Environmental, social and governance evolution: Impacts on strategic direction of businesses
Our businesses, economies and nations have experienced disruption from events such as the global economic crises and more recently the COVID-19 pandemic.
The world at large, though significantly impacted by these unplanned global events, continues to develop resilient measures in adapting to the effects of these unforeseen events while taking into account the growing prominence of environmental, social and governance (ESG) considerations.
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The need for businesses to adapt to a changing world cannot be overemphasised, with a steady shift from the singular traditional focus on financial performance measures such as revenue and ultimately profitability to an increased awareness and importance of the processes businesses employ in delivering an output.
ESG, which encompasses environmental, social and governance standards for company operations, has seen increasing prominence in recent times and is expected to have a major impact on businesses.
While nations are putting in place ESG regulations, major funders are beginning to demand companies’ ESG strategies and reports before committing to funding.
Stakeholders are demanding that businesses start measuring success not only in terms of profit but also through environmental sustainability, employee engagement, external partnerships and societal impact.
As a result, societal needs and business opportunities are coming together to transform the way companies craft strategy, drive performance and report results.
To operate successfully, businesses will be required to earn trust and deliver sustained outcomes for shareholders, stakeholders and the wider society. Even before COVID-19 upended business and society, the ESG movement was gaining steam. Far-reaching challenges such as climate change and economic inclusion concentrated the minds of investors and executives on the importance of long-term priorities and non-financial reporting. Then the global pandemic heightened awareness of how interconnected we all are, how rapidly external shocks can work through the global economy and how central trust and transparency are to the economy’s operation.
These crosscurrents are expected to come together to propel the next wave of corporate transformation: the ESG transformation.
Potential
Like digital, ESG has the potential to revamp how successful organisations plan, implement and operate. Also like digital, ESG is a sprawling topic, making it challenging for organisations to know where to begin. In the case of digital, that uncertainty led many organisations to start small: they put a toe in, launching pilot after pilot—learning in the process but also running the risk of being overtaken by more ambitious competitors who were quicker to grasp the opportunity to reimagine their business digitally.
Today, most management teams realise that capturing the true potential of digital calls for an all-in approach—a comprehensive programme in which digital touches all aspects of the company, every business unit and function. Digital does not just enable you to do the same thing faster—it changes what you do.
The same is true for ESG: it gets to the heart of why you are in business, who you are as a company, what your impact on the world is, how you align your business model with the needs of society, what you report, how you engage your people and with your stakeholders more generally. With digital transformation still a work-in-progress for most companies, the notion of tackling another big transition may seem daunting.
We will suggest, though, that deferring the ESG transformation creates the risk that as you rewire your company, you will hard-wire in old value creation models that cannot meet the concerns of your stakeholders and the long-term needs of your business. It also becomes increasingly likely that you will fail to manage very real and material risks and you will find yourself out of step with your shareholders.
An ESG strategy goes beyond simply having a detailed plan contained in a company’s strategic document/plan or disclosures in annual reports. It entails embedding the core principles across the lifeblood of the organisation to create sustained value. Companies must appreciate the perspective of transformation as an investment with returns that far outlive regular short-term initiatives and decisions. PWC