Going the Extra Mile – Why ESG Builds More Profitable and Resilient Companies
Variations of ESG reporting are being adopted by companies around the world but a commitment to environmental, social and governance transparency shouldn’t be seen as simply onerous. Those that embrace it have a competitive edge.
When the COP26 summit opened its doors in the autumn of 2021, it wasn’t just policymakers and NGOs who flocked into the meeting rooms, conference halls and fringe events. Businesses were also there in great numbers. Some were offering solutions aimed at mitigating climate change and others were there to learn from their peers and join discussions on ways and means to achieve the goal of “net-zero” by the middle of the century.
It was a reminder, if one were needed, that we are currently in the early stages of a profound period of transition. Every organisation – large or small – will have to put sustainability at the heart of its operations. This will not only be enforced by ever more stringent national and international regulation but also – and perhaps more fundamentally – by the demands and expectations of customers, employees and investors.
But here’s the question. How do those various stakeholders – regulatory bodies, financial backers, staff and customers – assess the progress of a business towards its stated sustainability goals? And how does the company ensure that its sustainability strategy is being successfully executed?
In this regard Environmental, Social and Governance (ESG) reporting is a vital tool. By adopting the appropriate standards businesses are entering a new age of transparency that will help drive the changes needed to secure a sustainable future.
A commitment to ESG reporting is no longer a nice-to-have. Governments, regulators and industry organisations are pushing the agenda forward. For instance, last year, the UK government announced that from April 2022, large public and private companies would have to report on climate-financial risk, but that is just part of the picture. ESG reporting covers not only environmental practices and risk but also the social impact and governance practices of companies. There are various reporting frameworks but common standards are evolving. For instance, 70 companies have already signed up to report using metrics developed by the World Economic Forum.
The ESG Opportunity
ESG reporting can be a complex undertaking but there are also opportunities for forward-thinking organisations to differentiate themselves from their competitors and become more resilient in the place.
Why? Well, the workforce itself is changing. Millennials are already well established and many of them have risen through the ranks to become today’s senior decision-makers. They have been followed by Generation Z. Both cohorts have grown up in an era where the environment has emerged as the number one issue of the time. They expect the organisations they work for to respond to the challenge.
Equally important, Millennial and Generation Z cohorts expect organisations to trade ethically while also taking steps to reduce any negative social impacts from their operations. In addition, today’s employees see the creation and maintenance of inclusive and equitable workplace cultures as an absolute imperative.
In that respect, companies that take their role as good corporate citizens are much better equipped than their competitors to attract and retain the best staff. But the key is transparency. ESG reporting provides evidence that businesses are delivering on their declared sustainability and governance objectives.
And of course, it’s not just employees who take notice. Investors are also increasingly focused on issues such as staff retention. Put simply, investors increasingly tend to favour organisations addressing the expectations of employees.
Meanwhile, customers also prefer to do business with organisations that can demonstrate a commitment to ethical trading and positive environmental and social outcomes. For instance, the commitment to sustainable products displayed by Generation Z consumers has filtered up to their parents. Today 90 per cent of Generation X consumers would pay up to 10% more for sustainable goods.
All these factors demonstrate why ESG matters to stakeholders, but there is an equally important reason why businesses should allocate resources to comprehensive reporting on their governance and impact. ESG metrics provide a means for businesses to identify, prioritize and mitigate the risks they face. This in turn makes them more resilient. To take an example. If you are aware of the ESG-related risks inherent in the supply chain, you can plan for resilience.
Collecting The Data
But here’s the challenge. Reporting across the three pillars of ESG requires the collection of a huge amount of data. For instance, the environmental strand might require numbers on the company’s carbon footprint, pollution record, electronic waste, water usage, emissions, impact on biodiversity and a host of other things. The societal pillar might call for data on human capital, labour standards, health and safety, inclusion, diversity and product sourcing. Governance covers areas such as board diversity, executive pay and ethics.
In that respect, it’s important to create ESG reporting teams that are cross-functional and capable of painting a holistic picture of the organisation and all its operations. The necessary data collection, management, and analysis also need to be put in place, again encompassing the whole business.
The first step is to adopt an appropriate reporting framework – something Verizon did with the help of feedback from investors – and make a choice of measurements. It will always be work in progress. For instance, Verizon is continually reviewing its metrics in line with changing risks and circumstances.
Good ESG reporting requires commitment, but it provides a means to build a better organisation.
