Integrating ESG and SDG's in your business strategy - some experiences

More than ever ESG and SDG's become very important for your business. Integrating the SDGs into a business strategy can protect a company against several risks.

I would like to share some experiences ER-Marine encountered in South Korea when working with Korean companies, mostly manufacturing companies active in the supply chain offshore wind.

First things first, a quick intro about ESG, SDG's;

ESG and SDGs how they are different?

ESG?represents the?Environmental,?Social and?Governance aspects of corporate management and growth.

SDGs?stands for?Sustainable?Development?Goals which were adapted at the United Nations summit in September 2015 for achieving a sustainable, diverse and inclusive society by 2030. 17 Goals and 169 targets were established to resolve international issues through the actions of all countries, along with companies, local governments, society and citizens.

Both SDGs and ESG are concepts for resolving environmental and social issues in order to attain a sustainable society.

They differ in that while the SDGs apply to?all?stakeholders, including countries and the general public, ESG?primarily?applies to the business community and companies.

SDGS represents the Goals, while ESG stands for Methods and Processes.

The SDGs are becoming increasingly important for investors, as they are an articulation of the world's most pressing environmental, social and economic issues and acts a definitive list of the material ESG perspectives that should be taken into account as part of an investor's fiduciary duty.

Integrating SDGs into business strategy can protect companies against several risks; what risks?

Regulatory risks:

As the 2030 deadline for the SDGs comes closer, many governments may introduce new policies to ensure the goals are achieved on time. Regulations that impose costs on greenhouse gas emissions and other un-sustainable business practices could see companies that do not comply risk paying the price in terms of higher taxation, or even in terms of losing their license to operate.

Operational risks:

As environmental and social issues continue to grow in prevalence and extremity, businesses that have not put plans in place risk feeling the impacts more acutely. Longterm economic growth can be hindered, and markets disrupted, by extreme climate events and social unrest. Taking steps to address the SDGs is not only what is best for the planet, it is also necessary to safeguard future business performance.

Reputational risks:

Stakeholders around the world are looking for businesses to step up and lead when it comes to realizing the SDGs. Businesses that fail to take action, or to robustly report on their progress, risk of fanning the flames of already decreasing trust and stand to suffer longterm repetitional damage. We all know it takes time to build a good reputation but reputation is quickly damaged!

Some experiences ER-Marine encountered in 2021-2022 in South Korea

ER-Marine's experiences are based on working with clients in the offshore wind supply chain in South Korea. The data shown in the document is an average based on our evaluations made with the different companies. All company names have been removed as our clients wanted to keep their data confidential.

Most companies see ESG and SDG's as a positive evolution and an opportunity to create shared value grouped around following themes:

• Sustainable products,
• Sustainable production,
• Enterprise development

Many companies focused on following SDG's;

SDG 3 Health and well- being

Commitment - Support Covid medical services to all employees.

Target 80% in 2021 and 100% for 2030.

Social outcome: Improved the level of health for all employees.

This was an easy one.

SDG 4 High quality education

Commitment - Provide an opportunity of customised education and training for all employees.

Target 20% in 2021 and 50% for 2030.

Social outcome: Contribute to develop skills through quality training and education and the establishment of conditions for equal education.

This was a challenging topic as people in Korea are overall very-highly educated and the people working at the lower positions stay at their positions for life in many cases. Gender equality is not as advanced as we see in the rest of the world. Most companies are dominated by males and difference in pay between male and female employees can be substantial. The theme is very actual and let us see how the newly elected president Joon will address this theme.

SDG 6 Clean water and sanitation

Commitment - Reduce water consumption in production stage

Target 20% in 2021 and 40% in 2030.

Social outcome: Taking care of the environment ensuring there is sufficient clean water in the communities.

This was straight forward in many cases after reviewing of the process design. In most cases potable water was used in manufacturing processes where it was relatively simple to provide a solution based on catching and re- using the water.

SDG 7 Sustainable energy

Commitment - Increase the supply of renewable energy

Target 20% in 2021 and 60% in 2030.

Social outcome: Contribution to reducing environmental impact through sustainable energy supply.

Most companies have installed solar panels as a first step and are involved in research and design, or in the supply chain offshore wind so they all contribute positively to the renewable energy topic. Note that the newly elected president Yoon announced that nuclear and renewable energy can co- exist. Most companies see nuclear energy as positive as Korea is a manufacturing country and need cheap and sufficient energy to be competitive with the rest of the world. All companies analysed mention that there is a need to increase the supply of renewable energy.

SDG 13 Climate change and action

Commitment - Reduce greenhouse gas emissions and develop greenhouse gas reduction technology to respond to climate change continuously.

Target 10% in 2021 and 80% by 2030.

Social outcome: Reduced environmental impact through the reduction of greenhouse gas emissions and the prevention of global warming.

Many companies in the offshore supply chain have made heavy investments to reduce greenhouse gas emissions. Many have implemented more ozone- friendly refrigerants in cooling systems or have improved various systems to increase efficiency and as such reducing emissions. There is a goal to replace diesel and gasoline cars with electric and hydrogen fuel in the near future.

There is a huge opportunity to reduce greenhouse gas emissions in the manufacturing industry as many companies operate processes based on outdated process design. Relatively simple upgrades can give huge benefits in the long term. As an example in HVAC systems there are still 3 way valves in chilled water systems where a variable flow system design could bring big savings, implementing VFD drives to let electric motors operate more efficient, recuperation of waste heat and implementation of industrial heat pumps. Many solutions exist but require thorough analysis to implement a cost- efficient solution.

What was the most challenging so far?

Defining the priorities was easy in most cases but setting the goals was challenging because of selecting KPI's (Key Performance Indicators) as an essential stage in setting goals as basis for driving, monitoring and communication progress could both surface positive as negative issues.

Many companies were very optimistic in defining goals and baselines but how the company defines the baseline can significantly impact the likelihood of reaching the goal. It is therefore important to be transparent about how and why a particular baseline is selected.

Ambitious goals are likely to drive greater impacts than modest goals but we have noted that too ambitious goals make it impossible to reach the target and people become quickly frustrated of the exercise as it is very easy to announce goals on paper but to realise them its another story.

Deciding the level of ambition is fundamentally linked to establishing the timeframe for the goals. Setting long-term goals do not work as it is another commitment in the far future, things can change as we have seen with the covid pandemic and the Ukrainian conflict.

Short and mid-term goals are needed, milestones, this seem to work well and keep people engaged.

Reporting was challenging as companies should report on both the positive and negative aspects of its performance against the priorities. This ensures that the report covers how the company meets its baseline responsibilities related to the SDGs, how it addresses adverse impacts on the SDGs and how it utilises its competences and solutions to further contribute to the achievement of the SDGs.

An effective report consider issues of high significance to stakeholders and not only report the positive impacts (green washing). In many cases we encountered resistance to report on negative impacts as there was the fear that the report would reveal things which should be kept internal.

In many cases the SDG report established was confronting for the simple reason that the analysis reveals the things how they actually are at that moment in time. Positive things but also the negative impacts and it is very easy to highlight the positive topics but the aim of the SDG report is to be transparent towards stakeholders, which requires both positive and negative impacts.

It was the biggest challenge to make our client commit to writing down the negative impacts. Negative impacts coupled to a realistic target in the short, mid-term is the way to reduce these negative things. essential to monitor the progress with KPI's and setting milestones to get the progress going. By splitting a big challenge into smaller challenges it creates opportunities to keep the focus and motivation and allows celebration upon reaching your milestones.

Success with implementing SDGs in your company!