Environmental, Social, and Governance (ESG) is more than executive lip service. It may have been in the past, but data today shows that ESG is ignored at the risk of organizations.
If organizations hope to stay profitable, it’s imperative that they become more “evolved” with ESG, according to data from a recent Deloitte study. Customers demand a lot from organizations, and as Deloitte’s most recent Integrated Risk Management (IRM) report shows, a vast majority of employees and customers are only backing brands that have made a positive impact on the environment and/or took a stand for social issues. At the same time, many board members and investors realize that solely prioritizing the bottom line is no longer as widely accepted as it once was. Boards need to revise their meeting agendas or risk being pushed aside by the decision customers make about their companies.
We recently sat down with the National Board Governance and Enterprise Risk Management Services Leader at Deloitte Canada, Prashant Masand, and talked about the shift we’ve seen in ESG and how organizations are coming to terms with prioritizing it on board agendas.
Traditionally, organizations have faced a two-pronged challenge: winning over investors and boards while also appealing to customers, trying to serve both sides but for very different reasons.
ESG has always been at play, but with the rise of social media in recent years, important ESG topics — such as climate change, social justice, and geopolitical issues — have become the center of attention. Customers, employees, communities, and organizations alike are starting to become aware of ESG’s importance to society, but this positive shift in perspective has seen some organizations come out on top and others at the brink of extinction.
“Investors want a good return on their investment while customers want value for money, but only if done so responsibly,” Prashant says. “The dynamic shift comes when both sides align on priorities and perform business in a responsible manner.”
Doing business responsibly means understanding where your risks are in your organization in the short-term (1-2 years), medium-term (3-5 years), and long-term (5-10 years) — whether they be risks to the environment, society, business operations, etc. — practicing business in a manner that minimizes risk or takes on more informed risk, where needed, and developing resiliency plans to respond to risks that are not fully controllable by the organization. Take, for example, a textile manufacturer with operations in Asia. This organization must be aware of the manufacturing working conditions and regulations, what the impact of its operations is on the external environment, and how the manufacturing business is impacting the community around it. The same is true for how external factors can affect any retail manufacturer.
Why is all of this important? Because customers and society say it is, and they’re the ones with buying power and influence. These ESG issues are real, and they’re affecting every person, culture, community, and organization across the globe. So, it’s no longer acceptable for organizations to solely prioritize the bottom line.
“Boards understand that ESG is a topic on their meeting agendas, but where the lack of alignment comes from is on which aspects under ESG will the organization take a stand and prioritize, and on which will they not,” Prashant says.
Prashant recommends that organizations start with an ESG materiality assessment. This is the concept of identifying an organization’s inherent ESG issues by examining current business processes and operations from all stakeholders’ perspectives and understanding their reputational, financial, operational, regulatory, and people and community implications.
Materiality assessments allow organizations to understand the ESG issues, both internal and external, that are most important to them. This puts everything into a balanced view and outlines tangible action items.
To learn more about materiality assessments and how you can incorporate them into your organization, read Deloitte’s working paper: Balancing your materiality assessment.
Once a materiality assessment has been completed, relevant topics can then be presented to management to determine how they will respond to these risks using their existing risk management infrastructure, upon which the plan will be communicated to the board.
“Take for example climate risk,” Prashant explains. “This has become one of the most important topics for organizations because it is highly consequential and calls for the most disclosure requirements at this time. With emerging technology coming into play, such as AI, management teams and boards need the full view of how technology can impact climate risk and vice versa, ESG, and the organization itself, to determine how they will respond.”
But implementing a strong ESG strategy goes beyond understanding and prioritizing ESG risks. Ultimately, the board and management must act beyond meeting minimum ESG standards and requirements set by regulators and standard setters. They must go a step further and weave ESG into their purpose, strategy, culture, and values.
Another outcome of materiality assessments is that it highlights what the organization cares most about, which makes it easy for stakeholders to get behind. The goal is to get everyone at the organization on the same page so they can move forward in a coherent way.
“Once an organization decides on which ESG topics it should prioritize and focus on, these topics must be lived and communicated by both the management team and the board,” Prashant urges. “People need to see that ESG-focused messaging is being communicated from the top on an ongoing basis and in different forms, including employee town halls, customer conversations, community engagement activities, investor interactions, and external communication initiatives.”
As a Partner at Deloitte Canada, Prashant and his colleagues are very aware of the rich and diverse history and the role of Indigenous peoples in Canada. They understand that land acknowledgement marks an important step in the process of reconciliation with First Nations, Metis, and Inuit peoples.
“When we have large in person or hybrid team meetings, we start with a land acknowledgement,” Prashant says. “It’s important that we restore trust and rebuild our relationship with Indigenous peoples many of whom are our colleagues, clients, friends and family.” It is one aspect of Deloitte Canada’s Reconciliation Action Plan to foster more inclusive communities and a more inclusive country in the spirit of continual growth and healing.
“Once the board and organization as a whole have aligned on ESG issues to prioritize, ESG will become a part of the fabric of the organization and will manifest itself in what they do,” Prashant says.
But it’s not just about internal core values. Employees and customers need to see these values in action, Prashant adds. “Employees and customers will feel better about the brand knowing that they share values with the organization.”
If that’s not enough proof as to why prioritizing ESG is necessary, doing so also allows organizations to experience monetary benefits. By incorporating ESG into organizational culture and following through on the issues the organization cares most about, organizations will likely experience revenue generation opportunities because they’re aligned with their stakeholders. Additionally, through the materiality assessment, organizations might find areas for cost optimization across their business operations. And lastly, over time, with growing revenue comes increasing shareholder and broader stakeholder value.
However, organizations must appropriately invest in ESG to realize these benefits. By investing in people, technology, and other resources to complete materiality assessments, organizations can focus on key ESG issues, and build communications strategies. Organizations will not only be talking the talk, but they’ll be walking the walk, too.
Organizations need to balance their ESG investments. For example, the journey often begins with a minimalist approach (Exhibit 1, Point B). Such organizations (“Lean Operators”) tend to underinvest in ESG. Although they keep their investment in ESG low, during a risk event, they struggle to adapt and recover and may incur unnecessary or outsized costs. In addition, they can rarely scale up quickly enough to seize the opportunities an event may present.
Those organizations can start their journey towards a more balanced approach to ESG (Point C) by more consciously weighing the tradeoffs between the cost of ESG and the costs to recover, perhaps by investing in capabilities that enable faster, more agile responses to ESG events.
“There will always be emerging risks and new ESG issues that influence society and its buying power,” Prashant explains. “But with stakeholder buy-in and support and incorporation of ESG into organizational strategy, organizations can develop resiliency plans for each of the ESG issues that are material to them. By holding town halls, using other communication platforms, and conducting scenario-based trainings and crisis simulations, employees will see the issue, understand the risk and opportunity, work to minimize the harm, and optimize the opportunity because their organization is all-in on ESG.”
For more information on how to develop a risk culture, read our white paper on Cultural Risk and Your Organization's Reputation.