ESG is evolving beyond a mere business practice or regulatory compliance, gradually becoming integral to the core purpose of business existence. Read on to know more:
In the early 2000s, technological advancements revolutionised business practices, driving substantial growth despite initial scepticism about its long-term viability. Today, sustainability mirrors the transformative impact that technology once had, emerging as a catalyst shaping the future and growth trajectory of businesses and organisations. It signifies how an entity manages its Environmental, Social, and Governance (ESG) impact to generate value for stakeholders.
Governments and regulators worldwide are increasingly acknowledging the significance of ESG reporting and risks. This acknowledgment has led to regulatory changes such as Business Responsibility and Sustainability Reporting (BRSR), Extended Producer Responsibility (EPR), carbon markets, green credits, the German Supply Due Diligence Act, and proposed rules by the Security and Exchange Commission (SEC) aimed at enhancing and standardising climate-related disclosures for investors.
Consequently, there is a heightened emphasis on reporting and disclosures, with a particular focus on lagging indicators contributing to improved ESG ratings. While lagging indicators help assess past ESG performance, their emphasis on historical achievements may cater more to short-term objectives. In contrast, prioritising leading indicators, such as transparency, compliance, and risk management, lays the foundation for a sustainably oriented organisation in the long term. Despite the race for superior ESG ratings and cost-effective capital, overemphasis on lagging indicators may expose organisations to the risks associated with greenwashing practices.
Moreover, ESG possesses characteristics aligning with the fraud triangle, involving incentives/pressure, opportunity, and rationalisation. Organisations pursuing better ratings, cost-effective capital, and ESG goal achievement may succumb to ESG fraud risks.
A 2022 report by the European Commission revealed that 42% of corporate environmental claims made online were likely false or deceptive. PwC’s Global Investors Survey 2022 indicated that 87% of investors perceive sustainability performance reporting by companies as containing greenwashing practices.
To establish a truly sustainable enterprise with enduring values and a resilient reputation, organisations should prioritise leading indicators promoting robust governance for long-term value creation.
Why build a Sustainable Enterprise?
Organisations must shift their focus to ESG parameters that enhance overall governance, positioning themselves for long-term success and yielding the following benefits:
- Building a Strong Reputation and Retaining Customers/Talent: Highly governed and compliance-driven organisations efficiently identify and manage ESG risks, enhancing brand value and earning stakeholders’ trust. PwC’s Consumer Intelligence Series survey showed that 86% of employees prefer supporting or working for companies aligned with their values.
- Sustainable Access to Capital: Robust governance and adherence to ESG principles create a foundation for sustainable access to capital.
- Ability to Manage Risk and Build Sustainable Stakeholder Trust: Organisations with strong governance effectively manage ESG risks, building trust among stakeholders and mitigating reputational risks.
- Long-Term Competitive Advantage:Prioritising ESG parameters and governance provides a long-term competitive edge, fostering sustainability and resilience.
To build for the future, the World Economic Forum emphasises governance as the linchpin of sustainable business, enabling environmental and social aspects. Despite this, corporate governance often takes a backseat due to the predominant focus on environmental and social initiatives or the presence of legacy governance frameworks.
Failures in environmental or social initiatives are often linked to poor corporate governance, encompassing weak anti-corruption measures, misaligned incentives, conflicting lobbying activities, unprepared leadership, and outdated internal controls. PwC’s GECS 2022 India Insights highlighted that 52% of Indian companies experienced fraud or economic crime in the last 24 months, with 31% attributable to ESG-related frauds.
To foster long-term sustainability and business growth, senior management should consider:
- Establishing or Updating the Governance Framework: Building policies and procedures, identifying emerging ESG risks, and mitigating environmental risks.
- Integrating ESG Risk into the Enterprise Risk Management Framework: Performing internal audits to support the board.
- Prioritising Strong Compliance Over Short-Term Objectives: Enhancing awareness among internal and external stakeholders.
- Incorporating ESG Competence into Decision Making: Engaging experts and conducting periodic independent assessments to identify areas for improvement.
While environmental (‘E’) and social (‘S’) aspects garner attention, organisations must recognise that sustainable growth is incomplete without robust governance (‘G’). Governance not only shields organisations but acts as a catalyst for the protection, enhancement, and success of ESG initiatives.