Sustainability is a mainstream issue
As highlighted in the Sustainability and business — the call to action: Build back better report, we started a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making, and how to incorporate these issues into internal and external reporting.
Sustainability is a mainstream issue. Business performance can no longer be purely judged on short-term financial returns to shareholders. Groups — such as customers, workforce, society, governments and investors — all demand greater organisational transparency beyond the traditional financial metrics. Sustainability has fast become the lens through which an organisation is judged. However, sustainability is also an important opportunity to build resilient organisations for the long term.
The sustainability call to action has implications for finance professionals. We are the individuals, teams and finance functions to make a difference. This comes from our skill sets and knowledge in organisational governance, strategy, risk management and performance through metrics and targets. We own the processes, systems, data, management information and reporting that will support our organisations’ transition to sustainable businesses. Finally, we support sustainable decision-making through our business analysis, and assurance of both financial and non-financial data.
The sustainability space — environmental, social and governance (ESG)
The U.N. World Commission on Environment and Development defined sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainability is often thought of as having three pillars or components: economic, environmental and social or, more commonly, profits, planet and people. In this context, its scope is about promoting prosperity and economic growth (profit) while protecting the planet and people across the three interconnected core elements:
Environmental considers how an organisation performs as a steward of nature. This factor includes the nature and extent of non-renewable resources used in production, as well as the release of potentially harmful elements to the air, land or water.
Social examines how an organisation manages relationships with employees, suppliers, customers and the communities where it operates. Social issues range from human rights and health and safety to other responsible business practices, such as product marketing and privacy. Expectations around these issues, as well as environmental issues, define what is often called the social license to operate.
Governance deals with an organisation’s leadership and effective management of the business. In addition to overseeing strategy execution, performance and management of risks, effective governance ensures maintenance of the social license to operate. Specific governance considerations include executive pay, regulatory compliance and shareholder rights, as well as internal controls and internal and external audits.
The ESG organisational maturity journey
An organisation’s ESG story is, and will continue to be, a complex one. However, the more an organisation understands how the three pillars of environmental, social and governance sustainability together affect and shape their strategies and business model, the more business-resilient they become. During the COVID-19 pandemic, it has been noted that, ‘companies with high ESG rankings have outperformed rivals during the crisis’.1 Although we have separated the pillars into three simple introductory briefs, finance professionals and organisations must take a wide, integrated view across the whole sustainability arena.
To help understand the journey organisations take when considering ESG factors, we have fashioned a three-stage model. This will help finance professionals identify where their organisations are in building ESG business resilience and highlight possible knowledge and skills gaps. The model diagram and descriptions that make up the ESG organisational maturity journey are based upon the Future-Fit Foundation business benchmarking methodology and PwC’s ESG Pulse three stages of evolution.2
The sustainability journey has been an evolution, over many years, from corporate social responsibility (CSR) to ESG. CSR was a self-regulation drive of individual organisations promoting good corporate citizenship in the business world and its roots can be traced to the 1950s. It focused an organisation on its efforts to have a positive impact on its employees, consumers, the environment and wider society. Reporting happened annually, and CSR was an add-on to business activities that were often disconnected.
ESG, on the other hand, is seen as core to the way an organisation’s business operates. It measures activities to understand more fully the impact of an organisation’s actions. A focus that integrates sustainability into the strategic objectives, the mission and everyday decisions of an organisation. This evolution includes an expanded role of organisational governance for the whole of its value chain and longer-term responsibilities around issues such as climate change and carbon accounting.
The changing sustainability landscape also mirrors how business responsibility has evolved from a narrow shareholder to an inclusive stakeholder focus.
Shareholder perspective — lacking ESG identification, integration or communication
The focus of a shareholder perspective is primarily on financial returns to shareholders.
There is little consideration of how the three ESG pillars, in combination, affect the organisation’s purpose, strategy or business model.
If sustainability issues are considered, they would likely be reported in a corporate responsibility report and focus on activities of employees in their local communities, demonstrating ‘good corporate citizenship’.
ESG is seen as an ‘add-on’ with no linkage to the long-term organisational strategy or value.
Focus is on short-term gains and rarely beyond the next quarter’s results
Stakeholder perspective — strong ESG identification, limited integration and communication
The focus of a stakeholder perspective is on strong ESG identification, primarily through their risk management processes.
Some integration and overlap across pillars are possible, but unlikely to be embedded into strategic goals or reflected in business model.
Communication is still likely to be focused primarily on governance financial reporting.
Sustainability reporting often confusing with too much information, lacking in relevancy to the intended audience, making industry comparisons difficult.
System value perspective — coherent ESG identification, integration and transparent communication
The focus of a system value perspective is on long-term value creation in a holistic way; governance is aligned with social space and dependent upon the wider environmental pillar.
Vision of the future and understanding of what must be mastered to move towards desired future state informs decision-making; resources are directed to rapid and radical change.
ESG is embedded into the heart of the organisation; ESG risks and opportunities are stress-tested and scenario planning identifies trade-offs and inform strategic and business model decisions.
The holistic approach feeds through into the communication of ESG risk and opportunity factors which form a transparent story focused on long-term value.
