Environmental, social and governance metrics are crucial when formulating your business strategy and looking to the future. But what can organisations do to meaningfully embed ESG into their business? Fiona Gaskin explains.
International events and movements such as COP26, the COVID-19 pandemic and Black Lives Matter (BLM) have concentrated the minds of investors and executives on the importance of integrating environmental, social and governance (ESG) into overall business strategy and non-financial reporting.
PwC's latest CEO Survey revealed that ESG metrics are still not being integrated into long-term corporate strategies, however. Released in March, the report found that fundamental ESG targets, such as net zero, have only been set by a minority of Irish companies.
So, why does ESG matter? At its simplest, ESG gets to the very heart of why you are in business, ‘who’ you are as a company, and what your impact on the world is.
It’s also about how you align your business model with the needs of society, what you report, and how you engage with your people and stakeholders.
Deferring integrating ESG into your overall business strategy gives rise to risk. It might mean, for example, that you will hardwire old value creation models that don't meet the concerns of your stakeholders and long-term needs of your business.
It also becomes increasingly likely that you will fail to manage real and material risks while also finding yourself out of step with your stakeholders.
Integrating sustainability into your overall business strategy is essential, as ESG will propel the next wave of corporate transformation.
Strategic reinvention
Companies are redefining their business and sustainability strategies before determining how to respond most appropriately to the evolving non-financial reporting environment.
Management teams are taking a fresh look at difficult strategic trade-offs in response to both new opportunities and external pressures.
This includes concerns about heavy carbon emissions — very much on the radar of energy companies and cement manufacturers, for example — and a range of social concerns including health, race, gender, inclusion, and inequality.
So, what can you do if your organisation's current strategic priorities result in outcomes increasingly viewed as unsustainable (or even unacceptable)? In this case, you will need to introduce a strategy to address such concerns, exploit different opportunities, and redefine, not only what the business does, but also how it does it.
Reimagined reporting
The most immediate call-to-action is often a combination of heightened regulatory requirements, greater risk awareness, and demand for data that can support the management and disclosure of ESG data.
Everything from carbon emissions to racial and gender balance and the sustainability of sourcing strategies is under the microscope. Investors, governments, regulators, rating agencies, and informed customers assess whether businesses have identified, and are appropriately managing, ESG risks.
As companies re-evaluate what they report publicly, formal non-financial disclosures are starting to augment or replace non-binding frameworks.
Business transformation
A business that begins to report against broader non-financial metrics will quickly find that objectives need to be defined in order to manage these metrics, and drive the change needed to achieve these objectives.
Similarly, a business that has had to redefine its strategic priorities to ensure its sustainability and relevance will need to transform to deliver on the new strategic objectives.
Either way, businesses will have to actively manage ESG outcomes by internalising ESG into strategy and transforming it to implement the related change and report progress and results.
Senior leaders have a critical role to play in driving this agenda for transformation, which is not separate from ongoing digital transformations but will inform and build on them, redefining both their context and purpose.
Every company is uniquely situated, as is the scope of change needed. Whether the motivation is an ambitious emissions target that inspires strategic reinvention, deals to exit or restructure unsustainable businesses, ambitious diversity, equity, and inclusion (DEI) priorities or supply chain overhaul, the resulting ESG agenda will eventually encompass reporting, strategic and business transformation initiatives.
It all adds up to a new equation for business – behaviours based on purpose and trust that create value by forging solutions to society's challenges. Here are four steps you can take to help your company begin its ESG transformation journey.
- Decide on strategy and metrics
The first step is strategic. Set an overarching approach to ESG. It should be supported by a clear tone from the top, with the CEO and leadership team committed to encouraging buy-in across the entire organisation cohesively and inclusively.
- Process and governance
Standardised policies, procedures, controls, and governance are crucial to efficiently integrating ESG into your business. Automated workflow and data transformation tools can help ensure that your data is appropriate and your metrics are clearly defined. Through this kind of structured approach to reporting processes and governance, your ESG story will be grounded in objective and reliable data.
- Prioritise integrated reporting
Treat ESG reporting like the integrated effort that it is. Create an architecture that includes data sourcing, aggregation, calculation, validation, reporting and analytics. Leverage existing financial reporting architectures to the greatest degree possible, and map each ESG reporting element to the architecture.
- Tell an authentic story
When telling your company's ESG story, present more than a snapshot of where you are now. Instead, talk about where you want to go next and how you plan to get there. That sense of evolution will help you act now, with reporting and data you can stand behind into the future.
The final word
The impetus for businesses to address ESG issues and opportunities is likely to continue to grow, spurred by investors, shareholders, governments, policymakers, employees, suppliers, customers and citizens. Now is the time to start planning for a new future.
Fiona Gaskin is ESG Leader for Assurance and Reporting at PwC Ireland.
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