In recent years, as the concept of Environmental, Social and Governance (ESG) has shifted from a niche finance framework to a more widely globally adopted rubric that all companies are measured by, companies have seen increased pressure to understand and align with the ever-evolving array of ESG standards and reporting frameworks.
For most firms, the utility of ESG has largely been seen as a compliance or reporting tool meant to satisfy to expectations of investors, regulators, or agencies, and given some of these may be unclear, conflicting, and not seen as core to a firms’ operations, products, or practices.
This is in part due to many of the standards, frameworks, and reporting guidelines being developed by outsiders to help them assess their own risk to an industry, or a specific firm, rather than being developed as an internal tool to help a firm align the sustainability of its operations with the challenges being experienced externally.
However, there is an opportunity being presented to use ESG more strategically, and as the size and scale of environmental, social, economic, and community challenges continue to grow, the business case for ESG as a tool to align sustainability, business models, and innovation will continue to grow and ultimately may show itself to be one of the key lenses through which markets are won.
Before considering anything else, the core to fully leveraging the potential of ESG as a strategic tool, will be to repurpose ESG from a scorecard that evaluates risk, to a lens. A lens that will bring together the data, systems, and human capital to effectively identify opportunities, allocate resources, and deliver solutions, against a growing set of external challenges that they and their stakeholders face.
To help illustrate this, consider the following use cases:
First, is a firm that has (historically) opted to leverage a defensive ESG/ sustainability posture and allow external stakeholders and investors to dictate the tempo for the adoption of related regulations, business processes, material selections, or labor standards, towards one that shifts towards management, or perhaps strategic.
The second is a business that sees ESG and sustainability as its core offering and wants to leverage the ESG standards and reporting of others to help drive the roadmap for its product/ service offering and to-go-market strategies.
For both, the starting point of this journey will be roughly the same. It will be to step away from the optimistic “we can do it” outlooks on the environmental social, political, economic, or community challenges faced and adopt a more realistic view of where things are headed.
So, instead of maintaining a vision that 1.5c is a likely outcome or that a body of water will always be available, or that demographic shifts will be predictable, they will adopt a vision for where 2.7-3.2c is more likely than 1.5c or depleted bodies of waters will elevate water pricing or remove access altogether.
From there, each will now have the opportunity to understand how, under more stressful conditions, the environments, stakeholders, and value chains they are intertwined with will be forced to adapt and from there they can create a strategic vision for their firm.
For the firm looking to transition from compliance to strategy, this vision will allow leadership to develop multiple paths forward, begin a process of assessing existing resources, and be in a position to engage their teams to develop and deploy forward-leaning strategies and investments that move the firm from their current state to one that is more resilient, to one that is ultimately in the leading position in their industry.
For the firm that sees itself as a solution provider, this vision gives it a North Star to help its clients aim for and a clearer understanding of how to deliver their solutions. Solutions that could be aimed at supporting a firm deploy resource management efficiency programs to improve energy, water, or labor resiliency, or adopt a strategy to reposition a business’s business model, infrastructure, or products entirely.
Either way, through a more “realistic” vision and mapping their strategies and tactics to that vision, both will have the opportunity to deliver resiliency, innovation, and market performances for their businesses.
Make no mistake, ESG is a tool.
It’s a powerful tool that business leaders have spent hundreds of thousands, if not millions and through which are engaging a significant portion of their organizations as part of the exercise to gather data on a range of processes.
Data that has is generation an incredible wealth of insight and information into the business, its operations, and where it is exposed to a range of challenges, and it is through a shift away from compliance oriented ESG strategies, the full return of those investments can be realized.
Either through efficiency and resilience-oriented investments, the improve profitability and resource resilience, or through aggressive go-to-market strategies that are aligned with the sustainability challenges faced and identify markets for their solutions.