The business landscape is constantly evolving, and the traditional notion of corporate success is undergoing a significant shift. Purpose is increasingly becoming an important lens through which an organization is viewed. It is therefore pertinent to adopt an action-oriented approach and turn ESG (environmental, social, and governance) theories into practice to drive long-term value. ESG factors are critical and have the potential to deliver immense financial and non-financial value to an organization. Several investors use ESG as a framework to understand any company’s business practice, ethical behavior, corporate responsibility, and performance on numerous sustainability and ethical issues. This parameter gives them the chance to evaluate their future investment plans in the company.
An RBI study states that large listed domestic companies with an active ESG framework have performed better than their broad market counterparts, even during extreme market events like the pandemic shocks. It’s been seen that ESG-focused companies tend to have better operational efficiency, lower employee turnover rate, increased innovation, strong governance, reduced compliance costs and better risk management.
It’s been observed that as an ongoing trend, most ESG initiatives are very well put in theory, but they don’t come fully in place when it comes to practical implications. Mercer’s 2022 Global Talent Trends study found that an overwhelming 99% of employees in India expect their employer to pursue a sustainability agenda that balances financial results with social issues, diversity/equity and environmental impact.
With the world evolving, there is the need for greater transparency as regulatory frameworks and investors among others are looking at organizations beyond just financial performance but also alignment with value systems that affect the world around us. To drive an effective ESG approach for an organization, there are many factors that need to be considered that will build more than just reputation; it will also become a critical part of any company’s intangible assets. The following is a deliberation on how we could approach an effective ESG strategy–not just in theory but also in practice.
Setting clear benchmarks
Establishing clear and consistent universally agreed-upon standards becomes difficult as different stakeholders have their own priorities and interpretations of what ESG practices must be. Another aspect is the lack of reliable and consistent data, making measuring progress and ensuring transparency more challenging. This creates a hurdle for setting ESG goals, resulting in delays.
Implementation in business strategy
It’s been seen that companies are usually focused on short-term financial gains over the long term, as ESG goals require long-term commitment and investments. Implementing them to the core of business becomes tough, as it might require a fundamental shift in culture, operations, and values. Also, the changing regulatory landscape makes it hard for ESG goals to follow global standards.
Greenwashing and its underlying reason
Since these goals require large human capital, time and money, companies with limited resources often engage in making misleading claims about ESG performance. This can undermine the credibility of ESG initiatives. Due to this credibility mismatch, stakeholders can easily distinguish between actual progress from mere marketing.
Expectations and supply chain complexities
ESG goals can have diverse outcomes, some align with the investor’s expectations and some don’t. It becomes challenging to find the middle ground when investors prioritize financial performance over sustainability. Also, compliance with ESG goals is quite complex and difficult when it comes to global supply chains. There is a need for more visibility and control over the practices of the suppliers and subcontractors working on the ground level.
Inferring to all the above, an action-oriented approach must be applied across all sectors to bridge the gaps between ESG theories and their practical implementations. This involves creating concrete strategies and integrating them into the core business process. This is how one can achieve them.
1) Identify the risks firsthand
One must identify the ESG risks and opportunities relevant to the company’s operations, industry and stakeholders. Companies can use materiality analysis to identify their most significant ESG issues. For example, a technology company might focus on reducing electronic waste and promoting data privacy, while a manufacturing company may prioritize supply chain transparency and worker safety.
2) Implementing on all decision-making levels
ESG considerations should be integrated into all decision-making processes, from strategy development to capital allocation to performance evaluation. Companies can integrate ESG considerations into their risk management processes. ESG risks should be considered alongside financial risks and companies should develop mitigation strategies for them. Additionally, companies should also evaluate the ESG implications of potential investments, mergers and acquisitions and other strategic decisions.
3) Keep everything on record
Companies should also measure and report their ESG performance to stakeholders and reporting should be integrated into the company’s existing financial reporting framework. It is essential to have clear accountability and oversight at the board level. This can be achieved by setting up board-level ESG committees or individual positions in the company. This would help keep track of the ESG goal progress and its effectiveness while maintaining transparency at the same time.
4) Active participation
Proactive engagement from leaders and employees at all levels and embedding a culture of sustainability, responsibility, and continuous improvement throughout the company is critical. Engaging stakeholders such as investors, customers, communities, and suppliers is also vital. By involving these key stakeholders in the development and execution of ESG strategies, organizations can foster collaboration, gain valuable insights, and build trust, ultimately enhancing the effectiveness and credibility of their initiatives.
ESG considerations are no longer just a theoretical concept. The transformation of the business landscape demands that organizations move beyond mere theories and integrate them into decision-making processes to remain competitive. By identifying ESG risks and opportunities, integrating considerations into decision-making processes, and measuring and reporting ESG performance, companies can turn theory into practice and create long-term value for all stakeholders.
As the awareness around ESG continues to grow among stakeholders and investors. The public will play a crucial role in driving the entire process and holding the companies accountable. Collaboration, transparency and a shared commitment to a sustainable future and resilient global economy can easily overcome all the challenges.
About the Author
Rohit Bhagwat, office managing principal and ESG lead, ZS.
