Solving environmental, social and governance threats is good business. Solving them well is better business.
We know the future: it’s both challenging and opportune. On the one hand, we face an increase in natural-resource constraints, political polarization and demographic instability. On the other hand, the atmosphere is warming and sea levels are rising. By this measure, the outlook ahead appears pretty grim. But, as the saying goes, necessity is the mother of invention and opportunities abound as a result of these challenges. The private sector has recognized that global threats are critical to business success. Solving these problems is good business. Solving them well is better business. In fact, companies that manage their environmental, social and governance (ESG) issues are better able to manage risk, are quicker to identify opportunities and are outperforming their peers.
How to manage ESG impact
A necessary first step is the measurement and management of a company’s own operational footprint. Environmental impact relates to various uses of natural resources, such as carbon, waste, water and plastics in direct operations. Are these being measured? Are efforts being taken to reduce waste?
The social impact of a business may involve a company’s values, community engagement and investment, employee health and safety and labor conditions. Are there established policies and remedial structures?
Finally, a company should consider their own governance. Are systems in place that are transparent and accountable? Is the board diverse? Are controversies handled appropriately? Cascading down through a company’s supply chain, managing all of these ESG issues require additional—and sometimes complex—reporting and monitoring mechanisms.
Trust takes years to build and minutes to destroy, so effectively managing ESG is also critical to long-term financial success. This is particularly true in carbon-intensive industries where increasing numbers of shareholders have started to demand more detailed updates on financial risks of climate change. Standards and frameworks such as the Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) enforce transparency and provide guidance on what data companies should make public. In addition, a number of exchanges are encouraging widespread reporting on ESG risks and impact.
Investors now understand the intrinsic value of corporate reputation. Many advisors are now reviewing ESG metrics in addition to standard financial measures when making decisions. The next generation of ESG management will revolve around the measurement of the impact of a company’s products. Guidance from the UN Global Compact has emerged as a widely accepted framework. Over 12,000 organizations and corporations have pledged to support the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development. Moreover, investors are embracing the SDGs and examining the relationship between the SDGs and corporate performance. Meanwhile, customers are paying attention and embedding questions in their requests for proposals (or RFPs), which often accompany new business agreements. Organizations want to partner and work with like-minded responsible companies. There is a tremendous opportunity now in “doing what is right”.
Lastly, the holy grail for those of us working in the sustainability space is the integration of ESG across the entire business, from product development, operations, legal, communications and human resources out to the sales teams. Are all employees more knowledgeable of internal accounting for carbon emissions, recognizing water scarcity, identifying labor or human rights issues in the supply chain, or leveraging diversity and inclusion for innovation? Do they have the confidence to not only solve problems but to identify innovations? Has each and every employee had the opportunity to learn about and act on these issues for their families, their jobs and their planet? Are all employees bringing this new ESG lens to the products and support we provide to clients?
Implementing comprehensive awareness and behavioral change across an organization requires extensive planning and execution. Mainstreaming of corporate ESG is the future. Among those companies that are already solid performers in 2018 there is likely to be an increase in the establishment of strategies or teams dedicated to fostering ESG across the business.
A version of this article originally appeared in The Economist.
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