ESG is not just good business, it is good for business: Gaining clarity on what ESG means for your company
As ESG is gaining momentum within the corporate community, it is essential for companies to start integrating and implementing the right strategy. But first and foremost they need to gain a clear understanding of what ESG really means and how it relates to the wider concept of sustainability. There is a lot of debate around the difference between ESG and sustainability and how they correlate. I think the easiest way to understand the nuances of these two concepts is to think of ESG as the toolset that helps a company realise its value-driven business strategy and it represents the sustainability of a company. And when we talk about sustainability in business terms, we talk about stakeholder capitalism. As Betsy Atkins, corporate governance expert and successful CEO and entrepreneur said:
“ESG is the operationalisation of stakeholder capitalism”.
One of the biggest challenges that companies often encounter at the early stages of establishing an ESG strategy is not having a clear understanding of what ESG really means – not only in general terms but what it means to their organisation. The leadership teams are often faced with decision paralysis when it comes to determining the best approach to integrating ESG considerations within their business. ESG considerations encompass a wide variety of issues that fall under the three pillars of E, S and G. It is essential that you identify the ESG issues that fall under the three pillars of environmental, social and governance that are most relevant to your company based on the company’s strategy, operations and level of impact both internally and externally.
I fully sympathise with the enormity of the task, but at the same time, it is imperative that this reluctance of not knowing how to successfully develop and integrate an ESG strategy doesn’t prevent a company from progressing with it. That is why I think it’s unrealistic to have the expectation that every single issue under the three pillars of ESG can be successfully addressed in an effective and impactful manner.
Therefore, it is important to reflect on what are your business priorities, what you want to achieve as a company and identify the ESG objectives that are aligned with these priorities. Every company has different goals and different needs and your ESG strategy should clearly reflect them. This is an opportunity to re-calibrate and re-prioritise what is important for the longevity of your company.
First of all, you need to figure out the level of importance that ESG principles have for your organisation. We often speak about ESG ‘maturity stages’ and ‘the ultimate destination of your ESG journey’. What these statements refer to is how relevant and critical are ESG issues to you. So your starting point is being honest with yourself in determining how important are ESG principles for your business. Do you want to establish an ESG strategy because you think it will mitigate risk? Do you feel pressured to do it because other businesses/competitors are establishing an ESG strategy? Or do you recognise the significance of ESG principles as a source of business opportunities that would safeguard the longevity of your company? These are the kind of questions that you need to answer in order to figure out what ESG strategy would work best for you and your business.
From my perspective, ESG is not yet another processing system that needs to be incorporated within a company. It’s not about establishing or changing reporting mechanisms but it’s about changing mindsets and the way in which a company operates. It’s about identifying its corporate purpose and understanding how the company can translate this purpose into action. It is very much about determining how a company’s operations impact the environment in which it operates, as much as how the changes in the wider social and physical environment are impacting the existence of the company itself. If you treat ESG implementation as yet another process/management system, it will not be as effective as it should be. That is why it is essential that you maintain a holistic approach to how your company addresses its ESG considerations and its overall sustainability strategy.
This can be achieved by aligning your ESG principles with the core of your corporate purpose. I often talk about the importance of integrity as a focal point for the successful integration of a robust ESG strategy. This simply means that if you want to embrace ESG objectives as part of your overall business ethos, you simply need to inject integrity, honesty, transparency, and accountability into the way you operate as a company. It is also about reinforcing the importance of all stakeholders and the efforts you are making as a company to meet their needs. Whether we are talking about your workforce, your clients, or your suppliers, they should all feel equally valued and appreciated and that should be reflected through the products or services that you are providing. It is completely understandable that profitability remains a priority for your company, but considering the interests of your stakeholders in the process, creates a much more powerful business proposition and as a result a more profitable company.
The simple answer is to listen to your stakeholders and team members and discover what is important to them. As I mentioned earlier, ESG as a concept encompasses so many issues within the environmental, social and governance space, so it’s important to identify the issues that matter to them and the ones that they can relate to. Giving them the opportunity to take ownership of that one issue and help support its promotion through a vigorous ESG strategy, will inevitably allow them to embrace the implementation of ESG strategy as a whole.
Another challenge for many companies is the increasing expectations with regard to regulatory requirements. Currently, it’s only publicly listed and large companies that are faced with mandatory ESG reporting. However, as the regulatory environment is maturing and regulators are gradually introducing mandatory reporting across the board, all companies need to prepare for this eventuality. My advice has always been ‘don’t leave it to the last minute’. It’s important to take the time and once you have established your ESG strategy, ensure that you identify the ESG reporting framework that is relevant to your operations and activities, implement the relevant reporting mechanisms throughout your corporate structure and start collecting the data, so you are wholly prepared for the regulators.
I appreciate that this is not an easy decision to make due to two areas of concern: a) given the plethora of ESG reporting frameworks out there, and b) the lack of standardisation of ESG criteria.
The lack of a universal reporting framework that will allow you to measure your positive and negative impact in a comparable way to your peers within the industry in which you operate, remains a challenge. Fortunately, there has been significant progress over the past year in establishing a common system of reporting and assessing ESG issues. The establishment of the Corporate Sustainability Reporting Directive (https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en) that is coming out of the EU is a step towards the right direction when it comes to a more stringent regulatory environment and in ensuring that sustainability reporting becomes mandatory – the same way that financial reporting is - and is no longer a voluntary process and a ‘good to have’ assessment.
But in order for regulations to be successfully implemented, it is important to establish the right base that will allow companies to measure their impact. The use of different sets of data means that there is no uniform evaluation system in place. That means that there has to be a standardisation of the ESG criteria used to assess a company. And most importantly, the data that is available is reliable, objective, accurate, accessible, audited, independently sourced, and unbiased by size, location or industry.
But despite these current shortcomings, ESG is here to stay. 2022 saw ESG being cemented as a concept within the corporate agenda. And as tends to be the case, any issue that gains a prominent role attracts some backlash. And we witnessed that over the past few months due to a growing opposition that is emerging out of the U.S. in the form of an ‘anti-ESG’ movement driven by some Republican politicians and sceptics within certain industries.
However, this growing opposition is unjustified. As Larry Fink, the CEO of BlackRock, captured this very eloquently:
“Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke’. It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”
Companies that embraced sustainability 20 years ago were perceived as visionaries and the exception to the rule. What excites me today is that we talk about sustainability as no longer being simply good business, but its implementation is good for business. Today, companies need to accept the new reality where sustainability is the driving force of every company because it can ensure a company’s longevity, safeguard its reputation and increase its competitive advantage, while having a positive environmental and social impact within the wider community in which it operates.
ESG Senior Advisor, Sibylline Ltd