ESG’s Two-Pronged Challenge: Pleasing Investors While Meeting Customer Demand

If organisations 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 organisations 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 realise that solely prioritising 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 organisations are coming to terms with prioritising it on board agendas.

ESG’s dynamic rise to the top

Traditionally, organisations 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 centre of attention. Customers, employees, communities and organisations alike are starting to become aware of ESG’s importance to society, but this positive shift in perspective has seen some organisations 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 organisation 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. — practising business in a manner that minimises risk or takes on more informed risk, where needed and developing resiliency plans to respond to risks that are not fully controllable by the organisation. Take, for example, a textile manufacturer with operations in Asia. This organisation 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 affecting 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 organisation across the globe. So, it’s no longer acceptable for organisations to solely prioritise the bottom line. 

How to find the synergy between an organisation’s leadership and their customers

“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 organisation take a stand and prioritise and on which will they not,” Prashant says. 

Prashant recommends that organisations start with an ESG materiality assessment. This is the concept of identifying an organisation’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 organisations 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 organisation, 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 organisations because it is highly consequential and calls for the most disclosure requirements at present. With emerging technology coming into play, such as AI, management teams and boards need the full view of how technology can affect climate risk and vice versa, ESG and the organisation itself, to determine how they will respond.”

But implementing a strong ESG strategy goes beyond understanding and prioritising 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.

Incorporating ESG into corporate culture

Another outcome of materiality assessments is that it highlights what the organisation cares most about, which makes it easy for stakeholders to get behind. The goal is to get everyone at the organisation on the same page so they can move forward in a coherent way.

“Once an organisation decides on which ESG topics it should prioritise 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 organisation as a whole have aligned on ESG issues to prioritise, ESG will become a part of the fabric of the organisation 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 organisation.”

If that’s not enough proof as to why prioritising ESG is necessary, doing so also allows organisations to experience monetary benefits. By incorporating ESG into organisational culture and following through on the issues the organisation cares most about, organisations will likely experience revenue generation opportunities because they’re aligned with their stakeholders. Additionally, through the materiality assessment, organisations might find areas for cost optimisation across their business operations. And lastly, over time, with growing revenue comes increasing shareholder and broader stakeholder value. 

However, organisations must appropriately invest in ESG to realise these benefits. By investing in people, technology and other resources to complete materiality assessments, organisations can focus on key ESG issues and build communications strategies. Organisations will not only be talking the talk, but they’ll be walking the walk, too. 

Organisations need to balance their ESG investments. For example, the journey often begins with a minimalist approach (Exhibit 1, Point B). Such organisations (“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 organisations 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.

Conclusion

“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 organisational strategy, organisations 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 minimise the harm and optimise the opportunity because their organisation is all-in on ESG.” 

For more information on how to develop a risk culture, read our white paper on Cultural Risk and Your Organisation's Reputation.