Balancing the ESG ecosystem

Right now, governments, climate experts and industry leaders from around the world are discussing crucial action to bring climate change under control at the COP26 Summit. The conference puts the spotlight on big businesses - as well as governments - to set more ambitious targets to curb emissions. Environmental policies - the ‘E’ in ESG - are no longer an aspirational goal or nice ‘to have’ for organisations; they are integral for growth and longevity.

But the journey to sustainability is a complex one. Environmental policies won’t be implemented effectively if focused on in isolation. Social and Governance considerations - the ‘S’ and the 'G' of the ESG ecosystem - are often left out of the conversation, and the business strategy. In order for each element to function optimally, we must pay attention to all three.

The acceleration of ESG 

Though forward-thinking organisations have factored in environmental, social and governance considerations for many years, ESG-oriented investing’s rise to mainstream has been rapid. Driving forces behind the acceleration are well known; lenders expect greater visibility, governments are implementing new regulations and taxes to reduce emissions, consumers are increasingly values-driven - as is top-tier talent. And it’s here to stay; with the market for ESG data forecasted to reach $5bn by 2025.

ESG merges societal demand with business opportunity to transform the way companies are valued, and is therefore integral in every growth strategy. Its importance is widely accepted, but for organisations and entire industries - becoming ESG compliant is uncharted territory. There are no regulators or industry-wide forms of measurement established, and no blueprints. Of the three criteria, environmental considerations are most understood; emissions are quantifiable, net-zero plans can be measured. But social and governance policies are largely ambiguous; how can we make diversity, inclusion and leadership objective?

Adding to the complexity is the interrelatedness of the ESG ecosystem; the success of one criteria depends on the proficiency of another. Environmental policies overlap with governance when companies seek to comply with environmental laws and wider sustainability concerns. And of course - to create and implement any strategy, you need a healthy and well-functioning team, which is why social considerations must be part of the conversation. 

Addressing the social issues of tomorrow, today

Social considerations within ESG go beyond good PR; they need to be identified and operationalised throughout an entire organisation. While every structure is different and there’s no ‘one size fits all’, each corporation must establish a baseline and build a framework. When building social criteria from an internal perspective, foundations include:

• Employee compensation from both an industry POV and gender POV including pay and additional perks outside of pay
• Workplace policies regarding diversity, inclusion, mental health and prevention of sexual harassment
• Training and education opportunities for growth such as additional study and flexible hours
• Turnover and staff satisfaction surveys

But the basics aren’t enough to sustain a competitive edge. Future-focused organisations must look further and implement policies to address the social issues of tomorrow, today. In practice, this is taking a company stance on human rights issues, supporting social causes, and going above and beyond legal obligations to meet evolving societal expectations.

The Ashurst Aurecon Alliance is a strong example of this. The partnership has developed a social licence to operate risk model to help future-proof progressive organisations. It deals with issues that are regulated (such as native title, environmental approvals and privacy), with emerging regulations (such as heritage, climate change, modern slavery) and issues that may be regulated if organisations systemically fail to meet societal expectations (such as plastics, social procurement, diversity and inequality).

Bringing strategic governance to the stage 

In the face of expanding awareness of global diversity and income inequality, strategic governance is critical to organisational growth and a core component of the ESG framework. S&P Global research on governance factors found that companies that rank well below average on good governance characteristics are particularly prone to mismanagement and risk. The ‘G’ in ESG puts the spotlight on top level executive offices. Accountabilities include:

• Attending to interests of the company’s various stakeholders (employees, shareholders customers and suppliers)
• Transparency around ‘E’ and ‘S’ policies; How do you reduce emissions? How do you maintain diversity and inclusion in your workplace?
• Transparency around pay and financial reporting
• Contributions to country/community of operation

Strategic governance is the tie that binds the entire ESG framework. Ensuring the ‘G’ receives adequate attention is critical, as risks and opportunities will only increase as social, political and cultural attitudes evolve. 

An organisation’s ability to curb emissions and take positive climate action is inextricably linked to its social and governance infrastructure. As corporations publicise their new environment policies, it is critical that the S and the G aren’t left out of the conversation.

While ESG benchmarks are presently predominantly a matter for corporate self-determination, demand for transparency and accountability will continue to increase. Organisations who aren’t up to scratch will suffer. The need for uniform, external reporting standards for corporations is clear, present and urgent; but equally - businesses must proactively identify and manage the critical concerns for their industry and organisation. Tomorrow’s leading organisations are pioneering purpose-driven strategies that address ESG criteria as an ecosystem, today. They understand that their future (and "ours") depends on it.

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