By Carlos Blanco and Tony Fiddes
A stakeholder-centric model of doing business is maturing across the world. Businesses are being held to account for their impact on the planet. Doing no harm does not cut it anymore. Businesses need to be net positive – that is, they need to demonstrate how the world is a better place thanks to their actions.
Three trends are driving the new model
This new stakeholder-centric model is reflected in three trends that highlight environmental, social and governance (ESG) issues and broader expectations around responsible business.
- Increasing expectations from employees, customers and society that businesses act on great common challenges. On issues ranging from climate change to social justice, citizens across the world believe that businesses should fill the void left by government. More than 65 per cent of respondents to the Edelman Trust Barometer survey want CEOs to step in when government fails, take the lead on change and hold themselves accountable to the public and not just to shareholders. Customers are flexing their influence through buying decisions that favour more sustainable products and more purposeful businesses. Meanwhile, employees expect their organisations to use ESG activities to further the organisation’s purpose. When companies fail to take heed they face employee activism, consumer backlash and the potential loss of their social licence to operate.
- Increasing pressure to measure and disclose an organisation’s ESG performance. Sustainability reporting (as it is often described) is incrementally becoming mandatory across the world, with the recently formed International Sustainability Standards Board leading the way. Many countries are making climate-related disclosure mandatory through applying the standards developed by the Taskforce for Climate-related Financial Disclosures. In June 2021, the G7 announced its support for moving toward mandatory climate-related financial disclosures. In the UK, a new taskforce will write rules forcing financial firms and listed companies to publish net zero transition plans from next year. Although not yet mandatory in Australia, over 80 per cent of the ASX100 disclosed climate-related risks in their reporting in 2021.
- Increasing realisation that an authentic, purpose-driven ESG strategy can ‘grow the pie’ and deliver value for multiple stakeholders, including shareholders. This is not to say it is a pure win-win. There are always trade-offs in life, but the growing evidence base demonstrates that positive ESG performance and positive financial performance usually go together. A meta-study analysing 1,000 studies on the link between ESG and financial performance from 2015 to 2020 found that:
- ESG can improve financial performance over longer time horizons
- sustainability initiatives at corporations can drive better financial performance through improved risk management and greater innovation
- ESG disclosure on its own does not drive financial performance.
Authentic ESG strategies create a golden thread that connects purpose, strategy and customer
Authentic and successful ESG integration, not just box ticking, can create lasting competitive advantage. This is critical for boards and executive teams. The drive for an ESG strategy that creates competitive advantage comes up often in our conversations with clients. It usually comes up in tandem with discussions about an organisation’s purpose and its customers. This discussion often leads to the realisation that a carefully designed ESG strategy can be a golden thread that connects purpose, strategy, and customer to deliver sustainable competitive advantage.
Leaders need to explore three questions to find their golden thread
Achieving this golden thread is not easy. In our experience boards and executive teams need to stimulate a broad understanding of ESG and the opportunities it offers their organisation. Preconceived notions of ESG or corporate social responsibility as philanthropy need to be left at the door. An authentic and impactful ESG strategy will touch every facet of an organisation.
Exploring these three questions in sequence can help organisations to find their golden thread:
- Where should we focus our ESG efforts? It is important that ESG does not try to be everything at once. ESG efforts need to be prioritised in line with strategy. A materiality assessment can help organisations to identify the issues that should get their most attention. A key concept is double materiality, which acknowledges that a business should focus on ESG issues that (1) influence their financial and business performance and (2) are material to how an organisation impacts people and planet. For example, the impacts of climate change may materially affect the financial performance of an organisation’s products, services or assets. At the same time, an organisation’s operations may contribute to worsening climate change through carbon emissions. In this case an organisation needs to consider climate change from two angles: how climate change impacts their bottom line and how their organisation impacts the global carbon budget’s bottom line. Frameworks such as the Sustainable Development Goals and the MSCI ESG Industry Materiality Map provide a useful starting point to explore where to focus.
- What levers should we use to activate our ESG strategy? Once you identify where to play you need to identify what levers you can pull to activate your ESG strategy. To help achieve this an organisation can consider eight levers of influence.
- How ‘brave’ do we want to be on ESG? The final question is the most important. Answering the two earlier questions requires the board and executive to think deeply about the impact they want to have. An organisation should consider three settings when shaping the look and feel of their ESG strategy – leadership, focus, and activity. In combination, these three settings determine how ‘brave’ you might be on ESG.
Being braver on ESG is not necessarily the right move in every case and these settings can shift over time. Organisations starting their journey will want to get their own house in order first. If you do not have your own house in order it is nearly impossible to position yourself as distinguished or to be loud on these issues. If you decide to be braver on ESG you need to walk the talk. Overpromising and underdelivering can kill a brand’s reputation. How brave you aspire to be also informs how you use ESG to position yourself in the market and create sustainable competitive advantage.
In our experience, the process of getting board members and executive teams to explore these settings will surface areas of commonality and difference. This process is a powerful way to build a shared understanding of the level of ambition your ESG strategy will aim for.
Organisations need to turn aspiration into strategy
Exploring the three questions is only the beginning. Organisations need to take the answers to where, what and how brave and feed them into a rigorous strategic planning process. This process needs to combine the analytical rigour of a business strategy with expansive stakeholder engagement that includes employees, customers and partners.
From working with clients to develop ESG strategies, we know that long-term success comes from a strong foundation built on answering the hard questions that will help boards and executive teams illuminate the lasting impact and legacy they want to leave behind.
Get in touch to discuss how we can help you to develop your ESG agenda.
Connect with Carlos Blanco and Tony Fiddes on LinkedIn.
Prepared with input from James Rendoth and Jesse Mo.
A version of this article was first published in The Weekend Australian on 4-5 June 2022.
 Edelman trust barometer 2021: Global Report (2021), Edelman
 Sustainable Market Share Index (2021), NYU Stern Centre for Sustainable Business
 Global Trends 2021: Aftershocks and continuity (2021), IPSOS
 The Australian employee perspective on ESG (2021), BCG
 Global Finance Ministers Discuss Transition to Net Zero (2021), UNFCCC
 Britain moves ahead with mandatory climate plans for companies (2022), Reuters
 Climate change – Tracking trends in ASX100 climate-related disclosures (2021), Symons, J. and Navidi, P.
 ESG and financial performance: uncovering the relationship by aggregating evidence from 1,000 plus studies published between 2015 – 2020 (2021), NYU Stern
 Making Global Goals Local Business (2022), United Nations Global Compact
 ESG Industry Materiality Map (2022), MSCI