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ESG Guidance: Move From Risk to Value Creation

May 17, 2023 by KPMG

Economic downturn, geopolitical pressures, war in Ukraine, the subsequent energy crisis – there is little doubt that 2023 will test the focus and resilience of CEOs and organizations around the world as they try to balance a host of short-term financial pressures with long-term ESG commitments.

A group of seasoned Corporate Affairs and Sustainability leaders came together at WEF in Davos in January 2023, to consider how to maintain and build momentum on the ESG agenda in these uncertain and economically pressured times. Overwhelmingly, the leaders from these global organizations were clear; there was no let-up in their organizations’ ESG commitments. However, there are very real challenges business needs to lean into:

Position ESG as a value creation for business growth instead of a risk to be managed:

It would be naïve not to recognize that, in the course of good governance in 2023, any organization needs to factor ESG risks into its business planning. Whether that is the risk from climate change, or the exposure to modern slavery in a supply chain, the role of Executive Leadership and the Board is to ensure they have clear line of sight of any impact to the long-term viability and profitability of their business.

However, increasingly ESG is an area of opportunity for growth. Sustainable investment is at an all-time high. In early 2022 a report by Moody’s ESG Solutions predicted some $1.35 trillion in sustainable and green bonds will be issued globally. Five years ago, that figure didn’t reach $200 billion. Government incentives and programs such as the Inflation Reduction Act in the US are value-enhancing for organizations participating in green investments.

It is also clear that consumers are continually demanding products that have good ethics behind them. When ESG is considered in the growth conversation, not the risk conversation, new avenues open.

Embed ESG throughout the business:

ESG is no longer the responsibility of a few. ESG has to be considered by risk managers, internal auditors, product strategy, people leaders and beyond – which means we need a significant transfer of knowledge and building of capability. The future of any successful business leader will require an understanding of ESG issues, and specifically of their organization's ESG commitments to ensure we do not create a ‘Say-Do’ gap.

Not only does this require training and thoughtful recruitment throughout the organization; there is also a recognition that the Board needs to govern ESG performance along with financial performance. Appropriate Board composition and structure is critical to only providing effective oversight, but also the ability to reconcile short-term financial objectives with long-term ESG goals.

Have a plan and report against it:

We know ESG transparency and disclosure are moving squarely onto the investor agenda. The ISSB (International Sustainability Standards Board), EFRAG (European Financial Reporting Advisory Group) and SEC (Securities and Exchange Commission in the US) will deliver clear ESG reporting standards through the course of the year. IFRS Chair Erkki Liikanen, announced at Davos that the finalized versions of the first global standards for sustainability and climate-related reporting will be released in June 2023. Quoting the Chair of IOSCO (International Organization of Securities Commissions), Liikanen said, “the aim should be that in 2024, financial reporting and sustainability reporting will go together.”

The hope by this group, is that those standards will be designed to encourage businesses to focus on making a difference in the areas that are most material to them. And, in turn, this reporting will support organizations as they put in place clear transition plans to close the gap on their stated ambitions.

Invest in technology and common data:

Rich ESG data is key to identifying the growth opportunities ESG presents, as well as ensuring true trust, integrity and oversight across this activity. In the bid to report transparently, it is important to set up the technology and the common data sets in advance, aligning a technology ecosystem with an ESG strategy and identifying how extracted data will be utilized. This will not only simplify the process for the future, but it will also help ensure data integrity and avoid having to repeat manual data collection in the future.

Move to a more interconnected view of issues:

Climate change is, without doubt, the most pressing issue on the ESG agenda. However, without repairing our biodiversity or building a circular economy, we will never meet the 1.5 global commitment on climate warming. Equally, the journey to achieve net zero carbon has the potential to impact the most vulnerable in society, to challenge food chains and to elicit unsustainable changes in nature. We must look at the science and the solutions in the round and avoid mishandling of issues today and displacing them for future generations to manage.

What is clear from these leaders is that we have entered the decade of ‘Must-Do’. Last year, scientists from the IPCC (Intergovernmental Panel on Climate Change) warned the world was on ‘Code Red’ for human-driven global warming. Business leaders at Davos were united in understanding that we must speak with one voice in making it clear that our commitment to ESG is not waning and that 2023 can’t be a year of retrenchment. The world can’t afford to kick the ESG can down the road.

We must be ready to prompt, encourage, lead and help the wider world see the business opportunities, not just the risks, presented by transforming the world to address the ESG challenges. Without a healthy world, there is no sustainable business.

Guest Author: Jane Lawrie is global head of corporate affairs at KPMG. Read more KPMG blogs here. More: Read all guest blogs here.

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