Why prioritising ESG in uncertain times matters
The world is a very different place to the one it was at the beginning of 2022, when COP26 was front of mind and ESG at or very near the top of board agendas.
The invasion of Ukraine has transformed the outlook for the economy and for organisations by creating volatility, whether that’s through sanctions and loss of markets, increased energy prices and associated wider inflation across almost all products and services, and supply chain disruption.
Another contributing factor disrupting the global supply chain is China’s zero COVID-19 policy. Their current approach to curbing it with stringent lockdowns is adding further uncertainty.
With boards prioritising their precious time negotiating this new volatile world, the question is where does this leave ESG?
Should current ESG strategies be shelved, or should boards continue to focus on it as before, or place even more emphasis on ESG moving forward? Essentially, do they need to rethink their approach to ESG?
ESG remains a vital focus
Those leaders and boards with foresight will recognise that despite the volatility ESG remains a very important focus for their organisation. One key aspect of ESG – concerns over the environmental impact of businesses – isn’t going away.
Deloitte Global’s third-annual Readiness Report, ‘The Fourth Industrial Revolution: At the Intersection of Readiness and Responsibility’ reveals that not only is the environment on the minds of executives, but that climate change and environmental sustainability have become integral to how they are managing their businesses.
Surveying more than 2,000 global executives, Deloitte Global found that almost 90% agreed to some degree that the impact of climate change will negatively affect their organisation. The world is getting warmer due to increasing carbon emissions and almost everybody recognises that action is required now if rises are to be small. This means those continuing to mitigate their impact on the environment at this time will be welcomed by stakeholders.
Boards must realise that any increase in the use of fossil fuels because of the current volatility would need to be a very short-term policy, with their business having a clear roadmap to quickly reduce emissions in the medium to long term, if they are serious about ESG.
The growth in activism from institutional investors will certainly help to keep the minds of boards focused on ESG. For example, BlackRock says in its proxy voting guidelines that it will continue to press companies to disclose a net-zero-aligned business plan consistent with their business model and sector.
In 2022, that will include asking companies to demonstrate that their plans are resilient under likely decarbonisation pathways toward a global goal of limiting warming to 1.5C.
New opportunities to grow business
The reliance on Russian gas and oil, particularly by many in Europe, presents an opportunity for forward-thinking boards to speed up their efforts to use sustainable and renewable forms of energy.
Organisations should also bear in mind that many governments in Europe are realising that energy supply is now an increasingly important issue of national security and will seek to speed up moves towards renewable energy adoption. For example, Germany now plans to give up coal entirely eight years earlier than planned – and obtain 80% of its electricity from renewable energy by 2030.
Amid this uncertainty, smart organisations will spot new opportunities to grow their business, with ESG front of mind. It’s those boards that are inclusive and gain the benefits of the five drivers of diversity – demographics, skills, experience, thinking styles and circles of influence – that will have an inherent competitive, decision-making advantage due to their board composition.
Along with those boards that have effective governance processes in place, including undertaking regular reviews of directors to ensure they are fit for the future, who will be able to identify and embrace these opportunities.
ESG planning by the board
When it comes to ESG planning by the board – of which there are three key areas – the best place to start is to effectively plan for and assess risk. For example, the invasion of Ukraine highlights the risk of organisations trading in autocratic states, and those businesses serious about the ‘social’ in ESG should assess their business dealings in such territories and take appropriate action, if required.
Secondly, boards should ensure that disclosure and reporting of ESG is verifiable and accurate. Lastly, there should be a good understanding amongst directors that they are individually liable if their business damages the environment.
As the current volatility continues with the war in Ukraine, boards should consider how they may need to adapt their short-term ESG plans to ensure they don’t compromise their long-term ESG goals.
The current energy crisis may accelerate the pace of change, with a reduction in use of non-renewable carbon fuels and increased focus on energy security. After all, boards have a responsibility to manage environmental capital and sustainability in a way that’s honest, reflects expectations and is good business.
Those organisations that continue to prioritise ESG and spot an opportunity with ESG to grow their business during these uncertain times will experience happy stakeholders and increased revenue and help to deliver a better future for us all.
About John Harte, Managing Partner at Integrity Governance
John Harte leads a global team at Integrity Governance that is focused on making boards more effective. A boardroom expert working with multinationals, SMEs, trade associations and not-for-profits, he provides practical, impartial advice to directors, business owners, executives and CEOs, to help improve board performance. John and his team have advised the boards of organisations in the UK and around the world since he founded Integrity Governance over 17 years ago. He has 30 years of experience at director level in the corporate world, having worked at blue chip businesses including Mars, Schroders and Goldman Sachs. He is an in-demand speaker and thought leader on board effectiveness, practical governance and business disruption.