ESG - The new normal

This article was originally written by Natalie Saunders and published in WA Works Magazine.

Environmental, social and governance (ESG) are the foundations for effective sustainability strategy and reporting.

Each pillar is integrated into how we do business through the resources we use, the people we hire and the laws and frameworks we adhere to. Good ESG strategy and reporting makes for good business and investors, shareholders and stakeholders are now demanding it. 

ESG has been positioned front and centre for business and political leaders around the world. In November, COP26 in Glasgow highlighted the intertwined nature of each ESG pillar. This has been expressed in demands for human rights to be included in climate change discussions, as well as ensuring the correct governance and systems are in place to hold governments and organisations accountable. The pressure, especially on the financial sector, saw the International Financial Reporting Standards (IFRS) announce the establishment of the International Sustainability Standards Board (ISSB) during COP26. The ISSB will act as a governing body to regulate ESG standards internationally. This comes as welcome news for those trying to navigate the various ESG reporting standards, and sends a clear signal to the market that ESG is here to stay.

Since the Paris 2015 talks, there has been a drastic uptake in how many businesses operate, shifting to a stakeholder capitalist approach, where companies are serving their stakeholders not just their shareholders.

This approach uses an ESG framework to consider the ESG landscape that the company functions in, and how they can serve it and minimise harm while making profits.

Companies that are adopting this approach are reaping countless benefits, with an increase in investors focused on the triple bottom line to understand risk; as a means for employee engagement and retention; and a mechanism to attract new business opportunities. It is now also being recognised as a metric for resilience, with firms who practise business responsibly weathering the negative financial implications of the COVID-19 pandemic more than others. This resilience is representative of how companies no longer just need to consider the short-term profits but also the longer-term ESG impacts to and from their business.

Despite the benefits experienced by firms that engage with and embed ESG into their practices, many companies are yet to adopt an ESG framework. Increasing demand for companies who score well on ESG is no longer a future expectation but is now being demanded.

Companies are swapping suppliers when existing suppliers are failing to adopt various ESG standards such as renewable energy commitments; safe working conditions; and ethical practices. Price is no longer the sole motivator.

Similarly, governments are shifting to ESG commitments with net-zero being prominent across the federal and state governments including the recent Federal Australian Government net zero by 2050 commitment at COP26 and the Western Australian Climate Policy. To meet these commitments, companies will need to ensure their goods and services that are procured by government agencies are meeting these commitments.

This ultimately poses a considerable financial risk for many companies that aren’t choosing to adopt and integrate an ESG framework.

Companies are also now addressing the symbiotic relationship between business and the world, addressing not only how they have an impact across ESG metrics but also how ESG risks can impact their business and how these should be managed. As the world faces widespread disruption to global supply chains on the back of the pandemic, we can also expect similar disruptions with climate change. With extreme weather events expected to increase in severity and frequency, disruptions will intensify, interrupting production and increasing costs but also creating new social issues including secure access to food, nutrition and medical support potentially impacting the welfare of employees. In the aftermath of single events, companies often demonstrate resilience and recover quickly; but when the disruptions are ongoing, businesses can struggle to recover and their resilience for future stressors can diminish.

In understanding ESG risks, companies are also managing to mitigate, minimise and adapt when they arise, creating a resilient organisation. Although it is clear ESG is a necessity for companies, many business leaders are unsure where to begin or how to embed ESG reporting in a way that adds value, ensures responsible business activities and meets stakeholder expectations. As the world continues to rapidly change, the way companies act and report against ESG will continue to become more sophisticated. Positioning ESG central to business strategy and operations is going to ensure organisations remain resilient and competitive in their respective markets

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