Council Post: Why It’s Time To Prioritize ESG Initiatives In Your Business

Over the past couple of years, business leaders have come under increased pressure to report on their company’s environmental, social and governance impacts. ESG factors were brought into sharp focus in 2020 as social unrest sprung up within our communities, our board rooms wrestled with diversity inequities, and the pandemic highlighted how much our business activity drives greenhouse gas emissions.

Pressure on organizations to address ESG-related issues comes from multiple stakeholders, including customers, employees and outside activists. Therefore, it’s no surprise that investors are now paying keen attention to ESG as well.

This desire for ESG disclosures is driven by the growing interest in “sustainable investing.” Morningstar reported that sustainability-focused index fund assets had doubled in the past three years to more than $250 billion as of mid-2020. Highly influential institutional investors have been outspoken on their support for ESG disclosures. I believe this institutional investor interest in ESG is driven significantly by the changing attitudes of their clients. Recent Morgan Stanley research reported that in the U.S., 85% of investors (and 95% of millennial investors) expressed interest in sustainable investing.

As the CEO of an integrated risk and compliance management software company, I report to my own investors and customers regularly about our internal ESG initiatives. In fact, these discussions led us to acquire an esg reporting software company because, from my perspective, if you haven’t felt pressure from stakeholders yet, rest assured that time is not far off. By taking steps now, your company will be better positioned for the future.

‘Doing right’ can mean doing well by shareholders, too.

As leaders, we want to be the stewards of good companies that are not only well-performing but also socially responsible. When we focus on improving ESG factors, we have an opportunity to simultaneously enhance corporate reputation, employee engagement and customer loyalty.

That said, the positive impact of ESG initiatives might be harder to measure than more traditional financial metrics. Some also hold the point of view that a corporation’s only purpose is to maximize shareholder returns. Investments in areas of environmental and social impact might feel counterintuitive with that principal purpose in mind, but consider this: Companies that prioritize ESG performance fare better in the stock market. In fact, according to S&P Global Market Intelligence, 14 out of 17 ESG-focused exchange-traded and mutual funds outperformed the S&P 500 from January 2020 to May 2020. In essence, “doing right” and doing well by shareholders are not mutually exclusive.

Treat ESG as an opportunity, not a risk.

For industries such as manufacturing, managing ESG factors isn’t new. The brand risks associated with pollution, child labor, unsafe work conditions or failure to validate the provenance of conflict minerals are just too great to ignore. But with the increased attention across industry sectors now, companies of all sizes will need to put an ESG program in place.

Yes, there’s certainly a business risk if your company’s logistics are contributing an outsized percentage of carbon dioxide to the atmosphere or if you are facing multiple lawsuits for harassment and discrimination. These are huge red flags and obvious risks that need addressing.

However, if you view ESG reporting as a risk-management and check-the-box exercise, you’ll miss out on the opportunity to use it to improve your company’s performance. The real risk here is that your ability to return value to shareholders could be hampered by not addressing ESG demands.

ESG presents leaders with an opportunity to look under the covers of your business and seek opportunities to build resilience. This is the time to evaluate your five-year capital expense model and make critical investment decisions.

ESG reporting is getting easier.

According to the Governance & Accountability Institute, 86% of S&P 500 companies published ESG or sustainability reports in 2018, though there were no accepted global standards for what and how to disclose.

This is still true today, but I believe we should expect this to change soon. The big four — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — have recently come together to recommend standards for ESG metrics and reporting in collaboration with the International Business Council of the World Economic Forum. In fact, more than 60 global companies just signed a commitment to follow the World Economic Forum’s “Stakeholder Capitalism Metrics.”

The Sustainability Accounting Standards Board has also put forth a framework to report sustainability metrics, which I suspect will emerge as the leading contender; it’s useful in that it provides guidance across the ESG spectrum and is not limited to climate.

Buoyed by a new administration more attuned to climate initiatives and ESG factors in general, I predict that the SEC will likely weigh in and help drive consistency and transparency for public market disclosures.

Still, investors aren’t waiting for standards and regulations, and neither should you. If you wait until the standard-setting dust settles, you will already be behind. It’s better to begin now by focusing on the most important, material and strategic areas of your business. The only real question is: How quickly can you get started?

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