Purpose-led reporting. Sustainability. Corporate responsibility. Environmental, social, and governance risks and opportunities. ESG. Responding to these business forces goes by many names; but one thing is clear – it’s becoming less and less optional. Now more than ever, companies need to think beyond financials to fully embed ESG into all aspects of business, from strategy to reporting, tax to legal, HR to M&A.
For many companies, the most challenging aspect of the sustainable development agenda is incorporating sustainability into their short, medium and long-term strategic plans. Even those who have done so have so far focused primarily on managing risk rather than considering how their response to sustainability issues might help them create more value.
However, we’re seeing that this is changing, with senior management in companies starting to focus on understanding how their response to issues like climate change, water scarcity, natural resource depletion, human rights, poverty and economic development may impact their key strategic priorities. The front runners in this space are indeed going even further, seeking to make sure that the strategy of their business is aligned with the actions that will be needed to deliver on the sustainable development agenda, both to reduce risk and to maximise long-term opportunities. Once there is agreement on how sustainability impacts core business strategy, then it is much easier to agree and act on the priority issues for the business, and to keep internal and external stakeholders fully engaged.
As organisational leaders look to improve the long-term value of the company, they need a strategic plan that takes advantage of market opportunities and addresses material risks. In its oversight role, the board is responsible for ensuring that the company’s strategy is appropriate and will deliver results, and for overseeing associated material risks. Some directors may not make the immediate connection to ESG issues when considering strategy and may think of the ESG component as a “nice-to-have,” rather than a necessity. But this ignores the point of ESG, as a force by which value could be created or destroyed. For example, a consumer company might look to sustainable packaging as an opportunity to be responsive to consumer concerns, or a manufacturing company might emphasize product safety or quality as part of their social obligations, even if it sacrifices short-term profits. Companies that don’t think this way are risking their long-term value.
Companies that embed ESG factors into their overall strategy and risk oversight discussions are better able to present their value creation story – including the growth potential from identifying and managing ESG issues – and shape the narrative around their brand and practices. The starting point for many is to focus on creating ESG strategies that are grounded in the company’s purpose.
Starting with purpose in considering your ESG roadmap
A company’s purpose is often expressed as the reason it’s in business. But it’s more than that. A company’s purpose, as well as messaging and activities, need to be aligned to the overall business strategy – how the company will achieve long-term sustainable returns. As companies create value among a diverse group of stakeholders, including investors, employees, customers, suppliers, and communities, it shouldn’t come as a surprise that companies may struggle balancing all those interests. To help find a balance, the board and management need to work together to define what’s important and find the best way for the company and its stakeholders to measure progress. The below figure considers the main steps as part of a roadmap to embedding ESG.
As companies face financial pressures from many sides resulting from the pandemic, those that take a broader view of their long-term strategy, including responding to ESG issues, may be in a better position to confront these challenges. While making it through the immediate crisis must be the first priority, boards can also take this opportunity to shift the conversation to longer-term concerns.
Many companies will emerge from the crisis looking different. Now may be the time to work out how to incorporate issues like climate change and income inequality into the organisation’s strategic goals—particularly as these topics remain top of mind for investors focused on the long-term viability of their portfolio companies. For companies that have traditionally focused on the narrow question of financial performance quarter to quarter, 2021 may offer the inflection point to consider the broader, long-term context.
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