Sep 23

ESG’s rise enables businesses to be valued based on their impact and value to humanity, plus financial performance.

ESG (Environmental, Social, and Governance) planning isn’t as new as some think. We were surprised by the recent opposition from a few policymakers to businesses measuring and reporting on ESG. In our view, planning for these factors has always been a part of good strategic business management. Environmental, social, and governance factors have typically been part of purposeful multinational companies’ risk management and reputational management program (See Case Study 1 below).

What has changed recently are:

  1. 1. The priority placed on these factors due to a change in society’s expectations of business;
  2. 2. An evolution in the proactive management and measurement of environmental and social factors; and
  3. 3. Increasing demand for transparency of these factors and progress in addressing them in public business communications.

Positively, the rise of ESG factors as part of essential business reporting places a “pull-pressure” on firms who haven’t moved their business plans at pace with their crucial stakeholder’s expectations. The rise in ESG reporting also guides small to medium enterprises towards what practice is required when specific expertise is unavailable.

ESG factors as a focus are not new. Case Study 1 example:

Mars Incorporated Five Principles have been the hallmark of its company objectives since 1947. Specifically, their principle of Mutuality places the company’s critical stakeholders above the shareholder. These principles are foundational to their business strategy and essential to long-term success. One Mars External Peer Review Panel noted in July 2013, “It is clear… that Mars, Incorporated is exploring the path to becoming a long-run investor in a holistic business future as opposed to a short-sighted, profit-only driven entity.[1]” Mars’ long-term environmental, social, and governance programs commenced with a focus on the downstream of the value chain (farmers and processors) and other vital stakeholders close to their business. From their cocoa programs focusing on social capital to coral reef restoration projects, from building wind farms to alternative proteins for pet nutrition, Mars has been focusing on long-run ESG factors and being mutual with its key stakeholders as part of its business strategy.

ESG factors were part of corporate social responsibility, governance, and audit programs.

In the past, ESG factors for publicly listed companies have been managed by governance, corporate social responsibility, or audit committees depending on the factors’ objective, risk level, and potential financial impact on the company. And indeed, they are often managed by the same committees today or an ESG Committee.

Senior corporate affairs professionals in visionary and purpose-driven organizations often defined these factors, along with other business leaders. These leaders would analyze environmental, social, and governance factors to prepare the business strategy and annual planning processes. Corporate affairs would combine several analysis techniques and their outcomes with the risk analysis outputs of other teams such as finance, audit, and legal.

What has changed is the expectation of a business’s role in society.

Today, businesses are required to have an increasingly positive impact on humanity and, simultaneously, ensure financial performance. Companies that recognize this expectation change and manage it appropriately within their business strategy will achieve financial success and enjoy the benefits of a positive reputation. A positive reputation gained from reducing crisis, ensuring regulatory compliance, and increasing critical stakeholder engagement. Therefore, today companies must measure their impact, value to humanity, and financial performance.

Evolution in the proactivity of managing and measuring environmental and social factors.

Governance is a foundational requirement for management today, just as in the past. Governance factors continue to evolve, and enterprises should comply with all relevant areas. If mismanaged, it would lead to a reputational impact that could rise to the level of financial impact, plus have legal ramifications for the company. Governance includes policies the company has agreed to of its own volition and has communicated to the public.

The management of environmental and social issues regarding the role of business has matured, starting with the launch of the United Nations Sustainable Development Goals in 2016, where enterprises were encouraged to deliver the goals with governments and civil society. Accountability for business through the UN Global Compact, certification programs, standards, commitment programs, and various indices has grown.

Firms with impactful ESG programs have analyzed and discussed with stakeholders the intersection of the environment and society with their businesses. They have then sought to measure their impact and implement mitigation programs where necessary and positive programs where they can benefit—monitoring their progress over time.

It’s important to note that science continues to develop as well as our understanding, so environmental and societal factors should be continually reviewed. The Intergovernmental Panel on Climate Change reports and Conference of Parties (COP) continue to focus businesses on the most critical impacts on climate and the environment. Societal impacts continue to be reviewed and assessed by the United Nations through the various SDG programs, lead agencies, action tracks, and civil society.

ESG standards and practices have continued to evolve to ensure performance and impact can be measured appropriately, accurately, and transparently. This evolution is vital because of the number of existing standards, indices, and certifications that do not measure impact in the same way or recognize performance in the same way. The initiative to align ESG reporting standards to form an international standard by the International Sustainability Standards Board, along the lines of accounting standards, is welcome. Developing one international reporting standard is not a simple task that will take some time to finalize due to the number of stakeholders and industries involved.

The increasing demand for transparency

Today environment, society, and governance factors can impact a business’s reputation and financial risk. The expectation society has of business has changed. Therefore, the external importance of ESG factors brings their prominence near equal footing to financial performance. We doubt they will overtake financial performance importance as profit is needed to continuously deliver on core business and ESG factors.

Due to their rise in prominence, the call for greater transparency has grown for ESG factors. Key stakeholders want to understand the progress of the business, whether that’s for policy, investor, or passion reasons. The reporting standards will help achieve transparency so stakeholders can compare one company to another.

However, as the ESG plan should be part of the business strategy, there is no reason ESG factors shouldn’t be tracked and measured as financials, and other business metrics are today. This reporting approach is especially true for publicly listed companies that must share pertinent information publicly. However, just because you have an ESG report doesn’t mean transparency exists (See case study below).

Having an ESG Report doesn’t mean transparency exists. Case Study 2 example:

Confident Strategy Group was asked to review the ESG report of a publicly listed environmental consultancy by another third party. We were asked to give our point of view on their report. The report was robust in the amount of text and pages. They had used one ESG reporting standard. However, in reviewing their report, we couldn’t identify what they were explicitly measuring, their goals, or their progress. In their report, there was a lot of education and theory on ESG and the Sustainable Development Goals. Still, not a lot of ESG information on the business itself is contained in the report. The company had submitted this report to various bodies to demonstrate its progress. However, there was very little transparency on what the progress was. The third party agreed with our assessment.

The best ESG reports are drafted per the business plan and narrative, with SMART objectives, progress clear, and reporting done by robust standards with the core data available for those who want to review it.

Case Study 2, described above, highlights the importance of the move by the United States Securities and Exchange Commission to provide some guidance and standards related to ESG reporting.

The Future: A business’s value to humanity is as transparent as financial performance.

We believe that the emergence of ESG and its continued evolution will enable society to value companies for their impact, value to humanity, and financial performance in the future. Thus, allowing people to support those companies with responsible business practices, sound financial management, and those firms with an eye on securing long-term sustainable future growth.

[1] Jay Jakub. The Roots of the Economics of Mutuality: The Economics of Mutuality. Oxford University Press 2021.