Article
The ESG Era, Amidst Crisis
Date: January 2022
Author: Kasiti Ketsuriyonk, Alisha Mata
The widespread impacts of the COVID-19 pandemic have affected businesses at all levels across multiple sectors. This crisis has highlighted the interdependence within business ecosystems; through supply chains, access to capital, and resource allocations. While businesses thrive to strengthen resilience and adaptability of their core strategies and operations, it is vital that businesses adhere to their corporate social responsibilities, to minimize business impacts on their stakeholders. The pandemic has also put heightened pressures on the environment, exacerbated social inequality, and brought corporate governance and integrity to test. Amidst these developments, businesses can no longer ignore stakeholder demands, which do not only reflect business risks, but also provide seeds for sustainable solutions. Accelerated by stakeholder expectations and environmental and social degradation, today, ESG (Environmental, Social, and Governance) issues are being brought back to the forefront of business decisions. How the organization is navigating risks and embracing opportunities associated with these dimensions to protect the long-term interests of business and its stakeholders, will increasingly come into focus. In the foreseeable future, businesses will be called on to respond to post-COVID-19 ESG demands, while navigating the turbulent times until the end of this crisis and its subsequent recovery.
Environmental
The environmental aspect covers how a company manages risks and opportunities related to climate change, use of natural resources, waste, emissions, water and other environmental factors to minimize negative impacts caused by their business operations. This crisis, coupled with worsening climate change, reminds businesses that they are now more exposed to environmental risks than ever. Businesses need to assess these risks and consider impacts not only in their immediate supply chain, but also upstream and downstream of their products and services. The survey conducted for the 2021 Deloitte Global Resilience Report found that, among 2,260 C‑level executives and senior public‑sector leaders from various industries in 21 countries, more than 60% felt that they were honoring their commitments to protect the environment.[1] Around one-third have already designed products and services that are more sustainable, and 28% are encouraging, or already have environmental and sustainability criteria in place for suppliers to comply. Moreover, respondents ranked climate change and environmental sustainability as the top sustainability issue for businesses to tackle over the next decade.
Social
Businesses must manage social impacts caused by business operations or business relationships. The social side of sustainability is a human-centric approach, which focuses on issues such as employee welfare, health and safety, human rights, product quality and safety. Many of the social challenges businesses are facing and contributing to today are integral to societal contexts. It is therefore important for businesses to look at their social impacts from various perspectives (e.g., direct contributor with full operational controls, or
impacts caused by business relationships with other parties such as suppliers
or joint ventures). The crisis has shown that businesses can respond to social
impacts better through collaborations with stakeholders and other players
across sectors, including government and non-governmental organizations. In
this area, the Deloitte 2021 Resilience Survey found that employee and customer health and safety has been on the top of the agenda. The results showed that more than 72% of respondents felt their organizations has done well in keeping employees and customer safety, and reflected that this priority has help them weather the crisis in 2020.[2]
Governance
Governance looks at company’s practices in line with business accountability and ethical standards, and other issues including risk and business continuity management, transparency, corporate structure, diversity of the board of directors and pay gaps, political contributions, compliance, data security and privacy etc. Identifying and integrating purpose into the core strategy of businesses means that it is fundamental to adhere to good governance principles, for an organization to achieve alignment between financial performances and corporate social responsibility, as well as ensuring responsiveness, accountability, and trust among stakeholders. Enhancing adaptability, responding to disruption and business continuity, and cultivating a resilient culture are all integral part of good governance. Deloitte found that resilient companies share these 5 distinct characteristics: they are prepared, adaptable, collaborative, trustworthy, and responsible.[3]
The question arises when businesses are making investment decisions in environmental, social and governance initiatives: What’s in it for the business? In financial aspects, findings show that ESG initiatives contribute to driving growth and sustainable competitive advantage. In addition, as shown in a recent Deloitte survey on Businesses’ Views on Environmental Sustainability, nearly half of the respondents indicated that investing in ESG initiatives lead to increased customer satisfaction, and 38% of respondents responded that embracing strong ESG values enhanced their companies’ ability to attract and retain talents. [4]
For organizations to lay a lasting ESG foundations to maximize value creation, they can start by focusing on three key steps:
- Make ESG a strategic priority – A clear and precise vision should be developed to frame what ESG means to the company. This should be linked back and aligned to the company’s purpose, vision, and strategy which will help the company to transform in the right direction.
- Connect performance metrics to ESG goals – Create accountability by linking performance metrics to ESG impact. Accountability must begin with top-level support, to move these initiatives to long-term priorities for the business.
- Measure and share impact – Developing a framework to measure the cumulative effects of ESG initiatives, regularly assess their impacts and commit to transparency in reporting results. This is being further backed by country wide ESG reporting regulations.
Whilst ESG agendas are becoming a core part of operational efficiency and competitiveness, many companies are still beginners on the sustainability maturity curve. Usually, less matured companies have limited resources to manage ESG related issues, such as ESG specific management approaches and controls, strategy and target setting, data collection and disclosures of ESG performances. Today, majority of companies are less developed in ESG performance disclosure, as compared to their financial information disclosures. Expectations of investors and stakeholders are mounting, with increasingly widespread recognition that ESG factors provide critical insights into how an organization is driving and creating its value. However, ESG information disclosure standards today are fragmented, and most companies cannot present metrics of performances and value created by ESG initiatives in the way that investors would easily understand. This is the main rationale behind the evolving development of common ESG metrics, and the main reason why recent reporting standards focus on presenting value creations and common metrics.Despite how fragmented the existing ESG reporting standards are, reporting remains one of the most effective tools for regulators and rating agencies to drive ESG performances forward. Mandatory reporting of ESG performances are gradually recognized as a requirement, in addition to, and in
many cases, integrated into annual financial reports. Thailand has also moved into this direction as SEC recently adopted the new ’56-1 One Report’ as an annual mandatory reporting form, encompassing requirements for ESG disclosures. To be fully enforced among all listed companies from January 2022 onwards, the annual reporting form requires companies to disclose their value chain, stakeholder engagement and their views, policy and management approach for ESG aspects. The form also requires specific disclosures within each aspect, such as human rights due diligence process, and greenhouse gas emissions (with required external verification of greenhouse gas emission data). [5]
Get out front
The pandemic has forced businesses to adapt and transform in innovative ways, whilst embracing flexibility and agility. As businesses are significant users of natural resources and modes of productions, it is apparent that businesses are now one of the key players to drive the ESG agenda forward. There are various business cases that prove benefit of integrating ESG into business operations, from risk assessment, cost savings, to finding new markets and business opportunities. Thus, it is now time for business to start integrating ESG as strategic priority, set targets and corporate sustainability process for ESG implementation, and prepare for ESG data disclosures which have become mandatory. These steps sound daunting, particularly when business still need to recover from the global health crisis. However, it is also an opportunity for businesses to rethink and realign ESG with their core strategy and business decision-making. The time for ‘build back better’ is now, and it should be done through paths that are environmentally and socially responsible. Encompassing sustainability will help companies to ‘get out front’ from this pandemic and create resilience to future disruptions.
[1] 2021-Resilience-Report.pdf (deloitte.com)
[2] 2021-Resilience-Report.pdf (deloitte.com)
[3] 2021-Resilience-Report.pdf (deloitte.com)
[4] Climate check: Business’ views on environmental sustainability | Deloitte Global
