ESG: Building a commercial case ESG: Building a commercial case

We recently released our UK CEO Outlook report for 2021 – and there are encouraging signs that UK business leaders are embracing the ESG agenda.

Two thirds (65 percent) highlight increased demands from stakeholders for greater ESG transparency and reporting. A similar proportion (61 percent) agree that it poses a serious threat to long-term growth. More still (78 percent) aim to lock in the sustainability gains made during the pandemic.

And CEOs are putting their money where their mouths are – over a third (35 percent) plan to spend at least 10 percent of their company’s revenues on ESG initiatives in the next three years.

There were some results that were less encouraging, though.

• CEOs remain unconvinced about the link between ESG and business performance. Just 37 percent believe that ESG programmes improve financial results, and 30 percent actually feel that they impair them.
• They’re struggling to drive inclusivity. Almost half (46 percent) say that the pandemic’s negative impact on women in the workplace makes it more difficult to drive gender parity at leadership level.
• They’re finding it difficult to tell their ESG story. Close to half (47 percent) say they’re struggling to articulate a compelling ESG narrative to their stakeholders.

To address those challenges, I thought I’d first look at some of the risks and opportunities behind the ‘E’, the ‘S’ and the ‘G’.

Starting with the ‘E’. We’re seeing an increase in extreme weather events. This year, flooding wreaked havoc in Europe, with the German government approving a €400 million recovery package. Wildfires also added to this year’s climate-related disasters. The Centre for Disaster Recovery reported in September that 7,618 wildfires have burned more than 2.4million acres this year in California. And wildfires in Serbia set a new record for fire-related carbon dioxide emissions.

The latest analysis from the UN’s Intergovernmental Panel on Climate Change (IPCC) – released in August – amounted to a ‘code red for humanity’ according to UN Secretary-General Antonio Guterres.

It all makes for hugely worrying reading from an ecological point of view. It also creates huge disruption and risks for residents and businesses.

A structured ESG programme puts companies in a stronger position to manage these risks, and put strategies in place to overcome the disruption they can cause.

There’s also an upside to addressing climate issues. There’s a huge opportunity here for firms to enter new markets by developing technologies that will aid the transition to net zero. The transition to net zero could create an economic gain of $26 trillion through to 2030, according to a 2018 report by The Global Commission on the Economy and Climate. And this could result in a £1 trillion-plus opportunity to create social value here in the UK, according to research conducted this year . 

Now the ‘S’ – an area I’m particularly passionate about.

There’s a commercial opportunity here from improved performance. Countless studies have demonstrated that diverse groups perform better. Diverse teams are more likely to spot new ways of doing things, to break the cycle and drive true innovation.  

Having an inclusive culture will also help you reach more customers. We had a look at the win rates of our pitch teams recently. I was confident that more diverse teams would be more successful, but even I was surprised by just how much more successful they were. 

To win some contracts, being able to demonstrate social value is now a must. Government procurement teams will knock 10 percent off your bid score if you don’t demonstrate your social value credentials. That means you’re essentially ruling yourself out. And you can’t just focus on your own company’s performance – you need to be sure that your whole supply chain is ethical.

A focus on the ‘S’ is also key to managing risk and developing products fit for our diverse society. We’ve seen examples of seatbelts and PPE equipment that were designed for men and don’t fit women properly. We’ve seen AI and social media algorithms that are less accurate for females and ethnic minorities, for example. And we’ve seen oximeters giving less accurate readings to patients with dark skin.

Clearly, there’s an ethical imperative to avoid developing discriminatory products. But it also makes commercial sense to adapt your offering to as wide a customer base as possible. The more diverse your R&D team, the broader the appeal your products are likely to have. 

To my mind, the ‘G’ of ESG ought to be a double ‘G’, for ‘good governance’.

Governance is how businesses ensure compliance with environmental and social regulations, and inform risk management. Good governance goes beyond that.

For example, good governance can enhance a business’s access to capital. Investment funds are increasingly overlooking companies without a formal ESG framework. Similarly, many banks now offer better overdraft terms to firms that meet certain ESG standards. 

With the scrutiny on firms’ ESG efforts intensifying, how can business leaders convey what they’re doing to the wider world? How can they turn ESG from a hygiene factor to one that engages customers and investors and drives growth?

Taking personal responsibility for driving change is key. Only by personally engaging with their ESG programme can CEOs tell an authentic story about it to the wider world.

The narrative needs to be about long-term value not just short-term profits. And your ESG strategy shouldn’t be founded on what your competitors are doing, or what regulators require. It needs to come from an authentic belief that it’s the right thing to do – for the future of your organisation and wider society. 

Building an authentic story starts with CEOs demonstrating a personal and visible commitment from the top. They need to set transparent environmental and social targets, and foster the conditions to meet them.

That will mean demanding the management information required to keep a close eye on progress. When it comes to diversity and inclusion, it will also mean senior leaders committing to self-education and acknowledging their own blind spots. They need to make a visible commitment to eliminating bias from their hiring, CPD, performance management and career progression systems. They’ll need to vocally champion inclusivity, elevate and celebrate under-represented groups, and embed a culture of zero tolerance for discrimination.

And they need to extend that commitment beyond the walls of their businesses and build ethical supply chains too. Robust management, with transparent reporting on ethical supply chains, helps ensure products and services are produced in a way that treats workers and the environment fairly.

The COVID-19 pandemic has made it abundantly clear that each of our actions affect the lives and experiences of others. In today’s interconnected world, doing the right thing simply makes sense – ethically and financially.