Often heard in today’s boardrooms and C-suites and their virtual equivalents: a mixture of anxiety and enthusiasm about environmental, social, and governance (ESG) issues. “What risks are we sitting on?” leaders (and investors) are asking, as pressure for ESG disclosures mount. “How do we measure and manage them when there are no common standards? Where should we focus, when the list of potential issues is a mile long?” And, critically—which is where the enthusiasm comes in—“As we take a hard look at our business, what opportunities can we identify to solve big problems and create value in new ways?” The answers to these questions are interrelated, as are the initiatives those answers will motivate: reimagined reporting, strategic reinvention, and, ultimately, wholesale business transformation.
The underlying forces at work are well known. Investors, lenders, and rating agencies expect greater visibility of an ever-broof nonfinancial metrics to better understand diverse social and environmental risks. Governments’ ambitious, top-down commitments to limit carbon emissions are increasingly backed by new regulations and new taxes. More—much more—can be expected. Activist shareholders, among many other stakeholders, are advocating for net-zero policies and for tighter linkages between ESG targets and executive compensation packages. Socially conscious consumers are more inclined to vote with their wallets, encouraging businesses to reappraise their products and purpose, including their role as employers of diverse, engaged workforces. And the global pandemic has created additional significant momentum for change.
Against this backdrop, the ESG maturity level of companies varies widely. When PwC segmented executives responding to a recent survey according to their awareness and prioritization of ESG issues, their personal commitment, and their belief in the potential for business to positively impact society, it became clear that leaders in most organizations (nearly three-quarters) were in the early stages of their ESG journey. A few companies, though, have begun reorienting their business toward a value creation ecosystem that adds environmental sustainability, employee engagement, external partnerships, and broader societal impact to financial imperatives as measures of success. Companies that have earned top ratings on ESG indexes and that also produce solid investor returns include asset managers such as Norges Bank; tech companies such as Adobe, Salesforce, and Microsoft; and consumer-oriented firms such as Procter & Gamble and Best Buy.
Whatever the starting point for the ESG dialogue, the project will result in changes in all dimensions of a business, including strategic decision-making, implementation of the new direction, and reporting of progress and outcomes.
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By Peter Gassmann, Casey Herman & Colm Kelly
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