Introduction
Not many years ago, Environmental, Social
and Governance (ESG) agenda has always been sidetracked by companies. The
importance of ESG back then was not clearly understood and only observed as an
addition to regulatory obligations. The lack of awareness by the Board and
management of companies also didn’t help to overturn this mentality. However, companies
across various sectors nowadays have started to give more attention to its ESG
management and performance. More and more companies have shown unique
approaches in ensuring ESG plays an integral part of companies’ corporate
strategic agenda. With the impact of COVID-19 pandemic, companies are pressured
to step up their ESG management and reporting. This article will briefly
highlight the approach that companies need to consider in order to meet the
increasing ESG expectations.
Multi-Stakeholder Management
Stakeholders are affected and also
affecting all of the ESG criteria – Environmental impacts, Social impacts and
Governance impacts. But as a ‘Stakeholder’, social issues have always been the
central focus, ranging from community engagement to subjects related to human
rights. Though till now it is difficult to quantify the financial values
generated from social issues, but the impacts posed by the mismanagement of
these issues are severe as companies would lose the confidence and trust from
its stakeholders and eventually have reputational and financial implications to
companies.
Talking about reputation, there is never
the best time compared to now for companies to adhere to its corporate
principles and progressively revamping its risk management processes and advances reputation. Just by meeting the
current demands of internal and external stakeholders is no longer acceptable particularly
to key stakeholder groups that are looking at long-term values and gain from
companies. So, the demands on future ambition and performance are also vital.
For example, COVID-19 has heavily impacted (and still impacting) companies’
workforce across sectors pertaining areas of health and safety, income
stability, and overall workforce morale and motivation. Stakeholders are
observing how companies deal with these challenges and assuring the best
solution are being provided to benefit them during and after the pandemic
crisis.
Specific stakeholder groups such as
regulators and investors as well as other market participants that include
rating agencies, will continue to press companies to place paramount attention
to social issues and how companies shows resilience in the competitive and
challenging business landscape.
What can be learned from the recent
COVID-19 crisis is that the immediate focus on social issues creates an
opportunity like never before for companies to relook and improve on its
overall stakeholder management and engagement to all of its key stakeholder
groups such as its workforce, community, regulators, investors,
and also those across its value chain such as the suppliers.
That being said, in allocating the efforts
and resources towards managing the critical social issues, companies should not
lose control of the continuous enhancement of environmental and governance
issues. At the end of the day, ESG issues are interconnected. Apart from that, environmental
issues such as climate change imposes great threats and impacts for companies.
The impact of COVID-19 pandemic should provide companies the lessons that their
business should be prepared at all times of all ESG risks that may affect them
in the long-term.
Effective ESG Strategy
ESG is no longer something that is ‘nice to
have’, but are now considered as an imperative component of companies’
financial performance and evaluation. For instance, there was an estimated
increase of USD$70 billion investment pumped in the 2019 ESG funds. This
supports the prediction that ESG investing to top USD$50
trillion in the coming two decades. This trend points out that ESG
investing will one day become mainstream and there is a clear opportunity for
companies to reap the benefit if they prepare for it from now.
An effective ESG strategy is not only
important to help companies to achieve the desired sustainability ambitions,
but also provides a clear direction on how they can consistently improve their
performance, manage and mitigate its risks and enhance market position.
The progress and outcomes of companies’ ESG
strategy should also be communicated to all stakeholders to enable companies to
gain the trust and confidence especially from the investors for long-term value
creation.
In reaching towards the development of an effective
ESG strategy, companies should oversee in a diligent manner on five key
components; the companies’ material issues, roles and responsibility of the
governance structure, comprehensive policies and innovative programmes, metrics
and targets, and ESG communication.
To come up with strategic focus areas,
companies should analyse issues that have the most interest, as well as
impactful on and towards the business and the key internal and external
stakeholder groups. Focusing on financial matters are now redundant as more and
more ESG related issues are gaining the interest from stakeholder groups. It is
definitely difficult to meet the demands from all stakeholders, as it is also
not viable for companies to neglect the business needs. So, companies should
have a structured and robust process in place to derive the key issues that
have balance significance on the business and also the key stakeholder groups.
These are considered as the material issues that should be in reference to
companies’ ESG strategy development.
A sound governance structure should also
demonstrate accountability and awareness on ESG management from all levels
especially the Board and management. The Board and management should be aware
of all ESG risks and opportunities relevant to the company and the industry the
company is in. There is no template approach in ESG management as companies
varies from one another. So, it is absolutely important that the governance
structure to carefully formalise the roles and responsibilities that maximises
the implementation and monitoring the robustness, effectiveness and the
performance of companies’ ESG strategy. It is also important to note, that even
though there might be specific functions or personnel that are responsible to
oversee ESG management of a company, the ideal approach is for the
collaboration of different functions to come together and work on ESG
management as one whole unit and to ensure regular and beneficial exchanges of
information are feasible. This would allow better risk and opportunities
management particularly once companies have define the material matters to
companies.
The development of ESG policies and
programmes should be well-coordinated and strategically planned out. In order
to do so, companies should not envision the short and medium-term outcomes but
to also evaluate the long-term outcomes for the companies and stakeholders. In
undertaking this evaluation, companies must see the areas that are feasible for
them to optimise and capitalise in the specialties and strengths that are
unique and aligned to the companies’ values. Most importantly, companies must
anticipate the potential changes in the business landscape including the
political, regional, regulatory, social and environmental trends that would
likely to occur within the proximity of companies’ operations and influence.
This would allow the companies to reap the long-term financial returns and
remain competitive at all times. Having these understandings, companies should
be in a good position to allocate the investments, resources, timeframe to
implement the relevant plans for its ESG strategy.
The success of any strategy, including ESG
strategy depends on various factors that are controllable and uncontrollable.
Companies should always monitor the performance of the developed strategy to
analyse the value it brings to be desirable or would actually cost additional
effort and unnecessary investments to the companies in the long run. Companies
must adapt and be flexible to changes and also must know when. The results from
the materiality assessment (to identify the material matters of a company),
should be referred to in developing the relevant metrics, KPIs and targets that
are achievable and realistic to place companies in a higher ESG management
position. Setting metrics, KPIs and targets that are too ambitious immediately
may result in early failures that would lead to demotivation to oversee ESG
management as a whole. The overall objective is essentially to measure
companies’ ESG performance, so companies should be mindful to develop metrices,
KPIs and targets based on its ability to improve and that are manageable to
monitor over a sustainable period of time.
The progress of companies’ ESG performance
provides important data and information for companies to readjust and
restructure on improvement approaches. It provides important data and
information for stakeholders as well. It is already well known that the access to
transparent information on companies financial and ESG performance is key to
gain stakeholders’ confidence, trust and loyalty. Communicating ESG performance
may come in various ways via companies’ Annual Reports, Sustainability Reports,
websites, AGMs and companies may even create specific events to solely discuss
and share on their ESG performance and obtain instant feedback from the
stakeholders. This would not only provide insights on the rationale and
ambition of companies ESG strategy to stakeholders but also provides solid and
concrete responses on how certain stakeholders value the ESG strategy that are
affecting them. These exchanges of information will further assist companies to
develop or redevelop better ESG strategies.
Conclusion
Companies’ ESG strategies or framework for
continuous value creation should by now be driven by the Board and management
that oversee ESG management and reporting as not merely a voluntary approach to
one that in some jurisdictions is increasingly subject to mandatory reporting.
Companies that have not embarked on ESG integration into their business
operations, or companies that have started to, or even companies that have
somewhat fully integrated ESG must all understand that the current landscape
demands them to always be ready to improve and adapt. There is no room to be
comfortable with the current establishment and practices in place would
eventually be obsolete without them even realising it.
All views and opinions expressed
on this site are by the author and do not represent any particular entity or
organisation
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