Wilson P. Tan l June 9, 2023 l Business World
Historically, organizations treated environmental, social, and governance (ESG) as an annex of corporate social responsibility. It is now dawning on them that ESG is actually a significant factor in their day-to-day operations, strategy, and transactions. CEOs are now rethinking ESG through the lens of organizational growth.
ESG issues have become critical for policy makers and stakeholders across different industries. Organizations must adapt to the risks and opportunities of this steadily growing development, and CEOs should concretize sustainability to create value for their clients and stakeholders.
This is where the Chief Sustainability Officer (CSO) comes in. The CSO establishes a company’s sustainability maturity level, such as its carbon baseline, and they are responsible for innovating sustainability plans. Lastly, the CSO must be knowledgeable about the organization’s vulnerabilities to adapt and mitigate risks.
The 2022 EY Long-Term Value and Corporate Governance Survey showed that 43% of leaders at prominent European organizations believe that their respective Boards are not committed to incorporating ESG factors in their long-term strategy, which they considered a significant hurdle.
The climate crisis has only worsened in the past years, and other problems such as COVID-19 highlighted the need for concrete ESG targets. The 2021 EY Global Corporate Reporting Survey showed that 84% of Chief Finance Officers (CFOs) perceive that stakeholders are now more focused on societal impact and inclusivity due to the pandemic. EY studies also showed that including ESG factors in an organization’s corporate strategy can boost revenue, primarily from ESG-focused consumers. Conversely, ESG failures like poor labor conditions can irreparably hurt a company’s reputation.
Given the stakes, Boards must work closely with CSOs in incorporating ESG into the organization’s overall strategic direction. By articulating a clear ESG agenda, the Board can assist the CSO in meeting their targets. This mutually beneficial partnership helps balance both profit and purpose. While the data show that there are still gaps between the Board and the CSO, there are three ways to achieve effective collaboration.
ELEVATE AND ENABLE THE CSO ROLE
While it is ideal for an organization to have a CSO, it is not a requirement. In place of this, there should be a designated person or group to oversee ESG-related affairs. Establishing proper governance is imperative, and it sends the message to clients and stakeholders that the company is serious about ESG.
The CSO can help organizations mitigate risks and adapt to vulnerabilities by analyzing their ESG maturity levels. Periodic reviews help transform insights into mechanisms for continuous improvement. The Board can assist by facilitating the reviews and clear communication with investors.
PRIORITIZE ESG AGENDA
CSOs cannot stand alone; their success depends on the Board’s cooperation. There is a clearly defined link between sustainability and strategy, and both parties should ensure that ESG is assimilated into the organization’s long-term strategy. Bridging the two can drive progress and elevate the company’s position in the global market. For example, climate risk is one of the more tangible components of ESG that can impact investor interest.
One of the significant challenges of integrating ESG into an organization’s strategy is ensuring that the latter is appropriately articulated among different business functions. Given its multifarious and rapidly evolving nature, both parties should have a growth mindset when approaching ESG.
DEVELOP ROBUST ESG DATA SYSTEMS
Clients and stakeholders seek explicit action on ESG issues such as health and safety, climate change, and transparency. The 2021 EY Global Institutional Investor Survey showed that 89% of respondents want global standards to be requisite for organizations.
Establishing a tight working relationship between the CSO, other organizational functions and audit committees could help the company articulate and achieve its ESG-related goals. They can devise risk-mitigating plans based on calculated scenarios and present these to investors. Better engagement can also give an organization a competitive advantage compared to its less transparent peers.
As mentioned earlier, ESG goals must be clearly articulated – specifically in financial terms. By properly linking ESG areas to economic performance, organizations are more likely to prioritize them. Conventionally, ESG is considered a framework; collaboration between relevant parties can help concretize this to achieve results.
CSOs can drive this change by creating business programs and policies to help create sustainability-related value for organizations, such as reducing carbon emissions. Boards and CSOs must work together to create value for their clients and stakeholders.
PRIORITIZING ESG
ESG is becoming an increasingly urgent albeit complex issue the world faces today. Organizations must be more mindful of their carbon footprint, brand reputation and labor practices as the market evolves. ESG underscores business in many ways as a developing strategic and cultural mindset, and integrating ESG-related strategies is a continuous and collaborative process by the CSO and the Board, along with others within the business, that can help organizations differentiate themselves in the global market.
*** Wilson P. Tan is the chairman and country managing partner of SGV & Co. and the president of FINEX. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. and FINEX.