The business world faces a reckoning. Is profit really all that matters? Or do companies have a role to play in confronting some of humanity’s most pressing issues? Over the past few years, regulators, lawmakers, shareholders, customers, and employees have made it clear that they expect us to do more to address environmental, social, and governance (ESG) issues. The challenge every company faces now is not deciding whether to act, but how.
Accepting that ESG is a business imperative is a necessary first step. But there’s a fundamental question that companies need to answer first: When we say ESG, what exactly are we talking about? This may seem easy—it’s a three-letter abbreviation, after all. The trouble arises because each industry, company, and stakeholder group brings a different focus and different priorities to the conversation. Is ESG mostly about climate change? Or is it about diversity and inclusion in the workforce? How about reducing packaging waste in the supply chain?
ESG is a big umbrella; it covers a lot. While issues that fall under the “E” and “S” tend to grab headlines, the “G”—governance—risks being overlooked. That’s unfortunate because it’s just as important, if not more so. Simply put, there is no ESG without governance.
This may seem counterintuitive. How can governance be more important than the climate crisis? It may help to think about what the work of ESG looks like for a company. To reduce greenhouse gas emissions, an industrial manufacturer might switch to renewable energy to power its factories, or it might optimize its supply chain to shorten the distance raw materials must travel. But how will it know whether these moves are producing results?
Purpose and profits are not mutually exclusive.
Every company that puts ESG front and center will face questions like these. Answering them will require well-designed processes, systems, and controls that are repeatable, transparent, and easily enforceable. That’s what effective governance provides. And it’s more important now than ever.
That’s because we’ve entered a new era of accountability when it comes to companies’ progress on ESG issues. The climate crisis has been an important catalyst. Over the past few years, some of the largest institutional shareholders have become very focused on the steps companies are taking to mitigate the risks associated with climate change.
Regulatory pressure is also rising. New rules proposed by the Securities and Exchange Commission would require public companies to disclose much more information about their climate impact and the impact that climate change may have on their business.
Meaning well, or doing well?
Good intentions won’t be enough to meet these heightened expectations. Having the right strategic approach will be necessary, of course, but it won’t be sufficient on its own. Companies will need to consider if their technology, processes, and organization are all up to the task. Is vital data collected by manual processes, or can automation help? Is it stored in multiple, siloed systems that can’t easily talk to each other, or is there a single source of truth when it comes to ESG? How is it verified, analyzed, and compared?
For many companies, effective governance in the context of ESG may seem a long way off. Given the uncertain macroeconomic environment, leaders of these businesses may be asking themselves whether it’s worth investing in right now. The answer to this question is a resounding yes. Study after study has shown that companies that lead on ESG post better financial results. That’s because a focus on ESG catalyzes strong risk management and a culture of innovation—just what’s needed to weather these turbulent times. Purpose and profits are not mutually exclusive. In fact, purpose can create value. And strong governance is what makes it possible.
Companies that fail to invest in ESG today risk paying a high price tomorrow—and beyond. ESG excellence can be a differentiator not just with customers, but also in an increasingly competitive fight to attract and retain talent. The next generation of highly skilled workers that companies need to stay competitive cares deeply that their employers’ purpose aligns with their values. Companies that are seen as ignoring or merely paying lip service to ESG are likely to lose out.
We must see issues like climate change and racial injustice for what they really are: not merely potential public relations challenges that can be addressed in a superficial way and forgotten, but real and profound threats to financial performance and business continuity. When it comes to increased regulator, customer, employee, and shareholder focus on these issues, not complying means not surviving. In that light, ESG, with governance at its heart, is more important than ever.