The Levers for Sustainable Growth: Why ESG Is More Important Than Ever

© AdobeStock
Businesses may feel compelled to focus on the short term, but given stakeholder interest, putting off long-term ESG initiatives could cause irreparable harm.

In this period of economic uncertainty, business leaders will be faced with many challenging decisions, particularly concerning cost-cutting and risk evaluation. Following a year which featured significant progress from businesses on their commitment to environmental performance, under the broader ESG (environmental, social, governance) umbrella, it will be important to see if momentum is sustained. While many businesses may feel compelled to focus on short-term insights, the question arises whether putting off long-term climate initiatives could cause irreparable harm.

The current market disruption of COVID-19 has put an emphasis on how companies are prioritizing the health, safety, wellness of their employees, customers, communities and supply chains. Investors and other market participants have doubled-down on their expectations of companies and boards around balancing the needs of all stakeholders and how this current disruption is stress testing how effectively companies have integrated ESG into the business strategy to drive resilience, adaptability and long-term sustainability. Growing market evidence continues to demonstrate that companies with strong ESG performance were outperforming the market and are well positioned to emerge quickly from this disruption.

Perhaps under-the-radar in this disruptive time is the impact global shutdowns have had on pollution. Satellite images from the U.S. showed noticeably lower concentrations of pollution in states with required stay-at-home protocol in place due to COVID-19, and similar effects were seen in China. These images indicate the immense environmental toll everyday commerce takes on the environment. They serve as a reminder that business has a fundamental role to play in creating a world where enterprise and sustainability can work hand in hand. Leaders planning for a new and uncertain future should consider understand that near-term decisions will likely drive how the business is sustained in the long run.

In January, Deloitte Global’s 2020 Readiness Report found that 90 percent agree the impacts of climate change will negatively affect their organizations, and 59 percent already have sustainability initiatives in place. Many companies are rapidly ramping up sustainability efforts—listening to internal and external stakeholders, aligning with clients and partners, and integrating sustainability efforts into their business models. As businesses grapple with an unprecedented situation and work towards recovery, many are acutely aware that long-term sustainability challenges remain. Similar to prior economic disruptions, companies will be evaluated on how effectively the short-term measures they take align with critical stakeholder expectations. Here are four considerations for companies and executives as they plan for the challenges of the present and future:

• Know that attracting employees and investors may depend on it. Deloitte’s Q4 2019 CFO Signals Survey found that more than 70 percent of North American CFOs say their company is under at least moderate pressure to act from at least one stakeholder group (mostly their employees, customers and board). Employees want it. Customers want it. Investors want it. In response to mounting pressure, 92 percent of CFOs reported at least one action in response to climate change. It’s likely pressure from key stakeholders on climate change will only grow, so leaders should continue to prepare.

• Set realistic targets to create real change. Overall, 44 percent of all responding CFOs say their company already has or is working on greenhouse gas reduction targets. However, about half of CFOs cite no company targets and about 80 percent of these say they do not have plans to establish targets. Businesses should consider setting realistic goals that are relevant to their business model and strategy.

• Understand the growing importance of ESG performance. In January 2020, Larry Fink, CEO of BlackRock, issued a letter stating that his firm will be increasingly resolved to vote against management and board directors failing to make progress on sustainability disclosures. The same month, world leaders convened upon Davos for the World Economic Forum to focus on addressing climate risk. Organizations that view ESG as secondary concern are at risk of falling behind competitors. Boards and audit committees should consider reevaluating their framework for overseeing ESG performance. This responsibility includes engaging management on climate-related risks and opportunities, optimizing the governance structure to improve ESG oversight, and understanding evolving sustainability standards and frameworks.

• Even the small steps matter. Every step to address sustainability can make a difference—leaders should view incremental progress as purposeful steps to improving the bigger picture. The Q42019 CFO Signal survey found that CFOs report an average of 3.7 actions or initiatives to address climate change. Actions or initiatives ranged from developing climate-friendly products to improving workplace sustainability. The most frequently reported actions were increased efficiency of energy use, including climate risk management in governance processes, and use of energy-efficient or climate-friendly equipment. Leaders should key in on ESG goals that fit within their overarching strategy and target incremental improvements. By doing so, environmentally-forward initiatives can be integrated into their business model.

Climate change is not a future problem—it’s a current challenge that companies are already focusing on. Just as the science and analytical models are informing urgent action around the current crisis, the science and analytical models around climate change can serve to accelerate measures companies have already begun to take. This is a time when businesses can seize the opportunity to position themselves for future growth. If environmentally-forward initiatives are viewed as levers for growth, companies will more likely be able to rise above current obstacles and establish a model that works for decades to come.

  • Get the Corporate Board Member Newsletter

    Sign up today to get weekly access to exclusive analysis, insights and expert commentary from leading board practitioners.



    AI Unleashed: Oversight for a Changing Era




    20th Annual Boardroom Summit

    New York, NY