Measuring up: Achieving resilience through ESG
September 19, 2023
September 19, 2023
Companies are progressing when it comes to measuring sustainability, announcing net zero targets, and making decarbonization commitments. In fact, 99% of S&P 500 companies reported environmental, social and governance (ESG) related information, and almost all of them have referenced at least one ESG reporting framework or standard.1
Which makes sense. Growing regulatory pressure and increased public scrutiny have moved sustainability from “nice-to-have,” to “must-have,” and leading companies are embedding it throughout their operations and reaping the rewards. Our research shows a correlation between ESG performance and profitable growth, for companies willing to take an integrated view of risk and impact that goes beyond just reporting and disclosures.
Those with consistently high ESG performance tended to score 2.6x times higher on total shareholder returns and enjoyed 4.7x higher operating margins than companies with medium ESG performance.2 They are more resilient—better at understanding ESG risks, managing resources and able to grasp opportunities for growth in a low-carbon economy.
Yet despite signs of real progress, too many companies are struggling when it comes to driving action and measuring progress. It may be because businesses (and most humans, for that matter) seem to respond faster to motivations that are “sticks” versus “carrots.” Punishment over reward.
Sticks are obvious: Like regulations being put in place such as CSRD, ESRS in the EU and proposed SEC rules in the US. And they tend to produce sustainability actions that are “bolt-ons.” Reactive, one-off interventions. This makes it impossible to effectively embed sustainability throughout the organization and capture the benefits from carrots—the ability to capitalize on growth opportunities.
What’s needed? A transformation-led approach to ESG, one built on the backbone of a digital core.
Broadly speaking, companies responding to carrots—things like incentives, cost savings and customer loyalty—have interventions that tend to be more deeply embedded throughout the organization, using data to drive business decisions with sustainability at the heart of strategy.
When it comes to reporting performance, companies need to figure out three things: What to measure? How to measure it? And how to put the data into a context? Without defining the right context, they won’t gather the right data or set the right metrics. And ultimately, they won’t make the right decisions. That means rethinking how they define enterprise value performance beyond reporting.
A strong ESG and sustainability strategy, one that is clearly linked to outcome-driven metrics, can lead to better business performance in several ways:
Once the new strategy is set, the organization needs to harness the new data and apply it. Trust and transparency are at the heart of driving sustainable change and necessitate fundamental changes to core business processes and data capture. Automated data flows, end-to-end visibility of data, using the power of analytics to drive insights and decisions are all key to this data-led transformation. The ability to measure end-to-end carbon footprints across processes and products, improving transparency and traceability across global supply chains, will be critical. By collecting and analyzing data on various aspects of a company's operations, leaders can identify areas where they need to improve, track their progress, and make informed decisions for sustainable investments.
People are at the heart of all change. Companies need to develop a program to embed sustainability in the DNA of all processes across the organization. This includes hardwiring the company’s purpose into the culture, clarifying governance, defining inclusion and diversity ambitions, and completing upskilling and reskilling plans. By infusing sustainability into every role, with clear lines of accountability, companies will ensure it is linked to the HR agenda and remove silos that may have hindered previous efforts. Companies committed to ethical and responsible business practices can build stronger relationships with their stakeholders, including customers, employees, and investors. This can lead to increased loyalty, engagement, and support, which can drive business growth and stability.
Embedding sustainability and a strong digital core lays the foundation for Total Enterprise Reinvention—a paradigm shift from a reporting-led to a sustainable, performance-driven organization. It creates benefits including cost savings, increased efficiency, improved brand reputation and long-term business viability.
To balance the carrot and stick approach when it comes to ESG measurement, here are different actions on a short, medium, and long-term horizon:
Short-term (6-12 months)
Medium-term (1-2 years)
Long-term (3-5 years)
In reality, companies will likely have to balance responding to the sticks of regulation along with the carrots of subsidies and meeting stakeholder demand. But those that aren’t waiting for regulations to get their measurements in order are more resilient and better able to grasp opportunities for growth. Better still, they enjoy the best carrot of all: knowing they’re doing right by both the planet and their company’s profits.
This blog is part of a series discussing how leaders can embed sustainability into different aspects of their organizations to create value and impact. The other topics are: