By Akanksha Sharma
Consider a company losing its social license to operate owing to its cavalier water handling or a brand compromising its competitive advantage due to high attrition. While both instances pose obvious business risks, the global investor mindset has lately pivoted to link them with the long-term sustainability of operations, putting Environmental, Social, and Governance (ESG) conduct of businesses at the center of boardroom discussions. The mainstreaming of sustainability is a welcome shift from the single bottom line cognizance of profitability. However, in a world desperate to return to normalcy and economic order post the pandemic, would the trend be deprioritized for financial materiality?
ESG: A cornerstone of modern business practices
Contemporary evidence suggests the contrary. At a time when successive waves of the pandemic and their disproportionate impacts have upended societal norms and diverged socio-economic inequalities, the demand for organizations to be accountable is higher than ever. And companies that are integrating long-term sustainability dimensions alongside financial dividends are likely to be more resilient in the face of future disruptions. It is reflected through a record 29% jump in sustainable investments, touching $ 1.7 trillion in the last quarter of 2020. Also, the inflating base of UN Principles for Responsible Investment encompassing over 3,000 global investors with more than $103 trillion in assets underscores the growing investor commitment to sustainability. Today, everything ranging from an organization’s response to climate change, workforce diversity, labor practices, ethical posturing, supply chain relations to a role in geopolitics are expected to have bearings upon how its stocks are evaluated and bought.
Tripping of balance?
But at present, there seems to be a polarisation of opinion around ESG practices and how to drive ESG efforts to ensure maximum tangibility. Is ESG merely a means of enticing investors who are searching for greater accountability for their funds? Or is it a radical instrument of change that can simultaneously ensure greater culpability of corporate actions and secure the interest of future generations by answering the call of the Triple Bottom Line? Unfortunately, the dissonance at present is indeed appalling. For example, a recent study revealed that 96% of businesses feel pressured to become ethical and environmentally sustainable. Only 4% have a clear understanding of various ESG metrics and how they apply to them.
Perhaps at the root of this disproportion is the propensity of executives to treat ESG practices as an operational appendage. The notion is often that simple actions like timely ESG disclosures, sustainability reporting, and sustainability-focused investor relations events would suffice. This superficial treatment has led to ESG practices being frequently used for public relations and marketing campaigns rather than actual transformational intents. For instance, companies have allegedly been greenwashing their carbon footprints by outsourcing their production workloads or offsets rather than reducing their footprints. However, by doing so, organizations also seem to be undercutting the strategic benefits that high-fidelity ESG adherence can otherwise bring to the collective cause.
Strategizing ESG intents
It is vital to transform ESG compliance from a mere roadmap for achieving operational efficiency to a strategy that is innovative, ambitious, ensures shared value, and probably hard for the competitors to imitate. It should not only elevate operations and add fiscal dividends to the company’s top line but also help the organization to stand out amidst the market clutter and establish itself as a thought leader well into the foreseeable future. For this, proactive, conscious, and continuous innovation to find eco-friendly alternatives is essential, rather than a parochial and piecemeal approach.
And we’ve seen this with several technology and e-commerce companies that have integrated their operations and social outreach programs to a whole new level. They have leveraged their extensive logistics networks and industry partnerships to help women entrepreneurs across India, helping them reach nation-wide markets from the comfort of their homes. However, such policy shifts call for informed and enlightened leadership to identify priority action areas and strategies accordingly to maximize value for the organization and its stakeholders.
Singularity of purpose
Companies that can successfully define their sustainability purpose and use it as a compass to guide corporate conduct obviously stand to benefit from improved reputation, better risk mitigation, enhanced business performance and assured industry leadership. However, despite the proven value of ESG practices and the risk of non-compliance in the contemporary world, delivering authentically on ESG commitments can be tricky. It involves large-scale cultural and operational changes that must be triggered at the top and percolate to the bottom tiers of the organization as well as up and down its value chain. But boards are often siloed from ESG and sustainability responsibilities, creating massive divergence in intent and action.
Nevertheless, there are exceptions, with organizations where top leadership actively participates in sustainability discourse at the industry level or ties executive incentives with the sustainability posture of their companies. Indeed the board of directors as the repository of corporate experience and intellect is expected to act as thought partners. They have the moral obligation to help embed ESG fundamentals into the company’s strategies, culture, governance, investments, and stakeholder relationships, influencing managerial decisions across functions.
Framing the right narrative
With pressure from institutional investors higher than ever, and corporate stakeholders, including environmental groups, employees, customers, and supply chain partners, getting exceptionally hawkish, it is crucial how a company pitches its ESG story. Reporting and communications allow stakeholders a broader view into how a company is acting on its ESG commitments. Also, it provides objective visibility into how the organization plans to build resilience and consolidate its competitive positioning. Setting the right ESG narrative is a strategic imperative that should underscore the company’s sustainability efforts for orchestrating favorable investor and stakeholder sentiments.
ESG disclosures should be shaped according to stakeholder expectations. Reporting should be aligned to standards like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Disclosures (TCFD), and Climate Disclosure Standards Board (CDSB). This way, companies can ensure that they deliver comparable data points that can be readily consumed for reporting. Also, to assure transparency and reliability of the disclosures and improve their strategic value, organizations must have robust data quality and authenticity controls as well as external corroboration. This is key to building stakeholder confidence and trust.
While content integrity is vital, and it is essential to cater to the diversity of the target audience, the messaging must resonate along a unified plane. Communicating a clear, coherent, and well-thought approach to value creation through ESG adherence is essential. Lastly, company leadership should find ways to ascertain and interpolate the financial materiality aspects of ESG into their disclosures, allowing investors and stakeholders to quantify the risks and opportunities involved.
Strategic value creation for the long haul
Organizations need to be conscious that over the years, what ESG means has evolved. ESG is no longer merely a calling card of a business’s good intentions into a recognition of its strategic vision and competence to deliver strong sustainability outcomes in the long term. Because, into a future that looks increasingly threatened by various socio-environmental and economic risks, ESG-driven business practices will be best equipped to protect investment returns and shared community values from eroding.
(The author is ESG & Policy Expert and Author of “For the Greater Common Good”. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)
