The new industrial revolution, centred around ESG, is just beginning. Conor Holland outlines what organisations need to do to be part of this exciting new economic change.
A new economy is emerging, driven by profound changes in technology and the increasing pressures associated with climate change and changing societal expectations. COVID-19 has accelerated changes in how we live and work, with enhanced digital integration and a greater focus on the resilience of company operations. Indeed, the context in which organisations now operate has been transformed by climate change, biodiversity loss, and an increased focus on companies’ role in addressing broader societal challenges such as diversity, equity and inclusion. Consequently, the role of business in helping solve these issues is more critical than ever. As a result, environmental, social, and governance (ESG) matters have become a top priority on board agendas. Companies increasingly recognise that they operate as part of an ecosystem with permeable boundaries and are interconnected with various stakeholders.
Prepare for a low-carbon economy
Businesses must consider the implications of transitioning to a low-carbon economy and how it will impact their business models, products, operations, and financial performance. This message was underscored during COP26, where it was clear that the institutional investment world is starting to exercise significant influence through investment policy and demand increased climate focus from investee companies – including private companies as much as public companies.
Crucially, transitioning to a low-carbon and climate-resilient economy will involve significant financial opportunities as businesses leverage new renewable energy technologies to displace carbon-intensive processes and identify other crucial disruptive innovations across all industries. Ultimately for businesses, ‘going green’ is not just a matter of saving the planet; it is about pursuing economic growth and development that is strategic, resilient, and sustainable.
ESG integration
Organisations should interact with all stakeholders, including clients, employees and their communities, to understand the context in which they operate. This means creating a strategy that integrates shareholder and stakeholder value and aligning managerial incentives with the company’s core purpose. In addition, strategic priorities and internal investment decisions should support key drivers of sustainable, long-term value creation and focus on culture, talent development and branding.
To ensure that businesses maximise value creation, management and directors must reformulate how they measure success. ESG factors must be integrated and internalised into governance, strategy, operations, and performance management and ultimately reported and assured to be fully effective. Therefore, organisations should consider how robust their ESG reporting framework is by ensuring that it effectively discloses quantitative and qualitative information while equally providing relevant and reliable information to their stakeholders.
Reporting and assurance
In response to the growing stakeholder demand for ESG information, many organisations are already preparing for future sustainability disclosures by identifying the metrics most material to their sector, strategy, and stakeholders and developing the associated infrastructure to facilitate reporting on those metrics. Moreover, as companies report and disclose more ESG information, they should expect a sharpened focus on the accuracy and reliability of their disclosures and metrics. Management must develop appropriate processes and controls, similar to financial reporting, and consider undertaking ESG reporting readiness assessments to comply with the new regulatory obligations.
We are on the cusp of a radical transformation in how we live and work. Businesses are expected to measure, manage, and report a holistic view of enterprise value, measured by a broad capital base (financial, human, intellectual, social and natural). Those corporations that align their goals to the long-term objectives of society are most likely to create long-term sustainable value while driving positive outcomes for business, the economy, society, and the planet. This is the sustainability revolution.
Conor Holland is a Director of ESG in KPMG.
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