Stating the environmental, social and governance (ESG) policies was once a box-ticking exercise for Australian businesses, summarised on a page in the annual report.
Now, consumers, employees and investors are putting significant pressure on organisations to meet evolving expectations about their responsibility to the environments they operate in.
In short, implementing an authentic, effective ESG strategy has become a business imperative. So what does this mean for Australian organisations?
How do ESG policies affect real world business problems?
ESG is a framework that needs to incorporate authentic and considered programs for each area:
Environmental: Environmental factors include how a company manages its impact on the natural world, including its carbon footprint, greenhouse gas emissions, waste management, resource depletion, energy consumption and efficiency, deforestation, biodiversity loss, and more.
Social: The social aspect evaluates how a company interacts with society, such as its relationships with customers, employees and the communities in which it operates. This includes labour standards in the supply chain; diversity, equity and inclusion; data protection and privacy; and more routine issues such as adherence to workplace health and safety. Aspects around employee engagement and community relations are also significant social factors.
Governance: Governance refers to the rules or principles defining rights, responsibilities and expectations between different stakeholders. Governance factors include the board composition and diversity, management structure, executive remuneration, company policies and values, auditing and corporate compliance, and shareholder rights.
The state of ESG across Australia
While Australian companies realise they need to embrace ESG, the degree to which ESG has been embedded into business strategies is highly varied, particularly in different industries.
Almost all ASX 200 companies now disclose to investors how they are managing ESG risks to some degree, with nearly three-quarters reporting at a comprehensive or detailed level, up from only 31% in 2008, according to the Australian Council of Superannuation Investors (ACSI) ESG Reporting Trends 2022 report.
Utilities, consumer staples, materials and real estate sectors led the way regarding ESG reporting, as they have identifiable environmental and social risks.
By contrast, healthcare and technology were labelled “laggards” in the same report – both have fewer than 40% of companies with a ‘Detailed’ or ‘Comprehensive’ rating.
The Australian mining industry is increasingly addressing ESG as a matter of urgency.
In a recent survey by leading insurance broker and risk advisor Marsh, 90% of respondents in the mining industry ranked climate change and ESG as an important, or the most important, issue for their operations.
However, 44% of respondents said they have an ineffective or no process for identifying, responding to, and implementing changes based on ESG-related factors.
This agrees with an analysis of the ASX 200 by PwC, which found that 42% of the ASX 200 had insufficient reporting on ESG performance to warrant inclusion in the study.
So why are businesses hesitating?
The cost of ESG strategies is a perceived barrier. Significant financial costs are involved for businesses to realise sustainability and social ambitions. As cited by EY, The Economist made a specific cost estimate for offsetting a company’s entire carbon footprint, estimated to be about 0.4% of annual revenues. And this is only one aspect of one ESG factor.
2. Lack of standardised reporting regulations
Businesses don’t have to report on ESG legally. The Australian Government does not yet comprehensively regulate ESG, though some new regulations and legislation are in the pipeline.
This also leaves a gap for businesses to “greenwash” by applying ESG frameworks which do not address the key risks. In a recent internet sweep, the Australian Competition and Consumer Commission (ACCC) found 57% of businesses reviewed were making potentially misleading environmental claims.
Often, leaders are unclear about ESG. They’re confused by the various frameworks and unsure how to embed ESG into their business.
Some organisations can fall into the trap of thinking they don’t have a high exposure to certain factors, such as climate change, and therefore their ESG risks are not as high.
This comes from a common misconception that ESG is only about environmental impact. Companies need to think more broadly about what ESG risks they might face, especially concerning supply chains.
ESG is good for business
Strong ESG performance is good for society, the environment, and it’s good for business. Companies that lead in ESG are magnets for investment, talent, and loyal customers.
Here are five benefits of an effective and authentic ESG strategy:
1. Long-term financial gains
A study by sustainability data firm ESG Book found that companies with strong ESG performance had an average return on equity of 10.1%, compared to 7.4% for those with weak ESG performance.
Furthermore, PwC reports that data on carbon emissions, pay equity, reconciliation action, diversity, inclusion and well-being are now recognised as “key determinants of long-term financial strength and resilience“.
2. Builds customer loyalty
Consumers are voting for ESG with their wallets. Australian research technology company Glow found that 64% of Australian consumers list social and environmental responsibility as crucial decision drivers when choosing a brand. One in five say they have switched brands in the last 12 months based on ESG performance.
3. Attracts and retains employees
An effective ESG strategy is becoming increasingly important in attracting and retaining talent, particularly for Gen Z (born since 1997) and millennials (born between 1981 and 1996).
A survey by Esker, reported in HRD Magazine, revealed 48% of workers believe it is extremely important for businesses to prioritise sustainability practices and values in today’s society, with a further third (32%) saying it is somewhat important.
A report by PwC found that 75% of staff want to work for an organisation that positively contributes to society – such as an organisation that leads on ESG.
4. Social and community benefits
The “S” in ESG encourages a company to connect with its community by understanding the business’s role within broader society. Whether through volunteering or larger community projects, an authentic ESG strategy means a business is looking to work with local communities to benefit society and the local economy.
5. More attractive to investors
Investors are focusing their attention on ESG issues. They increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty, according to EY.
However, it’s critical to note that investors are looking for genuine commitment and actions, not just box-ticking.
Who’s in charge of ESG?
ESG is embedded into the entire organisation’s decisions, starting right at the top. CEOs must ensure their ESG strategy aligns with their financial and organisational objectives. This means working with their boards to ensure that ESG is integrated into the company’s strategy and goals and that the C-suite is aligned.
But when it comes to driving the ESG strategy, everyone from CFOs and CTOs to CMOs and COOs are taking the lead. It’s a cross-functional effort.
The CMO manages community liaison and brand building. HR manages all things related to employees, such as labour practices, and diversity, equity and inclusion. The CFO and legal are heavily involved in compliance, reporting and information disclosure to ensure there is no risk of ‘greenwashing’. And while IT may not first come to mind when considering ESG, the CTO has a critical role in collecting and measuring ESG data.
In a survey by McKinsey & Company, 94% of CXOs across all functions reported that their responsibilities relating to ESG expanded compared with three years ago. Almost half (47%) indicated that the increased responsibilities were significant.
As a result, the current level of demand for leaders experienced in ESG is unprecedented.
To meet this need, some businesses are creating a new Chief Sustainability Officer (CSO) role to specifically focus on implementing the ESG strategy.
Where the CEO might set the broader vision and take overall accountability for driving change, the CSO focuses on engagement, communication and embedding the ESG strategy throughout the organisation. They connect the dots on ESG, support functional heads in collaborating and ensure they are clear about their roles in delivering the strategy.
Therefore, a CSO should be highly skilled in engaging key leaders and promoting cross-organisational collaboration.
ESG is a way of doing business
Business leaders should not merely see ESG as a compliance and regulatory set of issues – it is an opportunity to innovate and think about the future of the business. To embrace this opportunity, Australian companies need to ensure they have access to the right skills in leaders across the business.
For over 20 years, Occulus has provided Executive Search services in ANZ and Asia, which means we can focus on delivering the C-suite talent with the right ESG skills for your business.