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Environmental, social and governance (ESG) strategies have today become critical to resilience and long-term business success. COVID-19 and its exponential impact have transformed societal norms and interactions, exacerbated social and economic inequality and heightened demands for companies to be accountable to their stakeholders. Financial figures alone no longer tell a company’s complete story. To sustain and thrive in this new era of accelerating transformation and stakeholder capitalism, companies need to embrace ESG as a strategic business imperative.
The critical question that arises here is — How can Indian companies and its board members embrace ESG as a strategic business imperative? Below are four ways to unlock ESG’s strategic value:
First, understanding the ESG ecosystem better: The key players shaping the ESG ecosystem include corporate reporting standard-setters that provide guidance for ESG disclosures; data aggregators that structure publicly available data or request data from companies via questionnaires; rating agencies that create assessments of companies based on public and/or private information to sell to investors; and increasingly in many jurisdictions, regulators.
Depending on the identification of the priority stakeholders and ESG issues, some or many of these organisations could be crucial in communicating a company’s narrative. Knowing the Indian ecosystem and how a company is viewed, should be part of a board’s oversight of strategic decision-making and communications.
Recent market-driven and regulatory developments are further speeding up standardised ESG reporting and impacting the expectations of stakeholders, particularly investors. By staying up-to-date on these and related developments, boards can help their companies keep pace with market trends and stakeholder expectations, and potentially get ahead of regulation.
Second, developing an ESG strategy: A fundamental step in ESG strategy development is a sustainability materiality assessment. An assessment typically includes engaging with a company’s key stakeholders (shareholders, employees, customers, suppliers, communities, among others) to identify and prioritise ESG topics that are most relevant to the business and where a company can make the most meaningful impact.
This is where the boards can play a critical role in providing oversight and accountability around ESG strategy and the management-level infrastructure needed to execute that strategy. We should do this with the broader context of a company’s purpose and overall strategy. While organisation and board structures vary across companies in India, strong governance is fundamental to success.
At the board level, the task entails overseeing ESG integration into strategy and enterprise risk management (ERM); the audit committee overseeing ESG disclosure processes and controls, and getting internal and external assurance over ESG reporting; and, the nomination and governance committee overseeing ESG governance, stakeholder expectations and related board expertise.
Some boards may choose to create a separate sustainability committee or an ESG committee to focus on ESG risks and opportunities.
Third, integration of ESG with broader strategy and ERM: Integrating ESG into broader business strategy can enhance performance and further differentiate a company from its competitors. The potential value of an integrated ESG strategy includes — highlighting sustainability of company’s business model over the long term; driving market differentiation through strategic positioning in terms of sustainability; innovating products, services and processes with sustainability attributes to capture larger market share; and enhancing brand and reputation among consumers, employees and investors, many of whom are increasingly environmentally and socially conscious.
An integrated ESG strategy also includes considerations related to capital allocation, supply chain management, partner choice and investments — many of which create ESG opportunities and risks that can impact the business. ESG-related risks are among the most significant risks facing companies today.
The World Economic Forum’s Global Risks Report 2020 revealed the top five risks in terms of likelihood are all environmental risks and three of the top five risks by impact are environmental related. Integrating ESG risks consistently through existing ERM governance practice and processes can help risk management and sustainability practitioners navigate these accelerating ESG-related risks.
Fourth, narrating the right ESG story: ESG disclosures provide a forward-looking view and insights into how a company is building resilience and strengthening its competitive positioning. As boards oversee ESG disclosures, they could consider the following factors: disclosures should align to investor expectations and needs; robust disclosure processes and controls must underpin ESG reporting; and, unified narrative should be used across reporting domains.
In all, organisations cannot ignore the relevance and importance of ESG. Organisations must be prepared to publish a statement of purpose, provide stakeholders with integrated financial and ESG reports, actively engage middle management in ESG matters, improve internal control and IT systems for measuring and reporting ESG information, among others.
Now is a good time for organisations to include ESG in their DNA.