Despite a growing consensus among scientists, investors, business leaders, and the public at large, ESG continues to be a fraught political topic, particularly in the U.S.
The past year has witnessed tremendous progress on ESG topics globally. For example, at COP 26, the latest UN Climate Conference, nearly 200 countries, representing over 90% of global GDP, signed the global climate pledge. And according to the Net Zero Asset Managers initiative, over half of all assets under management globally are now committed to supporting net zero goals by 2050.
Many companies now recognize the importance of integrating ESG into their operations and risk and compliance programs is to build stronger and more resilient organizations. One thing COVID has taught us is that disruption impacts all types of risk – financial, operational, legal, reputational, and strategic. This requires an organization to address impacts for each type of risk and identify underlying support:
- How do I refine my operations to mitigate the financial risk posed by change in product demand?
- What additional steps do I need to take to support employee safety, health, availability and engagement?
- What messaging do we need to take with stakeholders across the value chain to proactively identify potential interruptions to and legal risk with procurement and supply chain?
Planning and implementing environmental, social and governance initiatives not only supports mitigating risks of future disruptions, it also builds resiliency for an organization to withstand new disruptors even if controls are not in place to easily manage the disruptors. This resiliency helps to insulate a company by increasing the value of an organization with cleaner and more ethical operations, diversity of thought and management in their employee base, and a strong governance focused on integrity and responsible capitalism. Having an ESG program then allows a company to measure whether they are doing this effectively to ensure a more resilient company.
However, many opposed to stronger ESG programs or regulations focus on concerns that these will limit profits from companies impacted by the transition away from fossil fuels and restrict access to the capital markets for certain categories of companies. While this could be true in the short term, and particularly for those companies who do not strategically plan the future of their business model, broader corporate implementation and transition to ESG addresses demands from some of the world’s largest investors and requirements by companies with significant global supply chains.
Exploiting ESG as a political lever hurts our society as a whole and limits companies’ ability to become more resilient to current and forthcoming disruptions. While government regulators such as the SEC are proposing guidance to companies wanting a more resilient platform, such regulations provide little more than a list of what to report - not a map for how to get there. The “how” will need to continue to evolve through active industry development and harmonized guidance put forth by organizations such as the International Sustainability Standards Board or ISSB – a critical guidepost for companies that must transition a significant portion of their physical business model and investment basis.
For business leaders still deciding about their commitment to and investment in ESG initiatives, we would caution against an overly-politicized interpretation of these issues. Those companies that prepare today to take advantage of the opportunity to mitigate climate and other risks to their business will be best positioned to build value with efficiency measures and equity programs and drive a more resilient platform for future disruptions