Where’s your comfort zone and how would you like it to stretch over the next few years? Sometimes this is also to the left. (For those tracking our tweaks on this model, I’ve dropped The Waves back to four capability zones, though the spectrum is fundamentally the same.)

  1. Use VILROS to make sense of your ESG interface

With clarity on the general direction forward, the ESG strategy process gets a little messier. Get your team engaged in making sense of your organisation’s unique interface with ESG issues. Issues and potential topics abound. Where do you start?

Our VILROS process is a step-by-step, sense-making framework that is a good a place to start as any.

 

Value creation

Start with your business model. Make it explicit. You’ll find Incite’s BM canvas here. This basic stuff is generally all you need, but use whatever works for you. I would suggest you avoid the IIRC’s octopus business model which is designed to tie you in knots.

Impacts

Think across the value chain, starting with a sketch. If you’re a listed company, the six capitals model should already inform your integrated reporting. If not, here’s a simple introduction. Dependencies are what you rely on for capital retention/protection and value creation (e.g. access to skills) – and hence potential ESG risks (e.g. skills shortage). Impacts are what happens to the capital stock/flow as a result of what you do (e.g. skills development) – and hence potential ESG opportunities.

Some colleagues will struggle to view the value chain through an ESG impact/dependence lens. Pre-populate a basic six capitals analysis, ideally on a single page. Don’t worry about whether things are inputs, outputs, outcomes or impacts at this stage. Just separate out dependencies and impacts for each of the capitals. Ask participants to interrogate and improve your analysis. Make yourself vulnerable. Impacts and dependencies are generally obvious to anyone who works in that particular part of the business.

The 80-20 rule applies. Brainstorming to add more and more detail runs the risk of obscuring the bigger picture. Our rule of thumb is about 10 key impacts or dependencies for human, social and natural capital respectively. Less for financial, manufactured and intellectual capital because the key impacts and dependencies are probably being addressed in the business strategy already.

Leverage

Not all the positive impacts can be scaled usefully through the business model. The point here is to work out which ones have the best potential, highlighting those that you can genuinely influence at scale. There are not many. Donella Meadows’ classic Twelve leverage points to intervene in a system is an eternal reminder that most people know where these points are instinctively, but more often than you’d imagine end up adjusting them in the wrong direction. Pick out and discuss your top 5.

Sense-check the analysis with ongoing consideration of emerging Risks, Opportunities and Stakeholder perceptions, whether or not they are directly ESG-related.

Insights on risk, opportunity and stakeholder perceptions are usually already available internally and may be updated every quarter or so. Sense-check repeatedly to avoid missing anything obvious. Unless you’re reimagining the organisation, your business model, key impacts and leverage areas will remain fairly stable. The spectrum of associated risks, opportunities and stakeholder perceptions can shift rapidly at any time.

VILROS may be a bit overwhelming at first. But the process can be done – enjoyably – in a single conversation with an executive team in about two hours. One at a push. As with most methods, your results improve with practice.

  1. Make your current ESG opportunity envelope explicit

It may have been obvious to you where the opportunities for scaled positive social or environmental impact lie. It may be less obvious to others because they don’t think like you do. Which is a good thing.

Make this opportunity envelope more explicit by transposing the scalable impact opportunities you highlighted (L) onto the business model (V). Use Incite’s Shared Value Canvas – based on Porter and Kramer’s classic three pathways – to help you. This is sense-check on whether the scalable opportunities you identified will genuinely find traction in the business model. But the process of writing them out into a separate canvas usually fine-tunes the opportunities and improves how they are conceived.

(I fluctuate between the terms Shared Value and Profit-led ESG Impact. Technically, the term is Shared Value à la Porter and Kramer. Unfortunately, these words have been terminally abused by integrated report writers and the term is rarely used in its technical sense. I’ll leave the terminology up to you.)

Deepen or accelerate your discussion by considering Shared Value pathways identified in published research. FSG shares useful insights on the extractive, health, education, banking and insurance sectors. If generic Shared Value pathways are not available for your sector, a quick review of peer sustainability reports will identify those that are getting traction and which peers are leading the pack. (This research also kickstarts the development of an ESG ideation pack – I’ll share our process on how to catalyse profit-led ESG innovation soon.)

The Shared Value Canvas shows where you already have assets, capabilities, partnerships and tech invested in delivering– or available to deliver – a blend of financial and ESG impact. Focusing on current ESG impact – fledgling, overlooked or otherwise – does not limit the potential for business model innovation. Neither does it prevent you developing new capabilities or exploring adjacent possibilities. It simply recognises that re-purposing existing assets and capabilities incurs less energy cost than investing in new ones. (As usual, credit to Dave Snowden for this insight.) Given the scale of the ESG challenge and the speed at which your competitors are moving, you want to optimise every bit of energy you invest in this space.

  1. Use heuristics to develop three broad focus areas

With a completed opportunity envelope for your organisation, you’ve just identified your best bets for scaling ESG impact through the business model. This is how you are currently poised to deliver profit-led ESG impact.  Cluster these into three broad focus areas – presented as heuristics – to form the top-line of a strategic decision-making framework for sustainability. Iterate and improve. Align focus areas with the relevant SDGs – this is where your impact is likely to be significant and will be worth measuring properly. And build some flexibility into your strategic ESG ‘goals’. It doesn’t make you weak – it keeps you open to possibility. If key decision-makers in your organisation don’t already appreciate the difference between strategy and aligning with standardised expectations of ESG raters, this should do the trick. If it doesn’t, chances are they never will.

When you’re ready (in the next session perhaps), add another line to the framework: cluster and focus the key value protectors and enablers – digital, responsible, cultural, ethical – that support your value creation effort on the top-line. A strategic decision-making framework is starting to take shape. Sense-check these against the expectations of ESG investors and rating agencies. Because they’re trying to anticipate impact across a range of organisations, they often (ironically) omit the unique value creation part, resulting in incongruities such as the Tesla conundrum. At this point, the red flag can be dropped.

Note that this is a decision-making framework for the entire organisation – not a set of goals for the sustainability team. If you got the heuristics right, they should help to orient and inform every decision from this point forwards – from global acquisitions to remuneration structures to deciding on the chemicals used by the cleaning crew.

With clear analysis and engaged conversations well underway, we’ve arrived at the third bullet in the opening paragraph. We can start discussing tangible commitments, timelines, measures and many things that can be tweaked or nudged to bring your framework alive. We can set about allocating energy with eyes nicely open.

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Banner photo: Flock of pigeons scattering by JJ Shev on Unsplash.

 

 

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