Making Better ESG decisions

Stakeholders and ESG

Many organisations are currently struggling to link their ESG approach to strategy and business planning instead of compliance. This may be due to internal resistance to change, focus on "greenwashing" or an inability to innovate. A re-evaluation of the company's purpose as well as strategy is required in order to rectify this issue.

ESG barriers and enablers

Companies are naturally resistant to change and unless this is addressed, they are likely to be disrupted or even forgo the opportunity of using disruption for their own benefit. By using the disruption lens, we are, in effect, stress testing the purpose of the organisation and acknowledging that the previously articulated purpose might no longer be fit for the future.

Transitioning the ESG approach

Companies will be on a spectrum that ranges from existing businesses trying to react and adapt to new ESG expectations to those that have created ESG-centric operations. Over time, we would expect to see a higher proportion of cash flow and value accretion to come from 'new' ESG anchored businesses. It is likely that companies will take a portfolio approach when making the change.

What questions should be asked to make sure that an organisation stays honest in terms of how it addresses ESG?

1. Which of our businesses have the most significant ESG exposure?

2. How is this exposure perceived by stakeholders?

3. How could this business be disrupted by more ESG centric offerings?

4. How could we use ESG to disrupt the marketplace to generate value?

5. Are our business case processes designed to identify ESG risk but also to encourage innovative ESG-centric solutions?

6. Do our reward systems encourage a transition to more ESG-centric solutions?

Governance Implications

The Board not only approves the strategy but is also responsible for questioning management's definition and execution of it. The Board also sets executive rewards and monitors executive and corporate performance. They must challenge the implementation actions to ensure they are in line with risk appetite and that they support the delivery of ESG objectives and pledges. The Board needs to be supported by Audit and Risk Committee and Remuneration Committee with an aligned view on the risk, performance and reward that should support and signal the direction of travel. In order to achieve this, the Board will need to have set and approved its risk appetite and risk parameters. For many Boards, there is also a risk disclosure aspect to ESG.