ESG must become a top priority for business leaders
Thinking in the long term opens up fascinating opportunities. Business leaders that use the ESG framework to make risk-averse, future-proof decisions might benefit from particular, profitable opportunities. The overall atmosphere also favours businesses that put ESG objectives first. The principles of ESG are supported by the government, regulators, lenders, investors, and customers.
They understand that organizations guided by ESG principles would have a solid long-term strategy advantageous to people, the environment, and sustained profitability. The opportunity for value-driven, socially conscious corporate leaders to fully embrace this paradigm change and profit from it could not have been greater. ESG stands for environment, social, and governance.
It serves as a framework for examining how a company’s operations have an overall influence on society. It has a collection of measures that gauge how much impact business activities have on the environment. It could involve carbon emissions, garbage generation, or water use.
Social indicators assess the effect on patrons, clients, suppliers, and employees. Governance metrics evaluate factors such as share class structure, legal compliance, moral conduct, and more. ESG framework is another technique to examine a business to see how it impacts the environment.
Business executives from all sectors need to concentrate on ESG because of its significant effects on EPS and EBITDA. Businesses with a singular concentration on profitability have blind spots because they don’t consider the impact of their activities on the environment, society, or the government. It has the power to bring down entire businesses in an instant. Business executives must adopt a comprehensive, value-driven strategy to de-risk long-term competitiveness and ensure the organization’s success.
The worldwide epidemic has demonstrated in several ways how interrelated we are and how the globe is one. As a result, both human acts and inactions have a significant influence on our environment. Putting one’s interests above others is no longer a viable option. Governments, regulatory agencies, investors, and customers know businesses’ immoral and unsustainable activity.
They are hesitant to interact with these companies. The assistance of pro-ESG firms is provided via special funding, consultancy, and legislation. Global leaders must understand that financial success, social progress, and good governance are not mutually incompatible but complementary.
Investors’ attention is shifting from being secondary to being main in ESG. Faster than most people and economists understand, this transition is occurring. ESG reporting is becoming more vital to the company to keep up with the shifting global value system. The value chain must be mapped using the appropriate metrics, and the social impact lens must be ingrained.
Integrated reports and mission statements with a purpose are becoming standard. Regulators are appreciated,
Recent environmental disclosure regulations from the Securities and Exchange Commission (SEC), a US regulator, require publicly traded corporations to disclose information about their greenhouse gas emissions, environmental risks, and the steps they take to mitigate them. Last year, the business Responsibility and Sustainability Report (BRSR) was introduced in India by the capital markets regulator Securities and Exchange Board of India (SEBI). This report applies to the top 1,000 listed entities (by market capitalization) and will be voluntary for FY 2021–2022 and mandatory for FY 2022–2023.
The good news is that the whole government apparatus, including Prime Minister Narendra Modi, supports ESG’s guiding principles to combat climate change.
In his speech at the COP26, Prime Minister Modi outlined five guiding principles that India will adhere to become a net-zero nation by 2070. India Inc. is also coordinating its objectives with the vision of the administration. The activity is evident. In the last three years, the number of ESG positions has increased by 468%. It demonstrates that businesses desire to be motivated by values rather than just money. Additionally, consumers are purchasing goods and services that help the larger ecosystem.
A haven of assurance in a volatile, unpredictable, chaotic, and ambiguous (VUCA) environment may be found in the ESG framework. The world is always in turmoil due to terrible weather predictions, pandemics, conflicts, etc. Thus it is essential to assess and maintain company resilience. A corporate leader who anticipates the needs of stakeholders and shareholders is backed. In this situation, comprehensive reporting through an ESG framework empowers executives and evaluates a company’s ability to adjust and succeed in facing challenges.
Instead of being the target of lawsuits from regulators, activists, and governments for failing to maintain principles, businesses may act as a catalyst for change. It also doesn’t ask for a fundamental shift in perspective; instead, it only calls for an adjustment to how the world is going.
Business executives may take the following steps to use ESG fully.
- ESG (environmental, social, and governance) initiatives offer a chance for investors to have an impact and mark a significant change in how companies must conduct their operations.
- To realize the term’s full potential, businesses must broaden the definition of ESG to embrace a wider variety of disclosures, including biodiversity and welfare.
- To achieve this, business leaders should take five crucial steps, including increasing stakeholder involvement and deeply integrating ESG into all aspects of their operations.
The world is moving toward a new set of goals due to sustainability’s quick rise to prominence on the global agenda. Investments aiming to influence environmental, social, and governance (ESG) issues are predicted to treble over the next five years.
This is an example of the ESG methodology. It is a chance for investors who want to make a difference and a significant change in how companies will have to do business in the future. It could make it possible for companies and their stakeholders to decide more wisely in light of an organization’s genuine influence and worth. This entails becoming more than a disjointed, occasionally perplexing collection of reporting systems. It involves acting as an agent of actual change by disseminating accurate information and adopting novel and developing disclosure forms.
ESG is crucial, but it needs to change.
ESG must change to reach its full potential. It must go from being an alphabet soup of conflicting standards to a standardized system of complementary ones, from being seen as a compliance burden to a strategic facilitator.
ESG has to develop and adapt more swiftly to new information demands and more closely integrate with financial reporting. More financially relevant ESG (FESG), according to research recently released by Ernst & Young Global Limited (EY), may support organizations in bringing about significant change. It also emphasizes how FESG should be modified to incorporate future disclosures on biodiversity, innovation, welfare, and other topics (FESG+), positioning organizations for whatever comes next.
Many of the improvements we need to see aren’t occurring quickly enough. A consistent set of reporting standards is necessary for the new ESG strategy since navigating too many different standards groups is difficult and tiresome. It must be broadly embraced and continuously used. Because non-financial reporting, like financial reporting, has to earn and inspire trust, it must include assurance. Additionally, it must be open to innovation since new strategic thinking will be needed to address the information demands of stakeholders more swiftly.
“Too many standards are confusing and tiresome to follow; thus, the new ESG method must have a uniform set of reporting requirements.”
Businesses must take the initiative.
And what does this entail for business? How do we get there? Progress will depend on consumers, investors, and other stakeholders taking action based on better information. ESG reporting can provide this information, but businesses must take the initiative and take action first rather than waiting for others to do so.
Business leaders can now take five steps to help ESG reach its full potential and act as a change catalyst.
- Participate in stakeholder demands
Consumers and regulators want to change that can be seen, not simply transparency. According to the most recent EY Future Consumer Index, 68% of consumers think businesses should promote favourable social and environmental consequences. In Europe, the proposed Corporate Sustainability Reporting Directive was just endorsed by the EU Commission (CSRD). A multi-stakeholder committee headed by the European Financial Reporting Advisory Group is shaping it (EFRAG).
Additionally, non-governmental organizations are pushing for reforms. The UK government will seek advice from the Green Technical Advisory Group (GTAG) on developing a “green taxonomy.” Similar consultations with market participants are being held by the Securities and Exchange Commission (SEC) of the United States. Business executives should actively interact with their stakeholders to be abreast of the changing viewpoints influencing their future and integrating them throughout their organizations.
- Respond to investor pressure
Companies that wish to keep their investor appeal must prioritize FESG+. Eighty-nine percent of institutional investors across key markets believe that companies with outstanding ESG performance merit a higher share price valuation. And 90% of respondents concur that businesses prioritizing ESG activities provide higher prospects for long-term gains.
According to an EY study, ninety-one per cent of investors now consider non-financial performance to be “pivotal” in their investment decisions. To boost data credibility and encourage transformative investment, the United Nations-backed Principles of Responsible Investment are also contemplating more onerous procedures, such as third-party assurance.
“According to a new study conducted by EY, 91% of investors now consider non-financial performance an important factor in their investment decisions.”
- Own the FESG+ narrative
As several new FESG+ variables appear, organizations must prepare for change. The disclosures approved by the International Business Council of the World Economic Forum are an excellent place to start. Still, they may measure and disclose their metrics as part of their own distinctive story.
The present emphasis on employee mental health illustrates the kind of information businesses may think about tracking and reporting. Business executives should consider the possibilities for differentiating their firms by creating new variables and using them to guide their strategic decisions.
- Understand the data
According to the EY Global Climate Risk Disclosure Barometer, data quality is a significant issue for many organizations. Organizations require the correct data specialists. They need to be capable of handling both the existing and upcoming reporting obligations, and they need to know how outside entities will interpret data. Financial experts must actively participate in sustainability reporting by utilizing their data collection, processing, and reporting knowledge.
- Embed the approach widely
More than simply their sustainability staff, many firms still need to integrate strategic thinking around FESG+. The finance function, the sustainability team, and top-level leadership need to work closely together, with boards and CEOs placing sustainability at the centre of strategic thinking.
New leadership models that enable organizations to embrace the complexity of the challenge ahead and effectively address it will be necessary to successfully integrate FESG+ factors into decisions across every area of the organization, from strategy development to execution, new product innovation, and manufacturing and distribution.
ESG and sustainability are new priorities for family businesses.
About two years ago, the CEO of a publicly-traded family business called me and asked whether I had any expertise in finding and assessing top managers in an ESG context. They desired to increase their board in line with this, ideally adding a female member.
Since ESG has grown to be a significant subject at our company in the meantime, we have hired a new colleague whose knowledge is currently in high demand and who specializes in this field.
Environmental, Social, and Governance are the components that make up ESG in a commercial setting. In other words, it serves as the foundation for ethical corporate behaviour that balances social and environmental issues with commercial objectives. ESG impacts a family business’s supplier chain, manufacturing, sales, marketing, finances, and human resources.
Family company owners are increasingly told that “stakeholders” want them to participate in resolving global problems actively. The standard is more significant than ever, and they are expected to assume responsibility for the societal objectives that will lead to a better world as well as the financial success of their organization.
ESG in Practice
To position businesses as leading suppliers of sustainable, ethical, and creative products and services—and to exhibit outstanding corporate governance—family company leadership at the top level is also accountable for creating and implementing an ESG strategy. A company’s performance will be improved via expansion into new and existing markets, and reputational, regulatory, legal, and financial concerns will be minimized.
It also strives to strengthen ties with decision-makers and members of civil society, notably in the home nation and essential markets for sourcing, manufacturing, or sales. Finally, it must be transformational and meaningful for management and staff to comprehend, support, and implement the ESG strategy.
The most crucial ESG concern is “decarbonization.” Strategically, it is very relevant and poses a significant danger. Transformations toward climate neutrality demand integrated and open management strategies at the family company level. The value chain must examine products, services, production procedures, and working conditions. CO2 objectives by themselves are insufficient; the way to reach them has to be supported by measurable checkpoints.
Sustainability is becoming a critical investment criterion for shareholders, particularly those from the next generation. Customers like to purchase goods and services that are as environmentally friendly as possible. Top talent seeks employment with organizations with a clear sustainability focus as a component of their “mission.” Additionally, authorities are penalizing unsustainable company practices more frequently.
This profound change has to be guided and fueled from the top down. This rapidly becomes a leadership and attitude issue for business owners and senior executives. Three interconnected regions of activity are present. Laying the groundwork is the first step, and culture and leadership abilities are the anchors for sustainability. Then, a strategy for integrating sustainability goals into the central business should be in place. Finally, it is essential to actively support all stakeholders while communicating the goals in all directions to enable the transition and desired change.
Under the Microscope
The news of natural (or alleged) corporate misbehavior is being disseminated globally via social media at breakneck speed by NGOs, activists, and influencers. Employees want new types of employment, ethical corporate governance, and secure, well-paying jobs in addition to these other things. Through the Internet, customers utilize their purchasing power to launch morally-motivated boycotts that have the potential to bring down wholesale markets.
Investors expect not just enticing profits but also a diverse management team and a sustainable strategic focus. There is a noticeable movement toward socially and ecologically responsible investments in the capital markets. Investors are increasingly considering ESG factors when analyzing securities, assessing and considering the social, ecological, and ethical ramifications of the assets that governments and corporations make.
The so-called “state” is aggressively getting engaged. Many family company leaders lament that “the burden of expectations” has sharply increased as their immediate environment has grown noisier, more demanding, and more complex. Activist funds, debt investors, insurers, and business partners want business models that are sustainable and rapidly decarbonizing. Relationships are being threatened, new boards are being installed, and fresh funding is being halted.
Climate neutrality is becoming the new triple-A rating: performance criteria that must be satisfied. Major institutional investors are becoming ardent ESG supporters and have particular demands for CEOs of family businesses.
It takes guts and forethought for family enterprises and medium-sized business owners to put sustainability at the core of their business strategies. The demand to act may not be felt in businesses that have not yet been specifically targeted by activists or have been lucky enough to stay out of the news. However, it is dangerous for family companies to maintain the popular misconception that SMEs and start-ups may avoid ESG reporting requirements from January 1, 2021, since they fall below the present legal threshold of 500 workers.
The day when stringent regulations solely applied to big businesses in the capital markets is passed. The demand for companies to report non-financial measures, regardless of size, is growing as financial institutions, investors, and customers pay attention to ESG criteria or align their investments with them. As a result, the actual economy’s structural shift is being driven by the capital markets. The loan cost increases with creditworthiness; in certain situations, funding unsustainable ventures is no longer an option. The supply chain maintains this. SME suppliers will have to get ready for more stringent reporting and transparency requirements for their clients.
Long-term, none of them will put up with a family company management that is reluctant or unable to move the organization in the direction of sustainability. This includes employees, top talent, customers, suppliers, and financiers. Regardless of size, more and more consumers, investors, and financial institutions are paying attention to ESG factors and aligning their investments with them, increasing the pressure on firms to provide non-financial measurements. As a result, the capital markets are driving the fundamental change in the economy. Creditworthiness affects loan rates; sometimes, financing for unprofitable endeavors is no longer possible. This is maintained through the supply chain. SME vendors must prepare for stricter reporting and client-facing transparency standards.
In the long run, none of them will put up with family business management that is unwilling or unable to steer the company toward sustainability. Customers, suppliers, top talent, workers, and financiers are all included in this.
Why is ESG more critical than ever for your company?
Conscious consumption is one of the main things the COVID-19 epidemic has fueled. Many businesses have responded by making carbon-neutral or net-zero pledges by committing to decrease greenhouse gas emissions and engage in climate change.
In such an environment, Impossible Foods, a firm that produces meat, dairy, and fish without using animals, has raised more than USD 1.6 billion to date and saw a sharp increase in demand for its goods, which the company says consumes substantially fewer natural resources in production. Adopting Environmental, Social, and Governance (ESG) measures is now more crucial than ever for businesses of all kinds to flourish in the present and also future-proof themselves due to rising consumer awareness and demand for climate action.
What is ESG?
With the current COVID-19 pandemic, investors, governments, and other essential stakeholders have emphasized environmental, social, and governance (ESG) issues since they are regarded as a strategy to protect firms from potential hazards.
Let’s start with the fundamentals before learning why ESG is now more crucial than ever for your company:
- Environmental, or the letter “E” in ESG, examines how a company uses resources and how it affects the environment. Examples include the carbon footprint and waste water discharge.
- The “S” or social criterion examines how an organization engages with the community in which it works. It also discusses internal labor, diversity, and inclusion policies, among other things.
- The letter “G,” or governance, refers to internal procedures and guidelines that promote sound judgment and legal compliance. Long-term top-line growth, talent attraction, cost savings, and customer trust are all made possible by ESG.
Various reporting frameworks are readily available and assist businesses in disclosing ESG-related data.
Why is ESG becoming more significant?
The unforeseeable dangers of a pandemic and the climate issue, which both significantly influence the world economy, are frequently compared. Many investors and governments have now understood the need to accelerate investments in developing enterprises that emphasize ESG. Because of this, our society is no longer solely dependent on the government to supply its demands.
These needs range from the development of jobs to the preservation of natural resources to the protection of consumer interests. ESG-focused funds have more than doubled in size in the US, from USD 21.4 billion to USD 51.1 billion, and have increased from USD 5.4 billion in 2019 by over ten times. In March 2021, managed sustainable fund assets in Asia outside Japan nearly quadrupled to USD 36.7 billion.
In addition, the pandemic has created corporate governance. This complex process necessitates making crucial choices about company goals, employee welfare, risk management, and stakeholder management in a novel setting.
Does ESG apply to all sizes of businesses?
Small businesses can benefit from quicker decision-making, flexibility, and more excellent touch with their consumers, which helps them better understand their requirements. At the same time, large organizations can afford to have dedicated teams to care for their ESG measures and reap their benefits. Small companies may save money and lessen their carbon footprint by taking simple “green” measures like greener packaging, digital receipts, renewable energy, and efficient waste management.
Small and medium-sized businesses (SMEs) with a strong ESG emphasis will be better able to draw attention as investors want to invest more in businesses with high ESG standards. High ESG standards help SMEs boost their top line while easing operational and regulatory burdens and lowering their risk profile.
What advantages can ESG policies provide your company?
It is becoming increasingly apparent to companies that ESG offers a wide range of benefits, including the ability to recruit talent, target future consumers, enhance brands, and innovate. Overall, ESG gives the company the tools it needs to be resilient in the present and potential future situations. To further understand why ESG is more crucial than ever, let’s examine each of its main advantages in greater detail:
- Increases top-line revenue
If a company has a solid ESG strategy, it is simpler for them to enter new markets and grow its operations there. By granting these businesses licenses and approvals, governments make access easier. The US Millennial generation is willing to spend more on an environmentally friendly products, according to GreenPrint’s Business of Sustainability Index report, which was published in March 2021.
- Costs are reduced as a result.
Businesses transitioning to more environmentally friendly production techniques improve efficiency and cut expenses. One such instance is Nestlé, which declared that it will invest up to USD 2.1 billion by 2025 in developing more sustainable packaging options and transitioning from virgin plastic packaging to food-grade recycled plastics. This would not only assist it in reducing its carbon footprint but also protect it from non-compliance charges in the various operating regions where there are stricter regulations on the use of plastic packaging.
- Compliance with regulatory requirements and stakeholder management
Regulating firms are all impacted by some regulations based on the markets they serve. Businesses that take strong ESG measures, particularly in governance, are subject to less regulatory oversight and have more operational independence. Additionally, they are not as subject to pressure from environmentalists, labour unions, etc. Customers also prefer these brands.
For instance, in 2017, Starbucks launched the “Starbucks China Parent Care Program,” which offered health insurance to more than 10,000 parents of Starbucks workers in China. The expansion of Starbucks into China has been considered a strategic move gave the escalating trade conflict between the United States and China.
- Increasing employee productivity and attracting talent
Strong organizations with high ESG ratings are known to draw more robust personnel and have higher retention rates. Employees feel internally proud when there is a clear environmental strategy. The younger generation favours working for organizations that have more extensive societal obligations. In a 2016 Cone Communications survey on Millennial Employee Engagement, 64 per cent of Millennials consider a company’s social and ecological objectives when choosing where to work.
Companies of all sizes must prioritize ESG if they want to reap both immediate and long-term rewards. They also need to adapt to changing regulatory requirements and stakeholder demands continually. With its AI-based capabilities, RegASK’s ESG Horizon scanning may help your company stay on top of any ESG-related changes in the regulatory compliance requirements.
Businesses need to be informed on how to easily access large amounts of data and frameworks and quickly reduce costs and labour time by adopting their ESG strategy. With the help of RegASK’s cutting-edge technology, companies may easily access the information that matters to them. Its vast network of advisors and industry specialists aids firms in making difficult choices and improving their ESG readiness. Firms should also have timely access to information on their ESG performance to preserve positive investor relations.
The benefits include speeding growth, cost reduction, effectiveness, luring talent, and focusing on future Millennial and Gen-Z customers, underscoring why ESG is more crucial than ever. ESG integration is a wise decision for businesses, as well as for the environment, society, and humankind as a whole.
edited and proofread by nikita sharma