Corporate sustainability or environmental, social and governance (ESG) is not a new concept, yet it is a topic that is increasingly shaping today’s business world.
It is part of a growing acceptance that society has a new attitude towards corporate accountability. This ranges from environmental issues like climate change and resource scarcity, to social issues like a company’s labour practices, gender pay gap, product safety, data security. It also includes governance matters like board and executive diversity, ethics and corporate values.
What does ESG really mean? Think about the current situation in Auckland for example, where businesses and households have had water restrictions in place for a number of months. Many companies, particularly industrial ones, need plentiful water at adequate temperatures to operate. How robust were their plans to confront possible water scarcity now and in the future?
Financial institutions such as banks are starting to perform risk assessments on the ways in which businesses depend on the environment, how these dependencies are threatened by environmental change, and the resulting risks for the financial institution on lending, insuring or investing in the business.
Investors, customers, suppliers and employees are calling on companies to do more around key sustainability issues and opportunities and to be more transparent about their efforts.
A number of large corporates now voluntarily produce corporate sustainability reports and there is a growing focus from regulators on extended external reporting/integrated reporting, which refers to reporting beyond information presented in the financial statements. The Government also intends to make climate-related financial disclosures mandatory for public listed companies and large financial sector organisations in the near future.
Increasingly, investors want to know about ESG factors when making investment decisions as responsible investment is becoming a mainstream concern for the investment industry, as evidenced by the dramatic growth in the number of investors adopting the Principles for Responsible Investment (PRI). Investors want to understand a company’s long-term value creation plans, yet many companies are not giving investors the right information in the right format.
Two commonly used sustainability disclosure frameworks are the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) standards. Using these frameworks is a great place to start as this will enable companies to disclose their material sustainability and climate change risk information in a standardised manner, providing investors with the information they want.
At a consumer level, there is an increasing focus on driving broader social, cultural and environmental outcomes. A 2020 study by the National Retail Federation across 28 countries showed that 57 percent of consumers are willing to change their purchasing habits to help reduce negative environmental impact, and among those who say sustainability is important to them, this increases to 77 percent. Brand trust, convenience and sustainability were all of high importance. Seven out of 10 consumers are willing to pay a premium for brands that support recycling, practice sustainability and are environmentally responsible.
Companies must maintain consumer trust in their brand and this must be constantly and consistently reinforced through multiple channels, as consumers say they conduct substantial amounts of research before making purchases. And these days, that power is at their fingertips.
On a business to business level, suppliers are seeing the rise in sustainable or social procurement. Organisations procuring goods or services are now assessing suppliers not just on price, quality and risk, but also considering the broader social and environmental outcomes. Potential suppliers must be able to demonstrate that they ‘walk the talk’ in sustainability and align with buyer ESG values and expectations in order to protect their brand. Organisations are looking across their supply chain to ensure that labour and human rights conditions are met, products and raw materials are sourced sustainably and that their supply chain’s environmental and carbon footprint is minimised.
Does your business understand its ESG risks and have plans to address these? Is ESG a part of your strategic thinking? Are you measuring your business’s ESG impact?
If your answer to the above questions is no, then you need to start addressing them, as action on ESG has moved from the realm of activists to the mainstream and is now viewed as a business issue with material financial and viability impacts.
Understanding ESG risks and having plans in place to address them is a significant opportunity to engage with your investors, customers and suppliers to demonstrate your value to them.
The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek advice.