ESG FORUM
Compiled by Tamara Rebeira
FUTURE READY CORPORATES
Aruni Rajakarier highlights the power of effective ESG in driving change
Q: How important is it to integrate environmental, social and governance (ESG) considerations into business strategies and decision making?
A: Factoring ESG considerations through useful information will help businesses weed out inefficiencies, enhance productivity, enable market access and build resilience across the value chain.
It’s in the interest of every corporate to consider relevant and timely information relating to these aspects. Financial statements – the most widely used measure of performance by boards – comprise many nonfinancial aspects that are factored into prices.
ESG information offers insights into the behaviours of underlying factors and understands the volatilities regarding the pricing of these elements. It supports better forecasting, risk management and deliberations using information instead of opinions.
Unfortunately, too many business leaders focus on the challenges of setting up systems to capture the nonfinancial data required for a holistic approach. This excuse is losing steam as more corporates demonstrate tangible benefits from holistic ESG strategies.
Q: Why is it necessary to demonstrate a commitment to sustainability, social responsibility and corporate governance?
A: A useful analogy is the growing demand for wearable technology that tracks information from your step count and heart rate to many more health indicators with the price varying by what’s tracked.
Timely and reliable information regarding your organisation’s health is as important and necessary.
The average lifespan of a company on the S&P 500 declined to 21 years in 2020 compared to 32 in 1965. Isn’t this enough reason to engage in securing holistic information on a corporate’s health?
Export-oriented organisations need this to gain access to markets so top line growth will be dependent on it. With the enactment of the European Sustainability Reporting Standards from 1 January or the deferred date under discussion, exporters to EU countries will likely have to submit this information to customers or even obtain ESG ratings.
If an entity’s energy consumption is high, you may want to track it with the intention of formulating an energy strategy. After all, this is a key pressure point as Sri Lanka transitions to a low carbon economy.
Corporate governance is key to integrating ESG as the board is charged with the responsibility for strategic direction, performance oversight and risk management.
If ESG indicators aren’t reviewed, and considered in assessing performance, determining strategic direction and risk management, it results in suboptimal resource allocation.
They bring the short, medium and long term into focus, and support better allocation of finite resources.
Q: What steps should corporates take to engage stakeholders to address ESG concerns?
A: The first step is for the board to ensure that collectively, they possess ESG knowledge. They can onboard a director or consultant with the requisite skills and competencies for this.
Next, this needs to be an item on the agenda – much like the review of financial performance. And as with all agenda items, information must be included with the board papers for review.
Typically, you’ll have a mix of quantitative and qualitative information, and progress on environmental, social and governance strategies that enable sustainability-related risks and opportunities to be monitored.
Usually, there’s sufficient information at various levels of the business that doesn’t reach the board. The trick is to present it in a comprehensive but concise format.
We’ve observed how corporates transform as directors increasingly ask relevant questions and drive stakeholder engagement, addressing many ESG concerns. We also see companies with a futuristic mindset anticipating stakeholder concerns and differentiating themselves from competitors.
Only cohesive action by boards can institutionalise ESG.
Q: And what benefits can organisations realise through effective ESG driven governance risk management?
A: For boards, it’s a chance to align digitalisation and sustainability. The ultimate goal is to create digitally tagged information that can be aggregated to create a global baseline and monitoring, thereafter using AI tools.
In today’s context, ESG information will also enhance the decision-making capability of senior executives and boards, and drive change where necessary.
Imagine what companies with energy strategies and full information on the consumption of various sources of energy and emissions can achieve! All ESG does is provide the next level of information to help companies thrive during the transition to a low carbon economy and manage the depletion of natural resources on which we’re dependent.
If one remembers that we never pay a price for the source materials, water or energy we use and only pay for extracting, transforming, packaging, transporting and marketing what nature has given us, we’ll be more careful.
Once gone, nonrenewable raw materials are gone; and we’re stretching the capacity of nonrenewables. Climate change is real and it translates into financial impacts – that’s the bottom line.
