“People are going to want, and be able, to find out the citizenship of a brand, whether it is doing the right things socially, economically and environmentally.” – Mike Clasper
There is growing attention on Environmental, Social and Governance, or ESG for short, around the globe, just as various stakeholders, including investors, companies, regulatory bodies, consumers, and most especially governments have intensified campaigns on matters related to ESG in recent times. The intensification of these campaigns is largely influenced by diverse socio-economic and political challenges confronting the business world.
In this edition of EnterpriseNGR Policy Insights, we briefly examine the emerging issues that are shifting the trend of the ESG campaigns, why companies need to move fast ahead of regulation, and how they can unlock this process to get into the game.
Three pillars of ESG shine a spotlight on areas companies can include in their people- and community-focused agenda. The environmental pillar is concerned with how companies’ activities impact the environment. Such impact transcends internal operations to include activities across the entire value chain and spans particular areas of energy efficiencies, carbon footprints, pollution alleviation, waste management, and water usage. Companies that neglect this aspect of the ESG may have to bear the consequence at some point in the business lifecycle.
The social pillar emphasizes people. The big question for business leaders is how decisions and policies the company makes affect its business ethics, human rights practices, gender diversity, and other social consequences. Companies’ dealings with suppliers, customers, investors, employees, and the communities where they operate are gauged and adjudged by a set of acceptable societal values at any given time. And, if there is one thing COVID-19 underscores, it is the importance of the social pillar. The governance pillar centres on leadership and sustainability, the superset of significantly important factors that include board structure, internal control and compliance, executive compensation, and extends even to the less popular areas of organizational politics and lobbying.
ESG is attracting growing recognition, especially in the financial services sector. Enormous campaigns on Sustainable Development Goals (SDGs) are nudging businesses to consider integrating ESG in their practices. With the rise in sustainable finance, global companies are integrating ESG propositions in their company statement, mission, and vision, and ultimately building a business model that addresses ESG risks. For instance, over 500 funds were repurposed in Europe in 2021, according to Reuters. Increasing numbers of investors seek to achieve a positive ESG outcome along with financial returns on investments. The 2021 global survey data by BNP Paribas report 61 per cent of investors that implore their company to adopt ESG mandates. In Nigeria, in 2021, FMDQ Securities Exchange Limited launched Africa’s first green exchange, FMDQ Green Exchange, which is a platform dedicated to promote the advancement of Green and Sustainable Finance, and transparency of data on Environmental, Social and Governance (ESG) in the financial markets. Recent trends in data show that equity funds with social or ESG mandates are attracting more funding than those without these mandates. Increasingly, asset managers are including ESG measures in investment criteria and closely monitoring ESG ratings to evaluate investment decisions.
Globally there are no unified standards and guidelines to reporting ESG practices and in many jurisdictions, ESG disclosure, as a requirement, is not yet an affirmative duty. To date, not all companies are mandated to report ESG practices but with the ongoing trend, they will likely be required to do so. There is rising speculation that the International Financial Reporting Standards (IFRS) Foundation will soon release guidelines and standards mandating sustainability reporting. In addition, countries that assented to the COP21 Nationally Determined Contributions, which represent each country’s commitments to “reduce greenhouse gas emissions and adapt to climate change”, and nations that committed to the COP26 Glasgow Climate Pact, including Nigeria, if they will fulfill their commitments, will ultimately require that businesses operate within the parameter of a set of national policies. Yes, regulators in the financial and professional services sector are already pushing boundaries for companies to embrace sustainable practices, but much of the current regulatory tools are moral-suasion.
Determine the organisation’s ESG priority areas:
Defining ESG propositions opens up questions that will enable the organisation to dissect and filter the particular areas of environmental, social, and governance interests that align with its mission and vision.
Develop ESG metrics:
Eventually, organisations will need to develop metrics on identified key ESG factors and firm up tools to collect, mine and monitor data on a regular basis. This step requires adequate planning and extensive resources, including the input and participation of both internal and external stakeholders. Where organisations do not have in-house data capability, finding the right partners to offer support and guidance works perfectly as well. Consultations with customers, suppliers, investors, and other ecosystem stakeholders to find correct answers and understand priorities and expectations, are a similarly important requirement.
Incorporate ESG in value-creation activities:
Value-creation activities demand a focus on the company’s sustainability agenda. Activities directly linked to profits and performance deserve a place on the sustainability watch list. Corporate governance, executive compensation, stakeholder engagement, energy efficiencies, waste management, and carbon footprints should be approached in similar ways the organization will approach any growth-driven programmes and “strategic business opportunities”.
Promote employee engagement:
- Facilitate continous customer engagement:
- Company-wide ESG practices that engage employees across different units are more powerful than those limited to the sustainability unit of the organisation. Corporate culture and values are areas organisations will engage employees to integrate ESG practices for a corporate transformational shift. Also, employees across business functions need to understand how to incorporate sustainable practices in varied business activities.
- For the organisation to understand customers’ ESG expectations, significant effort will be required in clarifying those expectations on a regular basis and how they can be achieved from customers’ viewpoints. At the product/service design or development stage, the approach should be to develop products with customers ‒ not for customers: spend time to understand their value journey and adapt value proposition accordingly. Beyond that, the product packaging and delivery process, as well as marketing effort, should create awareness and emphasize how products or services align with customer ESG expectations.
Collaborate with product partners, suppliers and distributors:
Companies require strong collaborations across forces for ESG to take a firm place. A bunch of an organisation’s ESG activities transcends the wider sphere of external stakeholders, suppliers, distributors and other partners. The activities and practices of each stakeholder group may significantly alter final products at the last mile. Understanding the company’s ESG priorities can shape partners’ business models in order to conform with those priorities. Partners’ choices among types of raw materials, delivery mechanisms, channels, and locations (onsite and offsite), need to be evaluated and positioned to deliver ESG goals for the organisation.
ESG is never a silver bullet for turning businesses into a spontaneous profit-generating venture. At the early stages, organisations should not expect major turnarounds; capital outlays devoted to ESG practices may bite deep into profits. However, once a good foundation is laid and the entire ESG strategy is well-positioned, adoption of ESG practices could become an adventure that will lift enterprise value.