The sixth assessment report from IPCC, the Intergovernmental Panel On Climate Change, is unequivocal – it is indeed late, and we are facing certain irreversible changes. The report shows that the world will probably reach or exceed 1.5˚C of warming within just the next two decades. Whether we limit the warming to this level and prevent the most severe climate impacts depends on actions taken this decade. So, this decade is called the decade of action on sustainability. Only with ambitious emission cuts can the world keep the global temperature rise to 1.5˚C, the limit scientists say is necessary for preventing the worst climate impacts. Under a high-emission scenario, the IPCC finds the world may warm by 4.4˚C by 2100 — with catastrophic results.
Earlier in 2015, 193 United Nations member countries adopted a new sustainable development agenda and global agreement on climate change. In 2016, they were presented with an unprecedented opportunity to bring the world together to improve people's lives through the 17 #GlobalGoals. UN also recognized multinational corporations as central players in achieving its agenda for 2030 and beyond.
In alignment with this agenda, organizations started to focus on understanding what sustainability is and why it is important for businesses and the community at large during the last decade. In the coming decade, firms will focus on how to execute their sustainable development goals and evolve organizations’ sustainable enterprise models. It has been established in multiple empirical studies that improved performance on Environmental, Socials and Governance (ESG ) factors have a positive impact on the brand value that can lead to new customers and employee retention, resulting in quantifiable business benefits.
For organizations, the key imperatives to move toward sustainable development are – 1. Purpose-driven consumers, who are ESG conscious, embrace the idea of sustainability and choose brands that align with ESG principles, 2. Activist investors force organizations to make sustainability a central part of their strategy with the belief that ESG compliance will lead to higher profitability and future sustainability 3. Regulation and ESG compliance in accordance with the UN sustainable development goals to ensure transparency in ESG matrices reporting to avoid greenwashing. 4. Social license to operate and gain acceptance in the local communities to derive business value in the long term.
ESG has become part of boardroom discussions, but moving toward sustainability is not a straightforward task. Organizations must have sustainability at the core of their business strategy. The journey from identification of ESG related challenges to ESG strategy and execution is a complex process from a descriptive and normative standpoint.
- The complexity lies in defining the process and roadmap an organization must undertake in its ‘sustainability journey by taking a holistic, not a siloed approach. It means that the shift toward sustainability requires collaborative and multi-disciplinary programs instead of small, independent function or business unit-specific efforts by few individuals. It also necessitates dedicated leadership focus to execute ESG strategy.
- Another dimension to ESG process and roadmap definition is overcoming short-termism and Tragedy of Commons in organization decision-making, as highlighted by behavioral economics. ESG transformation is a long-term process and requires short- and medium-term milestones for successful execution. The same notion was highlighted in the letter Larry Fink, the CEO of BlackRock, wrote to CEOs of S&P 500 companies. (Full letter)
- Reporting ESG related matrices adds another dimension of complexity with establishing trust in ESG-related data quality, overcoming the lack of standard reporting benchmarks, and identifying the right metrices; to be tracked based on materiality aspects.
- Right partnership Ecosystem – ESG reporting journey requires partnerships with the right organizations. Some organizations can help in drafting the ESG visions (e.g., Ellen Macarthur Foundation, Ceres Foundation, Givewith), ESG Reporting (e.g., Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Morgan Stanley Capital International (MSCI), etc.), 3rd party data providers (e.g., FactSet, Refinitiv, etc.), ESG-specific solutions providers (e.g., Arabseque, Sustainalytics, TrueValueLabs).
To execute the ESG strategy, organizations need a trusted digital technology partner for leveraging the right set of digital technologies to implement ESG-related initiatives.
Starting a journey toward sustainability –
- Define the purpose of creating social value to augment economic value. Go beyond investors and customers to include employees, suppliers, government, and communities. This broader purpose necessitates organizations to look beyond pleonexia. If secondary stakeholders are unsatisfied, they can undermine the company’s value creation process. E.g., the government can bring in new regulations. So, it is essential to nurture relationships with both primary and secondary stakeholders.
- Governance – The governance structure must align with the purpose. It should create roles and representations to all classes of shareholders and invite them to engage in key decisions, implementation and development of alternatives, selection process, etc.
- Define the right set of activities to focus on – It requires an understanding of what type of activities are required, the issues to be tackled, analyzing alternatives, and continuous improvement to those activities. Activities must align with specific focus areas such as engaging with suppliers compliant with ESG, the well-being of employees and communities and focusing on innovation to reduce carbon footprint.
- Capabilities – It is a key building block of executing sustainability strategy and starts with identifying capabilities that must be augmented by partnering with the right organizations. This also includes broader capabilities to bring change by reimagining how things are done currently, developing better relations with communities, employees, etc.
- Employee enablement and culture of shared value - Finally, it boils down to employees coming up with new ideas and executing them. It is important to enable people to understand the organization’s sustainability strategy and purpose, their role in executing it, and why it is important personally and professionally. Organizations must nurture the mindset of employees toward the broader purpose of creating a social value.
To sum up, while the journey toward a sustainable future is complex, the time to act has already arrived.