The launch of COP26 this weekend will provoke a wave of environmental, social and corporate governance (ESG) scrutiny, says our CEO, Richard Wall. In this piece, Richard discusses what UK businesses can do to best position themselves.
In the last five years, ESG has been steadily climbing up the corporate agenda, but many are still content in viewing it as just an annual reporting requirement - a means of placating stakeholders, and best left to the Sustainability team. The matter of fact is that few organisations have properly embedded ESG across all areas of their business.
This passive and reactive approach might have sufficed before, but it now feels disastrously inappropriate and backward given the current context. More is and will be expected from businesses than merely reacting in response to scandal or regulatory pressure.
ESG should be viewed as a journey and not as challenging singular events and moments in time. This is a journey for businesses to work out their place in society and how best to create value for all stakeholders, and will require a focused and embedded effort. It is not a switch that can be turned, but rather an open-ended and demanding exercise that needs significant time and resource investment.
With COP26 commencing on Sunday, it will shine a global spotlight on not only the UK Government, but also domestic businesses. More than one in five of the world’s largest organisations have committed to some version of a net-zero goal. A great many more will no doubt be driven to make new, more ambitious commitments. Some organisation will react to stakeholder pressure, but, to genuinely rise to the demands of the current situation, businesses will need to adopt a long-term strategic mindset when it comes to ESG.
The limits of a "reporting" mindset
There is nothing wrong with the notion of annual sustainability reports. Done well and diligently, they are a useful tool to document and communicate a business’ performance in relation to ESG. Reports are an information asset for stakeholders that can not only hold businesses accountable for their progress (or lack of), but can also ignite hard conversations and catalyse action and course corrections.
While it might seem like a constructive exercise, reports are not often the drivers of action and challenge they are touted as. Reports can perversely act as a smokescreen, disguising deep-seated issues and institutional inertia.
This can be easily accounted for. While ESG is not a new term, it represents a budding function within most organisations. Businesses are, in effect, playing catch-up with the pressing realities dictated by climate change as well as a raft of social and ethical issues, including diversity and human rights across their supply chains.
Many have sourced talent to build out teams to address those issues. However, these teams tend to be limited, under-resourced, and peripheral departments nested within organisations whose headcounts can run in the hundreds of thousands. These teams normally surface when a reporting “milestone” is approaching, but are otherwise invisible or unknown to most employees.
Nevertheless, it is not the size of the sustainability team that is important. What is important is what these teams signal on behalf of the organisation. Or rather, what they do not signal: a serious commitment to embedding an ESG infrastructure and culture across the business.
ESG as a journey
Managing and reporting sustainability using an annual reporting cycle can only take a business so far. The lack of frequency and velocity of sustainability information provided into the public domain – especially when compared to functions that in the Business 3.0 model have been deemed business-critical such as sales or finance – should give us pause for thought and demonstrates the nascency of the sustainability function and ESG reporting.
As long as businesses, investors and other stakeholders are satisfied with the annual reporting cycle, it is unlikely that the higher expectations now demanded will be met or surpassed. If anything, targets for other ESG metrics will continue to underperform, and data quality will remain poor.
Small and siloed sustainability teams and departments unsupported by proper systems that readily integrate with the rest of an organisations’ IT infrastructure, are reflections of an old and tired mindset that is no longer serving anyone, let alone long-term ESG goals.
The new model of ESG comprises of daily, weekly, monthly and annual collection, processing and management of sustainability information and measurement of performance in line with the methodologies used in other key business functions. Businesses should therefore consider building the requisite infrastructure that can best support their pledges and commitments that work with the new model.
This involves the investment of robust systems and infrastructure, operated by qualified people and teams to measure, manage, and improve performance. Crucially, it relies on a culture that sees sustainability embedded across the entire business, rather than compartmentalising it. By doing so, a business is set up for long-term success, and in a position to validate external ESG ratings and defend reputation.
A major focus for us here at Emex is the instalment of software systems that measure, manage and improve sustainability and ESG performance for our clients. It involves working with businesses at the outset or at any point of their ESG journey to deploy the systems that drive meaningful change and performance.
COP26 has arrived, and UK businesses would do well to abandon the belief that ESG expectations can be met overnight. Businesses should also critically assess their institutional reliance on annual sustainability reports, and establish whether they mask underlying issues, or if they are truly fit for purpose.
Those that switch out of the reporting mindset will realise that embedding sustainability is a journey – a long course that involves asking the hardest types of questions about a company’s future, relevance, and of course, purpose in the world. It will take time and a great deal of institutional learning, but it is nothing short of what society expects.
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