When Boards implement ESG, they are doing more than just complying with regulations; they are creating value for their organisations. ESG management is about looking for opportunities, not just looking at environmental, social and governance factors which the company may not have been able to align its operations with. There is a need for Boards to look at long-term value for stakeholders and their organisations in an interconnected way because investors today expect companies to have certain programmes in place that can effectively address ESG concerns.
This may not have been considered a core business objective before, but it is now a hot Board topic mainly because of demands from investors, employees, regulators, customers and the communities where the business operates. These stakeholders are growing increasingly vocal about wanting the organisations they are associated with to be responsible corporate citizens. Companies like Tata Motors, Ecosia, Unilever, Patagonia, Ikea and Microsoft are examples of organisations which have significantly integrated ESG principles into their core businesses.
Unilever’s sustainable brands grew 69% faster than the rest of its business in 2019, due to the firm’s commitment to ESG which made its supply chain more resilient in the face of disruption. Patagonia’s transparent supply chain includes an online platform which allows customers to track a product’s journey from raw material to finished item. Ikea emphasises value chain transparency, from sourcing sustainable materials to utilising renewable energy sources, designing energy-efficient products, actively reducing waste and promoting circular economy practices. It also ensures ethical sourcing and labour practices.
But while investors have grown more sophisticated and knowledgeable about ESG-related matters, not all Boards have developed in parallel. There have been instances where ESG awareness at Board level has been very low. This, together with a lack of clarity about what needs to be done, has made it difficult for risk professionals to push the ESG agenda. However, Boards should take note that some banks have already put policies in place that take into consideration related components of ESG, such as climate change, as banks see this as affecting the banking business.
Anything affecting the banking business usually has a knock-on effect on other businesses, which depend on the financing and credit that banks provide. Analysts note that some financial institutions have even developed a scorecard that enables companies to be rated for ESG when they apply for funding or credit. Boards should realise that ESG is about disclosure and that it benefits companies to market themselves as ESG-compliant. Stakeholders want to know how the organisation is affecting the environment, and how it treats its employees, clients and communities.
They also want to know if the firm is conducting its business ethically. These environmental, socioeconomic and governance variables are diverse and likely to affect its financial situation or operating performance. These ESG risks, concerns and issues can also significantly impact the long-term sustainability and profitability of the firm. ESG risk management is therefore risk management, with the potential of creating long-term value. An ESG programme is a form of risk management encompassing the firm’s ESG practices, benchmarking their progress and their impact on the firm.
Many firms may already have Corporate Social Responsibility (CSR) programmes in place but these differ from ESG programmes; CSR initiatives are usually voluntary, and aimed at improving the company’s relationship with its external constituencies. ESG programmes, on the other hand, are a broader corporate strategy which addresses the demands of investors or the regulatory authorities. Also, ESG practice is rigorously measured and reported because it concerns environmental, social and corporate governance matters which have risks and impacts that must be properly understood.
Investors and lenders may rely on ESG data, including ESG scores or ratings, to assess a firm’s risk exposure as well as its possible future financial performance. Communities and customers may want to know about a company’s environmental and social practices, to inform their advocacy and purchase decisions. Stakeholders may be concerned with social issues like employee relations, human rights, and occupational health & safety; and governance matters like board management practices, succession planning, compensation, diversity, regulatory compliance, corruption and fraud.
Businesses need to address ESG regardless of the nature of the business, as ESG-related issues can quickly snowball and impact negatively on the organisation if not identified and appropriately dealt with. It is critical therefore for the firm to be able to recognise and mitigate the ESG risks which confront it. Proper ESG mitigation lessens the volatility the company may be subject to and is likely to strengthen investor confidence. Also, if a business is responsive about mitigating risks that might otherwise impact its bottom line or reputation, it is in a much better position to be profitable.
ESG-conscious organisations are also more likely to see greater employee productivity and enhanced employee motivation as employees start to feel more engaged and instilled with a sense of purpose at the prospect of being able to give back to society through their work. Improved employee experience leads to greater output. It should be noted that ESG programmes offer organisations the rare opportunity of being identified and recognised as good corporate citizens, which supports their branding.
ESG is more than just a compliance exercise. With a clearer view of ESG, businesses can better allocate their resources, combat rising operating expenses, improve their employee retention, and remain compliant with regulations. More companies are embracing it as a strategic business imperative particularly as they realise its potential to build long-term competitive advantage, enhance resilience, accelerate sustainability risks and attract socially and environmentally conscious investors, talent and customers. These combined can help to create greater efficiencies and cost savings in the long term while providing a stronger foundation of resilience in the face of uncertainty.
