COP26 will bring a wave of environmental, social and corporate governance (ESG) scrutiny, says Richard Wall, Founder and CEO of Emex. Here, he asks what can UK businesses do to prepare?
In the past five years, environmental, social and corporate governance (ESG) has been steadily climbing the corporate agenda, but only few organisations have properly embedded it across their business. Many are still content to view it as an annual reporting requirement, best left to the so-called sustainability team, or as a means of placating stakeholder concerns.
This passive, reactive mindset might have sufficed before, but it feels disastrously out of place and backward in the current context. More is expected from businesses than merely reacting to regulatory pressure or the occasional scandal.
While that might seem like a constructive exercise, reports are not often the drivers of action and debate they are touted as. Perversely, they can act as a smokescreen, disguising deep-seated issues and institutional inertia.
Those challenges are distinct events and moments in time, while ESG is best viewed as a journey – a serious and embedded effort by a business to work out its place in society and how to best create value for its stakeholders. It is an open-ended and challenging exercise that requires significant time and resource investment, rather than a switch that can just be flipped.
COP26 is fast approaching, and it will shine a global spotlight not only on the UK Government but also domestic businesses. More than one in five of the world’s largest organisations have committed to some version of a net zero goal. A great many more will no doubt be driven to make new, bolder ESG commitments. Some might be reacting to stakeholder pressure but, to genuinely rise to the demands of the moment, businesses will need to adopt a long-term, strategic mindset when it comes to ESG.
The limits of a “reporting” mindset
There is nothing wrong with the notion of annual sustainability reports. Done well and diligently, they are a useful tool to document and communicate a business’ performance in relation to ESG. They can enable stakeholders to hold businesses accountable for their progress (or lack thereof) – an information asset that can lead to hard conversations and catalyse action and course corrections.
While that might seem like a constructive exercise, reports are not often the drivers of action and debate they are touted as. Perversely, they can act as a smokescreen, disguising deep-seated issues and institutional inertia. Some businesses, in other words, have developed a tokenistic reliance on reports, instead of embedding the systems and culture that are needed to drive meaningful change.
This can be easily accounted for. While ESG is not a new term, it represents a nascent function within most organisations. Businesses are, in effect, playing catch-up with the pressing realities dictated by climate change as well as a raft of social and ethical issues including diversity and human rights across their supply chains. To address those challenges, many have created ESG or sustainability teams.
Those tend to be limited, under-resourced, and peripheral departments nested within organisations whose headcounts can run in the hundreds of thousands. They normally surface when a reporting “milestone” is approaching but are otherwise invisible or unknown to most employees.
It is not the size of those teams that should concern us, though. It is what they may signal on behalf of the organisation. Or, rather, what they do not signal: a serious commitment to embedding an ESG infrastructure and culture across the business.
ESG as a journey
Managing and reporting sustainability using an annual reporting cycle will only take a business so far. The lack of frequency and velocity of sustainability information provided into the public domain – especially when compared to functions that in the Business 3.0 model have been deemed business-critical such as sales or finance – should give us pause for thought and demonstrates the nascency of the sustainability function and ESG reporting.
As long as businesses, investors and other stakeholders are content with the annual reporting cycle, it is unlikely the higher expectations now demanded will be met or surpassed – if anything, targets for different ESG metrics will continue to underperform and data quality will remain poor.
Small and siloed sustainability teams and departments, unsupported by proper systems that readily integrate with the rest of an organisations’ IT infrastructure, are reflections of an old and tired mindset that is no longer serving anyone – not least the organisation’s long-term ESG goals.
In the new model of ESG, businesses should consider building the requisite infrastructure that can best support their ESG pledges and commitments. This is daily, weekly, monthly and annual collection, processing and management of sustainability information and measurement of performance in line with the methodologies used in other key business functions.
Small and siloed sustainability teams and departments, unsupported by proper systems that readily integrate with the rest of an organisations’ IT infrastructure, are reflections of an old and tired mindset that is no longer serving anyone
It involves the creation of robust systems and infrastructure, operated by qualified people and teams to measure, manage, and improve performance. Crucially, it relies on a culture that sees ESG embedded across the business, rather than sitting in a silo. By doing so a business is set up for long-term success and in a position to back up external ESG ratings and defend its reputation.
Putting in place software systems to measure, manage and improve sustainability (ESG) performance is a major focus for us here at Emex. This involves working with businesses at the outset or at any point of their ESG journey to deploy systems that drive meaningful change and performance.
With COP26 just around the corner, UK businesses would do well to abandon the belief that ESG expectations can be met overnight. They should also take a step back and critically assess their institutional reliance on annual sustainability reports. Are they fit for purpose, or do they mask underlying issues?
Businesses that switch out of the reporting mindset will realise that embedding ESG is a journey – a long process that involves asking the hardest types of questions about a company’s future and relevance in the world. It takes time and a great deal of institutional learning, but it is nothing short of what society expects.
Richard Wall is the Founder and CEO of Emex, which provides ESG and EHS software solutions to businesses