NICOLA ROBINS: Beyond compliance to strategic integration in ESG
The future of sustainability demands a shift in investor mindsets, favoring nuanced, context-specific strategies over standardisation to capture long-term value and resilience
Sustainability integration goes beyond compliance, harm reduction and being responsible. It recognises that any decision and action may be improved by considering material environmental, social & governance (ESG) issues.
These decisions include innovation in products, processes and business models.
As social and environmental trends contribute to a growing poly-crisis, improving every decision from a sustainability perspective will increasingly impact competitive advantage.
While the recent investor awakening has pushed ESG issues up the agenda, their valuation methodologies do not necessarily support a longer-term strategic view.
Many investors prioritise short-term risk over long-term value, a bias reinforced by the discount rate. Though some investors consider the bigger picture, many still weight their valuation algorithms to reward risk reduction over opportunity capture.
To facilitate comparison, the algorithm focuses on factors that can be standardised.
ESG risk is easier to standardise across the sector. An individual company’s ability to seize strategic opportunities depends on their unique combination of assets and capabilities, and how effectively they are used in pursuit of sustainability.
Taking the circular economy as an example, one mining company’s ability to perform may depend on legacy smelters, such as Glencore. Another company may have invested in a network of small collectors to collect used catalysts. These assets are difficult to compare, but they will determine the leaders in the circular race. The same goes for virtually every other sustainability or ESG issue. It always depends.
There is little doubt that material local nuances are being lost in the investor-led global drive to standardise ESG disclosure. While net-zero carbon emissions may legitimately top the priority list for some mining operations, it may not be the primary concern for every operation based in SA.
Even if it is, the specific way that a company opts to address the issue may be different. Effective assessment of performance requires context-informed indicators, which are going to sweat the algorithms. Organisations seek resilience, never more so than in times of uncertainty.
Resilience is about relationship and how we achieve it depends on who we are and what is around us. No organisation can afford to implement global standards (often set by practitioners in the Global North) without due appreciation of context.
An individual company’s ability to seize strategic opportunities depends on their unique combination of assets and capabilities, and how effectively they are used in pursuit of sustainability.
For sustainability to become a critical element of organisational resilience will require many of us to shift our views. “Either/or” approaches must give way to “both/and”. Investors who assume that sustainability performance can be tracked better simply by increasing the number of ESG factors will find themselves wondering what happened. Organisations must balance their focus on investor expectations with improving their ability to take sustainability decisions with a deep appreciation of context, internal and external. Consultants with templates and quick solutions need not apply. As suggested earlier, context is not just about risk. It may also require executives to take a proactive role in engaging investors who operate from a more limited view.
Large complex organisations take years to change; investors can change their algorithms overnight. Sector-based ESG expectations are a reasonable start, but investors will have to augment these methodologies over the next few years. They have every reason to improve their ability to track how effectively organisations respond to the nuances of their particular context.
While it may not immediately result in improved investor ratings or sentiment, it makes sense for organisations to focus on strategic integration in advance of the investment community.
• Robins is cofounder and partner at Incite.
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