Why sustainability and ESG are critical for firms
The terms ‘Sustainability’ and ‘ESG or Environmental, Social and Governance’ run the risk of becoming mere buzzwords in today’s green-minded world. Worse still, these terms are often used interchangeably when they do not quite mean the same thing. Sustainability is an umbrella term that encompasses all of an organisation’s efforts to be a responsible steward and includes the three specific ESG pillars that are measurable, as they are data driven.
Admittedly, there is some intertwinement with these terms but because sustainability is a much broader concept, it can be bandied about while remaining somewhat ambiguous. ESG on the other hand is associated with very clear ideas such as having regard for environmental issues by reducing carbon emissions, using resources more efficiently and cutting down waste production and complying with environmental regulations. On the social aspect, ensuring workplace safety, employee engagement, diversity and inclusion, and observing the data and privacy requirements for employees, come to mind. Governance issues such as executives’ salary levels, composition of the board, shareholder voting rights and even the organisation’s stance on bribery and corruption through its policies are key.
Narrowing sustainability down to an ESG based approach is useful because it compels an organization to report on all three elements rather than cherry-picking ad hoc standards which lends itself to manipulation. For instance, consider a company that decides to terminate its coal mining operations to prevent further environmental pollution. It may be applauded for this were it not for the loss of livelihood for countless employees who were working to produce the coal. Similarly, a power production company that makes the move from a fossil fuel based energy to a renewable energy source must think of the workforce that may be rendered redundant. As part of planning for such pro-environment initiatives, the developers need to consider how to re-train or re-deploy their employees, failing which the social downside may receive much more attention than the environmental upside.
Inconsistencies in the actions of investors can cause significant reputational damage. There was a widely reported case in the international press where a prominent investor made ambitious commitments on sustainability while earning returns as a shareholder in a company accused of environmental violations in its supply chain.
To cure any such dissonance, an organization can adopt a balanced ESG framework for a more holistic approach. This is crucial in a world where organizations are increasingly accountable for sustainability to a wider pool of regulators, investors, consumers, employees and the general public. These stakeholders are not going to be appeased by mere greenwashing – they are likely to ask more discerning questions about ESG performance such as whether a framework has been adopted to guide business operations and whether the impact of the initiatives can be reliably measured. They may also ask whether responsible business strategies have been incorporated into the investment selection process and whether the business models mitigate ESG risks.
There was a time when sustainability was considered to be a soft issue compared with the hard bottom line. Today however, sustainability related failures directly and significantly affect profit making. This is partly due to our heightened sensitivity to topics such as climate change which have come to the forefront following a series of recent catastrophic weather events in many countries. As the correlation between the value of a company’s brand and its ESG performance increases, it behooves the management to develop clear, measurable and impactful ESG objectives. To avoid setting the bar too high, ESG efforts and outcomes always need to be reasonable and achievable. More ambitious ESG targets may be set provided that the timeframes are realistic and the entity is prepared to dedicate the resources required.
Once targets are set internally, an entity can decide to publicly disclose them for greater accountability and as part of a green-signaling advertising campaign. Opting to publicly commit to sustainability efforts may seem daunting due to the fear of falling short. However, statistics show that public sustainability commitments with clear quantitative targets that are measurable in real time and publicly disclosed, have in the past prompted open dialogue and useful stakeholder feedback that in turn boosted many a company’s efforts to meet its targets. Nestlé is a good example of the positive effects that can come from making public commitments. By the end of 2020, the food and beverage company had reduced its greenhouse gas emissions per tonne by 37% since its commitment period by sourcing 50% of its electricity from renewable energy. It also had a clear roadmap that aimed to halve emissions by 2030 and be net zero by 2050.
There are good reasons for taking an approach similar to Nestle’s. When a company announces that it has successfully met its ESG objectives, this facilitates top-line growth by attracting more customers and inspiring greater customer loyalty. As a bonus, the entity also reduces costs by eliminating wasteful practices and minimising regulatory and legal interventions.
For stakeholders to be convinced that an entity has indeed met its targets, the contents of its ESG performance reports need to be verified. This is one reason why auditors globally are recruiting heavily for ESG related offerings. Entities therefore need to ensure that they maintain accurate and detailed records on their initiatives to enable an auditor test and opine on the ESG elements of sustainability reports.
The path towards fulfilling ESG targets is not without challenges. One truth that must be acknowledged is that sustainability efforts often face some organizational resistance. Leadership support is crucial to counter this. For example, executives should demonstrate commitment by prioritizing the sustainability agenda and actively engaging with employees to address any negative perception that sustainability is bad for business. Staff performance metrics should also include ESG imperatives with corresponding incentives and rewards. In addition, management should demonstrate willingness to walk away from processes, products and service providers where they do not align with the company’s roadmap to achieving its targets.
In conclusion, sustainability initiatives can be well implemented through the prism of ESG. It is therefore worth prioritizing the same and developing a clear roadmap for the journey. If somewhere along the way a bump is encountered or a new turn needs to be made, then the entity’s ESG strategy should be flexible enough to deal with this.
The article was featured in the Business Daily on 07 September 2021 and can be accessed here .