Setting a sustainability strategy
A meticulously devised and quantifiable Environmental, Social, and Governance (ESG) strategy has become indispensable for businesses seeking capital injections in today's ever-evolving economic landscape. Embracing such strategies not only amplifies attractiveness to potential investors but also exerts a profound and lasting influence on the valuation metrics associated with the business. Private equity entities, banks and investors are actively integrating and transparently reporting on ESG advancements across their portfolio investments to their stakeholders, recognizing the intrinsic value and long-term viability of sustainable business practices.
The era when considerations were confined merely to environmental or social impacts has unequivocally passed. Contemporary society, comprising employees, consumers, and the broader public, demands a deeper commitment to responsible business practices. Welcome to the area of responsible business and the imperative of securing (and maintaining) a social license to operate. With impending regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB), this transcends a mere procedural obligation; the financial markets are now taking heed and recalibrating investment criteria accordingly.
Hence, the opportune moment has arrived to implement an ESG (or sustainability) strategy with unwavering resolve and foresight. Commencing with a comprehensive grasp of what ESG signifies for your organisation and sector serves as a robust foundation for strategic planning. Crucially, one must delineate the breadth of the strategy, meticulously considering the Environmental, Social, and Governance dimensions. Personally, I like to start with understanding what is your corporate superpower and how I can amplify it. Then I consider, will your aim be to lead the industry, reside in the middle of the pack, or perhaps lag behind? Each positioning entails its own set of advantages and drawbacks, necessitating a careful balancing act in alignment with overarching business objectives.
Subsequently, and arguably most crucially, scrutinise the commercial aspects with a discerning eye, identifying where and how revenue generation occurs. Through this lens, commence discussions regarding the present and future implications of ESG, projecting impacts over the short, medium, and long term. Will pressure manifest from shareholders and debtholders withdrawing support for certain product lines deemed incompatible with sustainability goals? An ongoing example unfolds in the UK, where financial institutions are increasingly cautious in extending services to clients in the oil and gas sector due to heightened environmental concerns. Or will pressure emerge from consumers, increasingly discerning and conscientious in their purchasing decisions, favouring ethically and responsibly sourced products? Notably, the demand for such products among millennials has witnessed a steady rise, underscoring the imperative for businesses to align with shifting consumer preferences and societal expectations.
Regardless of your chosen strategy, ensure its enduring viability over time amidst a dynamic regulatory landscape and evolving stakeholder expectations. The temporal horizon of your strategy is pivotal, given the rapid evolution of the ESG framework and associated reporting standards. What once constituted cutting-edge initiatives three or even two years ago may now be outdated, underscoring the need for continual adaptation and innovation. Achieving alignment necessitates a collaborative approach; socialise your strategy rather than conceiving it in isolation. Solicit input from shareholders, debtholders, employees, consumers, and suppliers to not only foster buy-in but also uncover emerging trends and industry-wide initiatives that may have gone unnoticed.
Upon drafting the strategy, cast a wide net once more. Delve into the requisite governance structures, corporate policy adjustments, and implementation frameworks essential for effecting change across the organisation. While each of these facets warrants comprehensive exploration in a separate article, they must be addressed prior to presenting the strategy to the Executive Committee and the Board of Directors. Embrace the journey towards sustainable prosperity, leveraging ESG principles as a catalyst for enduring growth and societal impact.
How does this all work in practice? Well from my experience you need inspirational thinking and tangible action. No organisation is the same. The ESG (or Sustainability) strategy must complement the wider corporate strategy, the Executive team must buy in to the commercial advantages ahead and make the strategy come to life. We have worked with organisations who wanted to progress from laggard to the middle of the pack, those who wanted to be industry leading to those who wanted to engage with systemic change. We do this by threading the connection between sustainability and finance and delivering pragmatic advice that provides a framework for sustainable action. No matter where you are on your journey, remember to enhance your inspirational thinking and then move forward to tangible action.