There are increasing numbers of headlines putting sustainability into the frame for corporates to consider. This assumes that it hadn’t been a part of discussions prior to The World Economic Forum at Davos this year and the recent launch of Green Finance.  This is misleading. The current relevance is actually due to the change to its materiality and the rising risk in doing business.

ESG risks and Corporate Responsibility

What are changing are the demands of both the consumer and investor and the potential cost to business if the two are not aligned.  Provided that the risk remains low then the way of business can remain focused on simply lowest cost or premium pricing to maximize profit and return for the shareholders; However, this neglects the changing tides of consumer perception.  Efficient use of resources goes beyond capital allocation and maximizing the return.  There is an element of corporate responsibility to consider.  But actually it pays to be forward thinking, to identify where the growth opportunities lie and where government levies or regulation may be introduced.  The likelihood of the latter is rising as we approach the 2030 deadline for the sustainable development goals.

Recycling and the Conscious Consumer

Conscious consumerism is also becoming mainstream.  As awareness of waste and planet contamination grows, greater efforts to recycle and be “more green” are adopted.  Having previously been a point of brand differentiation, a good corporate environmental record is now expected and poor performance can be extremely damaging to reputation.  Annual reporting on Environmental, Social and Governance is already required – but as progress is increasingly monitored, creating shared value [CSV] by being proactive can become a competitive advantage.

ESG risks

Measurement and its criticality

The key is to integrate the material metrics already being collected and use them to inform strategic direction.  Applying Environmental and Social lenses to all business opportunities should ensure that the overall metrics improve.  The idea is not to simply arrive but to be on a continuous journey of progress.  This extends both down the supply chain and up the value chain to consumers and can bring community investment into focus.  The business strategy, to be effective, requires integration of the ESG criteria into the investment process.Intent and measurement are integral for CSV, as progress cannot be assessed without indicators.

Better Management of Risk Through ESG Analysis And Engagement.

There are multiple benefitsbut communication is key.  Your workforce must understand that the corporate’s core purpose focuses on improving the world, leaving it better than we found it, not just exploitation to profit a few.  There should be plenty of opportunities for social innovation with a feedback loop – from the experts who identify where improvements can be made to users refining what they want. Strategy must also be clearly communicated to the stewards of capital – the investors as well as the end consumers – articulating the how and the why.  Only authenticity will be rewarded.

Long term impact and mitigating ESG risk

George Serafeim of Harvard Business School has researched the long-term track record of quoted companies and their corresponding strategic practices, with publication imminent. Criticism about the short termism of stock market trading and the effect that can have on investment decisions isn’t new.  Investment to build a sustainable economy comes by supporting a wider community goal and reaps much greater returns. The value created when addressing large societal issues is a much larger pie with economic and societal rewards. Analogous to AIA’s Vitality program of promoting a healthier lifestyle, corporates can develop a viable, loyal customer-base that generates returns for the business for a much longer period of time.