Regulators are the most powerful force in making ESG practices transparent
The environment tends to be overlooked in favour of social and governance issues, FTI barometer shows
Companies are expected nowadays to play a lead role in addressing environmental, social and governance (ESG) issues that have traditionally been the preserve of governments.
The most resilient companies have embedded sustainability into their business models and decision-making structures, and engage with a range of stakeholders to prepare for these related risks. Yet there still appears to be a mismatch between the extent to which ESG expectations are changing in the political and regulatory arena, and the way in which companies are managing them.
It is also no longer possible for companies to trade off their good performance on one sustainability measure with their underperformance in another. Just because a company performs well on addressing social concerns doesn’t mean it shouldn’t prepare for environmental risks. Sustainability issues should be comprehensively and holistically embedded in a company’s business strategy.
The recently published annual FTI Resilience Barometer shows the growing appreciation by senior executives of the importance of ESG to a company’s success but also identifies clear risks they will face from not addressing these issues to keep pace with evolving regulatory and social pressures.
Overall, the more than 2,000 senior executives FTI Consulting surveyed globally believe ESG issues can add significant financial value to their company. They estimate that an extremely positive or high ESG rating could increase their corporate value by 33%, up from 27% the previous year. Whether this is as a direct result of a positive ESG score, proactive future-proofing of the company or perception of the leaders, the impact on value is considerable.
A total of 39% of respondents in our survey say the biggest pressure to be more transparent about their sustainability strategy comes from regulators, compared with 37% for customers and clients and the more traditional sources of pressure, such as media (19%) and civil society (13%).
This has partly driven the types of issues companies tend to report on. The Resilience Barometer shows that companies tend to be more positive about their efforts to address social issues rather than environmental issues by an average margin of 8%. Of those companies that reported their materiality or sustainability activities, most focused on social issues rather than environmental factors: consumption (65%); employee health and safety (60%); labour practices (54%); anticorruption practices (53%) and management of the legal and regulatory environment (52%).
This focus is likely to shift in the next year and beyond as the environmental issues highlighted by various international organisations such as the World Economic Forum receive even greater policy and regulatory impetus.
Given the intense focus on climate change by regulators and the public, it is striking that just 37% of Group of 20 (G20) business leaders disclose their greenhouse gas emissions, for example. This while a raft of mandatory carbon emissions regulations emanating from the EU is expected to have widespread ramifications for all companies across industries and jurisdictions. That nearly two-thirds of companies are not reporting their greenhouse gas emissions suggests a severe lack of resilience in preparing to report and reduce emissions over the next decades.
It was also found in the barometer that the financial services industry, as a key focus for regulators, has been feeling the most pressure on ESG issues over the past year, particularly in Europe. The sector plays a key part in extended value chains, and G20 leaders expect a ripple effect to result as other sectors along the supply chain are pressured to become more transparent and proactive in managing ESG risks.
While the foundations have been laid for many of these trends and issues, we expect to witness the widespread implementation of ESG-related practices across industries and jurisdictions in the next 10 years.
Companies, investors and governments that fail to act on ESG will likely face greater risks and miss significant opportunities compared with ESG leaders in many vital areas, ranging from better access to capital to operational improvement and pursuing new business ventures. Demonstrating leadership in ESG will ultimately become a differentiating factor for entities in the public and private sector, and market participants have much to gain from embracing ESG stewardship as part of their competitive advantage.
To close the gap between how stakeholders expect companies to manage these issues and the way in which companies are currently doing so, companies have to take a more holistic, integrated and urgent approach to ESG. Companies will need to embed ESG into corporate strategy as well as all board-level activities more systematically in the next decade — and not just in response to formal reporting and disclosure obligations.
• Porter is senior adviser at FTI Strategic Communications.