ESG Amid Economic Uncertainty
The global economy is facing mounting challenges amid inflationary pressures, a cost-of-living crisis and market uncertainty. While businesses will undoubtedly be preparing to navigate this financial downturn and looming recession it is crucial that they do not lose sight of their environmental, social, and governance (ESG) initiatives and policies. After all, ESG is tied to the entire business and outlines risks and opportunities which will drive long-term and potentially even shorter and medium-term value for companies.
In the 2022 Forrester/Dun & Bradsheet study of over 260 decision-makers across the UK, US and Canada, four out of five (97%) respondents stated that their company’s current ESG strategy created a significant or transformational increase in revenue. In comparison, 81% of participants said their company had experienced negative consequences by failing to meet their ESG goals, the most common being increased operational risk (43%) and increased financial risk (38%).
With an increased drive towards sustainability and reaching global net-zero goals, companies must find the right balance of investing in their ESG strategy to drive long-term value, against short-term economic turmoil.
The business case for ESG
It’s crucial that companies recognise the direct value of focusing on ESG in their markets. In order to tackle material environmental and social issues, companies need to scale up their investments supporting these areas. This requires a clear understanding of not only the environmental and social benefits but also the associated financial benefits.
For instance, the NYU Stern Center for Sustainable Business examined the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020. They found that companies were 76% more likely to experience a positive or neutral correlation between a long-term focus on ESG and improved financial performance.
ESG helps illustrate where companies’ expenses are going and where they can improve their resource efficiency. In relation to identifying operational inefficiencies, companies can use ESG-related data to see where they may be spending more money than necessary to clean up their pollution and waste. They can then look into more cost-saving waste reduction strategies. Additionally, many businesses may have untapped financial benefits of ESG strategies that they’re currently not tracking such as avoided cost, where ESG-related data can help identify instances where less money is needed to be spent.
Access to consumers can also be dependent on how companies are demonstrating their ESG efforts. In fact, a 2021 PwC ESG consumer intelligence study revealed that globally 57% of consumers say companies should be doing more to advance environmental issues (e.g., climate change and water stress), 48% want companies to show more progress on social issues (e.g., D&I and data security and privacy) and 54% expect more from companies on governance issues (e.g., complying with laws and regulation and addressing widening pay gap). As a result, ESG reports that successfully meet customer standards can improve the chances of both retaining existing customers and expanding customer base.
Employees are also increasingly concerned about their employers’ ESG efforts. For example, a 2020 Reuters survey of workplace culture found that of 2,000 UK office workers, 72% of multigenerational respondents expressed they were concerned about environmental ethics, while 83% of workers said their workplaces were not doing enough to address climate change. With there being significant costs associated with recruiting and retaining talent, it’s important that as with consumers, companies put the effort in meeting employee standards.
Focus on material ESG issues
Companies may be tempted to cover the universe of ESG issues, but this is not the best approach. Instead, they should understand which ESG issues are likely to have a substantial impact on enterprise value and finances of the company as well as the demand for its presence from stakeholders (i.e., material ESG issues).
ESG issues, such as business ethics, greenhouse gas emissions and community relations can be dependent on a company’s sector, size, geographic location, among other factors and so it is important that executives understand which areas make the most sense to put their focus and resources into. For example, a company within the oil and gas industry will be focused on methane emissions while a company within the technology industry will not.
Understanding what the material ESG issues for a company are, begins with conducting an ESG materiality assessment. This is where companies can gain input from a broad range of stakeholders as to which ESG issues matter most -or are material. After gaining this input, and understanding connectivity to financial data, the company should obtain consensus with a cross-functional committee of leaders, management and the board.
There is greater value in focusing on doing the best work when it comes to material issues and related performances that matter most to a company and its stakeholders, as opposed to simply doing an okay job at everything. A study from Mozaffar Khan found companies focused on material issues would have a 6% outperformance on stock prices while those that focused on immaterial ESG issues or no ESG issues at all would underperform the market by -2.6%. Overall, it’s in the company’s best interest to focus on material ESG improvement.
Data transparency and one source of truth
While ESG can allow businesses to identify cost-saving avenues, they need the right data to provide insights and help inform their decision on new opportunities. The future of ESG reporting will enable connectivity to financials and help companies calculate the impact of ESG efforts as opposed to merely reporting metrics.
To achieve this, companies can harness cloud-based technologies, providing a single source of truth for all financial and non-financial data. This means the data collection and reporting takes place within one central location, where everyone can collaborate in real-time in the same workspace with everything tracked, and everything linked between financial and non-financial.
In fact, Workiva’s 2022 survey found that globally, three out of four respondents expressed that technology was important for compiling and collaborating on ESG data, as well as validating data for accuracy (80%) as well as mapping disclosures to regulations and framework standards (85%).
Propelling ESG reporting into a transparent, innovation-friendly, actionable and dynamic environment will streamline the steps needed for a company to make informed decisions.
Nothing happens in a vacuum
Currently, the recession, geopolitical conflicts and other factors are taking place alongside ESG. This is why it is important that companies effectively weigh where priorities should lay to successfully navigate through uncertainty.
Dedicating efforts to ESG enables a greater understanding of risk and opportunities that can be cost-saving and opportunity-generating. Even amongst economic turmoil, businesses will need to continue to walk the talk when it comes to climate commitments, advancing social issues and addressing corporate governance.
Through effective ESG reporting, having one source of truth will bring together the financial and non-financial data to best inform decisions. With clear and transparent insight across the company, the particular ESG issues that are most fitting can be determined, and this will support in standing up to both existing and future scrutiny.
Mark Mellen is the Director of ESG Enablement at Workiva, the world’s leading platform for integrated regulatory, financial, and ESG reporting. Workiva simplifies complex reporting and disclosure challenges by streamlining processes and connecting data and teams. Learn more at workiva.com.