ESG – A driver for transformational change

by Daphne Biliouri-Grant

Interest in sustainability has been growing for decades and terms, such as Corporate Social Responsibility (CSR), Socially Responsible Investment (SRI) and more recently Environmental Social and Governance (ESG) issues, have been gaining momentum over the past couple of years within the business community.

Today ESG issues are considered mainstream concerns due to a combination of factors and the realisation that a strong ESG proposition improves business performance and adds long-term value.

Why ESG has gained so much traction in recent years?

There are several factors that have contributed to the rise of ESG issues at the forefront of the corporate agenda and the combination of all of these that has led to this cultural change.

The value system has been gradually shifting as people are more conscious of the impact of their activities and are embracing sustainability, both as consumers and as employees. As a result, they expect companies to implement strong ESG standards and develop a more balanced approach between profitability and their environmental and social impact. Companies also need to respond by aligning their values to those of their employees as they depend on attracting and retaining talent.

This shift is also evident through the emergence of new economic models, such as stakeholder capitalism, circular economy, impact economy and doughnut economics, that are becoming prevalent on a global scale.

There is growing pressure from investors demanding more transparency and this is evidenced through the increase of shareholder activism aimed at achieving a sustainable corporate purpose.  Corporate purpose sets the foundation of how a company operates and engages with its stakeholders.

Pressure is also evidenced by policy makers and regulatory bodies insisting on greater accountability and the development of a more robust regulatory framework that effectively addresses ESG concerns.

Also, technological innovation is allowing companies to capture data and provides the ability to translate qualitative information into quantitative data.  Therefore, companies can implement ESG considerations, measure their impact and integrate such data into their decision-making process.

The pace of these changes has accelerated over the past two years due to the climate emergency crisis and the pandemic crisis. These global crises have added more pressure to companies to address environmental and social issues and increase their transparency and accountability.

A combination of all these factors has led the business community to move forward with this transformative change. There is now extensive evidence that companies genuinely committing to sustainability by integrating ESG considerations within their business strategy are better prepared to face risks, enhance their corporate governance, safeguard their reputation, increase their profitability and have a positive environmental and social impact.

This offers an opportunity for certain companies to become a leading force and an innovator within the sector in which they operate.

The evolution of ESG

Now that the ‘why’ question has been addressed, it’s important to highlight how ESG issues have gradually gained more significance over the years in order to understand their current positioning within the corporate structure.

Four decades ago, most companies were referencing their activities in relation to environmental and social issues under the banner of Corporate Social Responsibility (CSR). CSR initially was allocated under the Public Relations (PR) and Communications department because it was perceived as a PR exercise aimed at raising a company’s profile around its volunteering activities to support environmental and social causes. Therefore, at that point in time, it was more about communicating to external stakeholders the company’s support of certain good causes that did not necessarily define the core values of the company.

With the rise of environmental activism and the growth of civil society throughout the 1990s, environmental and social issues were beginning to be perceived from a compliance perspective. Companies were beginning to consider them as a risk which means that concerns around ESG issues were allocated under the Risk Management and Compliance function.

In some cases, companies also felt that the link between ESG and security was becoming increasingly relevant and started engaging their security teams to ensure the resilience and efficiency of the company.

By the early 2000s, when the term ESG was coined, it was becoming evident that companies needed to start incorporating ESG concerns in a more effective way within their strategy and operational activities. Over a period of 15 years a gradual change has been emerging in terms of the allocation of ESG concerns. There is a clear move from ESG being a box ticking exercise and often perceived as an optional concern rather than an integral concern for companies, to gain strategic importance.

This change is driven by the realisation that the successful integration of ESG issues within the core of the business strategy of the company provides the company with a competitive advantage and potentially leads to economic growth.

However, the majority of companies are still struggling to incorporate ESG concerns throughout their strategy at the level that ESG becomes the prominent driver for transformational change that accelerates growth, innovation and ensures positive impact on the wider environmental and social landscape.  

ESG Integration vs ESG Implementation

As mentioned above, various factors, such as the climate emergency, the pandemic crisis and the emergence of stakeholder capitalism, have created a level of urgency that has accelerated the shift towards a value-driven market. This means that the business community needs to transform quickly in order to keep up with the changing nature of society.

However, there are some pitfalls that companies are faced with by presuming that ESG integration and ESG implementation are one and the same.

The difference between integration and implementation is dramatic, and often not fully appreciated. There is the misconception that by simply adopting a set of ESG practices and establishing an ESG reporting framework that this is sufficient for any company to achieve an ESG-driven approach.

Nevertheless, it is the realisation that only when a company fully aligns its corporate purpose with ESG considerations that it can achieve a leadership role within its industry.  ESG drivers are based on integrity and a set of values that need to be evident at all levels of management and throughout its workforce. Integrity as a driver reinforces the fact that ESG considerations should be embedded in the strategy of the company and represent its corporate purpose. This is the way that transformational change towards a more value-driven system can materialise. And it is this value-driven system that will establish a more balanced approach between profitability, social purpose, good reputation and longevity.

In an effort to maximise the positive impact of engaging ESG issues, what often occurs within the corporate community is a case of ‘run before you can walk’ approach. This means that there is a growing emphasis on establishing implementation tools, such as ESG reporting and implementation of ESG ratings, when there is not a clear strategy on how these tools can help materialise the company’s strategic objectives.

Often this is driven by the pressure to meet certain regulatory requirements leading companies to a reactionary approach to address this growing pressure and keep up with the changing regulatory landscape.

Inevitably, the implementation of ESG ratings and reporting tools leads to yet another add-on to the overall process of the company, without actually addressing the real problem. If it is not embedded within the core of the strategic goals of the company, it will not provide the positive outcomes that are now associated with ESG considerations.

It is also important to realise that ESG integration should not be considered a burden for any company fuelled by the fear that there are so many additional systems and processes to be added. It’s impossible to do everything within the ESG space, but it is about being strategic about choosing the ones that are relevant to each company and are aligned with its core business strategy.

The best approach is to ‘choose a few and do them well’ instead of trying to tackle every single issue that falls under the three pillars of ESG.  By being selective in what ESG issues companies wish to address and prioritise, they are able to add value in connection to those specific issues.

The mentality of ‘business as usual’ is no longer an option to ensure great economic performance, robust corporate governance, longevity, positive reputation and ensure positive environmental and social impact.

What is becoming obvious for the business community is that by revisiting their strategic objectives to encompass an ESG perspective, allows them to develop a more competitive advantage within their specific sector. At the same time, it ensures the promotion of a positive environmental and social impact, an improved employment impact and a stronger relationship with all stakeholders.

If you have any questions or would like to find out more about how Sibylline can help you integrate and implement effectively ESG considerations, please reach out to our ESG Senior Advisor,  Daphne Biliouri-Grant 

 

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