Discovery Leadership Masterclass Series: ESG COMPLIANCE…the future of sustainable business

The universal agenda and ambition as enshrined in the sustainable Development goals push for the socio-economic freedom of nations and people through the management of the environment and the people who are affected by it. The growing concern globally to see businesses impact their environment through a socially governed innovative policies for sustainability and progress saw the need for the development of policy frameworks to ensure   corporate institutions remain socially responsible (CSR) and to answer the call for the protection of the environment within which it operates.

Again, with the growing alertness and demand for climate action amongst consumers, adopting Environmental, Social and Governance measures now makes it more imperative than ever for businesses of all sizes to thrive in the present and also future proof itself in adherence of being ESG compliant. Hence, the need for an ESG framework serving as the vehicle for evaluating the ideal business now for sustainable investment, impacts and access to investment funding is more than a clarion call for all institutions to adhere to.

Not in the too distant past, the COVID-19 pandemic and its devastating effects on businesses, economies and nations have amplified the importance of ESG issues as critical deliverable to be mindful of by institutions that are future focused. Moreover, it is the concern of stakeholders that, greater transparency on how organizations manage their ESG risk and integrating them into their business strategy provide hope for resilience and sustainable investment.

That notwithstanding, the subject of ESG among other topical issues of business promotion and sustainability played key in the recently held Ghana Economic Forum organized under the auspices of the Business and Financial Times, drumming home the need for all well-meaning businesses to remain or consider adopting the ESG framework as a policy guide to ensure sustainability, impacts promotion on the environment as well as to enhance the growth capacities for those companies.

It must be emphasized that, our society is no longer only dependent on the government but also on well-functioning businesses which meets its needs, ranging from employment creation, equitable growth, and protection of natural resources and safeguarding consumer interest. With these fundamental reasons, it’s imperative therefore that, the ESG framework becomes the guiding instrument for all Ghanaian businesses to ensure compliance, safeguarding and promoting ethical businesses and environmental security.

Therefore, the need to establish the relative importance of ESG compliance by organizations for business sustainability, deepening good governance and the significant impacts for society for the greater good have to dominate business discussions in meetings and summits. Let’s talk ESG compliance and the future for sustainable businesses.

What is ESG?

There has been uncertainty and debate as to what to call the inclusion of intangible factors relating to the sustainability and ethical impact of investments. Names have ranged from the use words such as green and eco, responsible investment, socially responsible investment, enhanced business, corporate health among others.

The debate to settle the barrier between what was considered ESG and the fiduciary duty of companies as was concluded by an UN Global Compact report stating that, failing to consider all long term investment value drivers, including ESG issues is a failure of fiduciary duty, it calls to acknowledge that despite significant progress, many investors and companies are yet to fully integrate ESG issues into their investment decision-making processes. So what is ESG?

ESG is the umbrella term for sustainable and responsible finance business within the framework consideration to the environment, social and governance factors that impact investment decisions. ESG is an evaluation of a firm’s collective conscientiousness for social and environmental factors. It stands for environment, social and governance and it refers to the factors that affect the sustainability of a company. However, it is established that investors, consumers and employees are demanding that companies be held accountable for their actions, noticing that those that prioritize ESG issues tend to perform better.

Environmental issues:

Threat of climate change and the depletion of resources has grown, so investors may choose to factor sustainability issues into their investment choices. The environment assess how the company performs as a steward of nature. It analysis how its activities impact the environment and manage environmental risk. It emphasis on direct operations and across the supply chain. This may include resource scarcity and management, natural resources preservation, animal treatment and greenhouse gas emissions

Social issues:

The social dimension examines the strength and weakness of how a company manages relationship with employees, supplies, customers and the communities where it operates. It lays emphasis on employee’s working conditions, health and safety, employee relations and diversity. The social aspect of ESG has to do with analyzing the revelations of a company with its employees, customers, the communities it operates in and more. Workplace health and safety, products safety and quality and consumer protection are some of the social metrics that are considered.

Governance issues:

Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights. Investors want to know if they can trust the company and what kind of decisions are taken behind closed doors. This include gender equality or equal pay, bribery and corruption and Board diversity.

Governance issues encapsulates a deliberate efforts by companies to define in broader terms policies of Board and committee composition, Procedures for ensuring transparency, hierarchical and internal control measures and the legal and regulatory framework system governing the company. These underpinning considerable form the vision, mission, goals and the strategic guidelines or blueprint of that organization.

Historical Basis for ESG

There are massive historical evidence to suggest that there are growing trends of selective investments by companies skewing towards making wider social environmental impacts using capital assets. Typically, of such companies include the International Brotherhood of Electrical Workers, investing their capital in developing affordable housing and the United Mine Workers in health Facilities. The trend has seen General Motors in the United States de-investing from South Africa in the early 1970’s along serious ethical consideration for its abhorrence to the apartheid system.

Moskowitz on the other hand, brought the spotlight onto the corporate governance aspect of responsible investment. His analysis concerned how the companies were managed, what the stockholder relationship were and how the employees were treated. He argued that improving corporate governance procedures does not damage financial performance but instead, maximizes productivity, ensures corporate efficiency and leads to the sourcing and utilizing of superior management talents.

The trajectory of ESG framework development saw in 2005, the United Nation Environment Programme Finance Initiative commissioning a report on the interpretation of the law with respect to investors and ESG issues. The report concluded that not only was it permissible for investment companies to integrate ESG issues into investment analysis, the report hinted that it was arguably part of their fiduciary duty to do so.

Many in the investment industry believe that, the development of ESG factors as considerations in investment analysis is inevitable. Again, the evidence toward a relationship between the consideration for ESG issues and financial performance makes a sound argument for combining fiduciary duty and a wide recognition of the necessity of the sustainability of investments in the long term as environmental, social and corporate governance a concern now and an increasingly important tool for the investment market.

ESG Framework

Up until a few years ago, environmental, social and governance (ESG) criteria ranked well below financial performance in boardroom priorities. Consumers have been demanding social and environmental commitments from businesses as well as quality, value for money products and services. They are wielding the power of hyper-connected populace to push for clear environmental credentials, the closure of gender pay gaps and sustainable corporate practices. As such, companies are expected to commit to the United Nations’ Sustainable Development Goals which emphasizes on good governance and best business practices.

The year 2019 also saw a rapid acceleration in the profile of ESG issues, capped in January 2020 with the commitment at Davos by many of the world’s largest companies to establish a set of universally recognized ESG disclosures. It was clear this was the direction that business would be moving in for the foreseeable future. The Corona virus surge across the world increased the momentum and catalyzed the importance of many issues, bringing to the fore the need for companies to have a wider consciousness and renewing the social contract between the business and the community.

That being said, there is still the growing demand that companies state their policies then walk the talk on governance and sustainability issues. The post-pandemic world has called for an ever-greater focus on environmental, social and governance issues and this, Business leaders need to be aware of how ESG risks can affect their company and greater stakeholders’ priorities.

Moreover, employees are considered another influential group in the expansion of ESG priorities. They want to work for companies with purpose and are aligned to their own priorities. It is also noticed that, firms with strong ESG credentials are increasingly able to attract and retain the best talent. Hence, Investment practices are increasingly influenced by ESG factors.

The pandemic has also made corporate governance an important task, which requires that making decisions related to business strategies, employee well-being, risk mitigation and managing stakeholders remain an unprecedented environment issue. While large businesses could afford to have dedicated teams to look after their ESG measures and benefit from them, small businesses can benefit from faster decision making, flexibility and closer contact with their customers which helps them better their needs.

Sustainable future for Companies:

ESG is seen as an alternative approach to risk management and that, its compliance is of great significance to companies. To be sustainable is to focus on meeting the needs of the present without compromising the ability of the future generations to meet their needs. Sustainability is usually defined as the process and actions through which mankind avoids the depletion of natural resources in order to keep an ecological balance that does not allow the quality of life of modern societies to decrease.

The term has been broadly applied to characterized improvements in areas like natural resources overexploitation, manufacturing operations, direction of investments, citizen’s lifestyles, consumers purchasing behaviors, technological developments or business and general institutional changes. Daniel Christian Wahl claims that, sustainability refers to sustaining the underlying pattern of health, resilience and adaptability that maintain this planet in a condition where life as a whole can flourish.

Meanwhile, today’s executives are dealing with a complex and unprecedented brew of social, environmental, market and technological trends that need to embrace the ESG framework for optimum business success and progress . These sophisticated challenge require sustainability-based management approach to curtail it. Nonetheless, most executives are often reluctant to place sustainability core to their company’s business strategy in the mistaken belief that the costs outweigh the benefits.

Sustainability and the way for Ghanaian Companies:

The fundamental business practice aiming at sustainability normally are focused on developing the future with deliberate sustainable designs and supply chain efforts. Through operational excellence, those companies that are dedicated to the culture of sustainability, ambitiously drive business strategies around financial performance, ethical business practices and the building of an environmental performance. Again, it makes sense that companies that are ESG compliant largely focus on its people and partners as a key measure in its decision of client wellbeing, health and safety needs assurance, Diversity and promotion of community partnerships and safety.

Meeting Environmental, Social and Governance criteria has become an important goal for all organizations now. Customers and market demands are placing increased pressure on corporations to engage in more sustainable business practice and investors are equally and increasingly using ESG criteria to evaluate the companies in which they might want to invest. Is there any readiness for our Ghanaian companies to comply with this new norm?

The case for sustainability in the context of our Ghanaian companies in the Fintech, manufacturing, Banks, insurance, mining firms etc must have the greatest appetite for improving on its CSR mandates to finally embrace the ESG. Embedded sustainability efforts clearly results in a positive impact on business performance. Having said so, to understand sustainability is to discuss the practices that make it hold. To be sustainable is not to harm people or the planet and at least create value for stakeholders as well as to focus on improving environmental, social and governance performance in the areas in which the company or brand has material environment or social impact.

More practically, the business of CSR describes the principles that guide ethical decision making for business. They set out rules that are supposed to ensure ethical behavior and the conduct of good business. Nonetheless, there are an assumption that what is organizationally prescribed as ethically appropriate and that ethicality equates routine behavior. It is argued therefore that, CSR has become a matter of shareholder value for business and that it is often seen as a tool of corporate greenwash, a rhetorical device employed by organizations to legitimize the corporate form and accommodate the social sciences of its consumers. However if CSR is monitored by civil society Organizations and independent external auditors, organizations conducts will be limited to acceptable behaviors open to firms to critique for better performance.

With the introduction of the ESG to solidify the CSR, sustainable businesses would be redefined to champion the corporate ecosystem by designing models that create value for all stakeholders including employees, shareholders, supply chain, civil society and the planet. It is argued by Michael Porter and Mark Kramer that, creating a shared value for companies in essence is to mean that the generation of economic value can directly be connected to addressing all identifying and social problems.

The Risk of ESG non-compliance:

Unlike traditional risk of business, social and environmental risks manifest themselves over a long term, often affect the business on many dimensions and are largely outside the organizations control. Managing risks therefore requires making investment decisions today for long-term capacity building and developing adaptive strategies. In the food and beverage sector for instance, the impacts of climate change have the potential to alter growing conditions and seasons, increase pests and disease and decrease crop yields. Disruptions in the supply chain may affect production processes that depend on unpriced natural capital assets such as clean air, biodiversity and groundwater.

The mining sector business equally throws environmental degradation, water pollution challenges. It is important to for business under these sectors to have an environmental reclamation plan to safeguard the environment and its continuous destruction. Remain ESG focus provide the impetus to ensure safety business and sustainability.

Leveraging ESG as Competitive advantage:

Adopting ESG framework as a policy tool inures great benefits for companies. These advantages are measured in the:

Creation of Value:

ESG factors play a key role in an organization’s ability to create value. Delivering results requires creating value for all stakeholders not just shareholders. Besides, this imperative drives and enhances the organizations fortunes in identifying and quantifying the impact of non-financial issues that will have a material financial impact on the organization’s short and long term value. These include an organization’s impact on talent management and employee diversity, governance, data security, health and safety issues.

ESG as a Strategic tool:

ESG metric can help businesses recognize when strategies need an overhaul and identify which practices may be associated with future risk and how these strategies can be developed into opportunities for competitive advantage.

Helps promote investor trust:                                         

The reassurance that ESG issues guarantee investor trust cannot be downplayed. It helps investors acknowledge the fact that, the company is thinking ahead so that they continue to invest in it.

Fostering Innovation

Investing in sustainability serves as a risk management tool as well as an instrument for creative innovation. Redesigning products to meet environmental standards or social needs offers new business opportunities. By adapting ESG policies and framework, companies are able to create competitive advantage by promoting the growing desire to gain access to new markets. Through innovation and the drive for competitiveness, there is the tendencies for companies to increase productivity to meet the market demands in terms of quality, reduced environmental impacts and cost and global competitiveness.

Enhanced Customer loyalty and retention

Consumers of today are highly expectant of most companies to remain transparent, honest in their service offerings and the manner of global impacts. Thatnotwistanding, consumers commit their loyalty to companies and patronize their products based on whether such companies are sustainably compliant coupled with service offering which are competitively priced.

Attracting and Engaging Employees:

Corporate sustainability initiatives aimed at improving ESG performance and improving value to society can increase employee loyalty, efficiency and productivity and improve HR statistics related to recruitment, retention and moral. This is proven from a research finding acknowledging that employees are now much focusing on the mission, purpose and work-life balance. It is suggestive to note that, companies that invest in sustainability initiatives tend to create a culture and engagement due strategy focusing more on purpose and providing value to such society. Moreover, companies that embed sustainability in their core business strategy treat employees as critical stakeholders just as important as shareholders. Notably, employees of ESG compliant companies are proud to work there and feel part of a broader effort.

In summary, I would emphasize that the preponderance of evidence shows that sustainability is going mainstream. Executives can no longer afford to approach sustainability as a nice to have or as solid function separated from the real business. Those companies that proactively make sustainability core to business strategy will drive innovation, investments, engender enthusiasm and loyalty from employees, customers, suppliers, communities and investors. As such, business must keep themselves updated on the ease of access to the vast amount of data and frameworks, cut costs and manpower through the ease and implementation of their ESG strategies for the reward is growth, cost reduction, effectiveness, effective talent attraction and targeting the consumers of tomorrow. ESG has been proven to be not only a smart tool for business growth but the surest means for sustaining businesses for the future.

Discovery….Thinking solutions, shaping visions.

The writer is  the CEO and Strategic Partner of AQUABEV Investment and Discovery Consulting Group and Dr. Genevieve Pearl Duncan Obuobi is a Banker/SME Consultant and Leadership Strategist