27 June 2023
ESG: Rethinking and Taking Action
Driven by climate change and increasing environmental disasters, a pandemic, and the ongoing energy crisis, we are increasingly realizing that sustainable business is no longer an option but a necessity. Superficial changes and empty words are no longer sufficient. There is growing pressure from European regulations, as well as a shift in mentality among investors and stakeholders. We have reached a positive point of no return. Today, prioritize people and the environment in all your activities to remain relevant tomorrow.
The foundation of this new responsible business is ESG. ESG refers to the three central factors in measuring the sustainability of a company or investment: environmental (E), social (S), and governance (G). The concept originated from the ‘Triple Bottom Line,’ also known as ‘People, Planet, and Profits,’ introduced in the 1990s. It emphasizes that companies should focus on all three P’s, not just profits. All components are equally important for a company or organization to be sustainable and valuable. This concept evolved into ESG, which now forms the basis for sustainable and responsible business and investing. ESG is based on the simple idea that companies achieve better returns when they create value for their stakeholders – employees, customers, suppliers, society at large, including the environment – and not just for the owners of the company. ESG focuses on how companies serve society and how it impacts their current and future performance. ESG is not only about what a company does today but also about tomorrow. The direction we should follow was set by the United Nations’ sustainability goals, but it is governments, (inter)national organizations, and companies that must take the real steps.
Not everyone is waiting. For many companies, ESG has been on the agenda for years. However, addressing ESG issues still raises concerns in many boardrooms. Where are the opportunities? How can we create material and immaterial value alongside profits? And what does it mean for our brand, communication, the products and services we offer, and our market approach?
Ultimately, all thinking and actions should revolve around sustainability. For companies, whether publicly traded or privately financed, large or small, in any sector or market, profit is no longer the sole determining criterion. It is no longer just about what you do but how you do it, which is crucial for investors and other stakeholders, your suppliers, customers, and employees.
Ready for the Revolution?
Companies must be prepared for fundamental changes in almost every aspect of their organization. How performance is measured, how processes are conducted, how excessive risks are avoided – these are all fundamental questions that will lead to a revolution. ESG has a profound impact on how organizations think, plan, and report. These three dimensions are strongly interconnected, and changes in one inevitably lead to changes in the others.
The field of forces
Implementation of guidelines and standards regarding ESG reporting often leads to a reorientation of existing business processes and objectives, with the logical consequence of a different positioning and market strategy, which in turn inevitably affects the structure and culture of the organization.
The European Commission has already determined that companies are required to disclose information about how they address sustainability and social challenges. This enables investors, policymakers, customers, and other stakeholders to evaluate a company’s non-financial performance. The intention is to encourage companies to continuously improve. Not all companies are subject to non-financial reporting yet, but it’s only a matter of time.
This new transparency requires a mindset shift. Companies and organizations should no longer see sustainability as a problem to be addressed but as an opportunity that makes employees happier, products better, and brands more popular. Call it a purpose or a sustainability mission. Through purpose, your profits are not the only parameter of your value; your contribution and added value to society also matter. It is essential to align your business processes with that purpose and mission. ESG compels organizations to review their R&D, challenge suppliers to become more sustainable, reconsider their transportation and logistics, and examine whether they need to reorganize their imports and/or waste streams. In short, it requires a complete shift in thinking and doing.
Purpose drives profit
Implementing ESG guidelines and reporting on them often leads many companies to strategically realign themselves. Those involved in daily brand and communication activities will not be surprised that this has implications for external communication in terms of content, design, and frequency. The corporate story must align with long-term intangible performance and objectives. Only then will reporting, along with financial statements, tell an authentic story about value creation, sustainability, and continuity. The corporate reputation and brand are literally integrated into a whole.
Over time, the drive for ESG and a focus on non-financial parameters may even lead to significant changes in business operations and, in some cases, large-scale organizational restructuring. These changes require expertise that companies sometimes possess but often lack. Responsibility for ESG and reporting should no longer rest solely with the financial department. On the contrary, companies need input and collaboration from all departments. The communication, branding, and/or design agency of the company also plays a significant role in how the company organizes and presents its financial and non-financial reporting.
In recent years, reporting has undergone significant changes in terms of content, form, and production processes. Technology has also advanced. Printed annual reports have become rare. Most annual reports are now online and multi-channel. Nowadays, most companies recognize the benefits of comprehensive online reporting as it makes texts, graphs, infographics, and value creation models easily accessible and understandable for a wider audience, including (potential) customers and (future) employees.
Investing in ESG and communicating about it has many advantages: it enhances brand experience, increases customer loyalty, allows investors to benefit from the company’s ‘sustainable’ reputation, and opens doors that may have otherwise remained closed due to visible societal relevance and social engagement. Consider the hunt for talent. In a tight job market, a sustainable image is an absolute advantage. Failing to embrace ESG has significant implications for a company’s future profitability and even its survival.