From “Nice to Have” to Strategic: The Evolution of Sustainability Towards ESG

By +SocialGood Connector Gabriel Cecchini

The private sector has a key role to play in advancing the Sustainable Development Goals (SDGs) / 2030 Agenda. Companies have not only taken note of this, but they are also in many cases leading the way, taking actions to decisively integrate sustainability objectives into strategic business decisions. Many of them, as well as other stakeholders such as investors and regulators, have gone a step further, moving towards adopting a systematic framework of ESG (Environmental, Social & Governance) standards, taking into account both quantitative and qualitative metrics with respect to environmental, social and governance factors.

Several organizations, such as the Sustainability Accounting Standards Board (SASB) or the International Integrated Reporting Council (IICC), are well-advanced in the development of strict standards that can be extended by sector or industry and that allow the measurement and comparison of corporate ESG performances, along with the traditional financial information that companies are used to reporting to regulatory authorities. In particular, SASB is finalizing standards that are intended to be used in the future by companies listed on the New York Stock Exchange (NYSE) in order to guide the way they report ESG information and metrics to the Securities and Exchange Commission (SEC) in their filings.

In what many are already calling the year (2017) in which the ESG framework is reaching its “tipping point”, companies are taking a step forward and taking the lead in setting ambitious targets aligned with the Sustainable Development Goals on material aspects that have a strategic impact within their company, in their sectors and to society at large. These transitions include a more efficient use of water and energy in their operations, the reduction of their carbon footprint, waste treatment, more transparent and fair value chains, the promotion of inclusion and non-discrimination behaviors among their employees, etc.

It is not only a question of mitigating risks and the impact that their operations have on their environments (a “defensive” stance), but most importantly, it’s about proactively seeking out new opportunities that will allow them to find solutions in innovative ways, further helping them to accelerate their adjustment to more sustainable business models while simultaneously creating additional value and revenue sources for the organizations that carry out these actions. In other words: there are many ways in which a sound ESG performance can lead to (and be tied to) a sound financial performance.

As Mindy Lubber, CEO & President of the nonprofit organization CERES, said during the “We the Future” conference organized by the Skoll Foundation, TED, and United Nations Foundation during the Global Goals Week in New York, what was unthinkable just 10 years ago is now a reality: one company after another, one CEO after another, are taking the lead in advocating and advancing sustainability goals like never before, even filling in the temporary voids left by other important actors such as national states or politicians (such as in the case of the US withdrawal from the Paris Climate Agreement).

This time is not about cosmetics, marketing or PR “nice to have” corporate social responsibility programs: it’s about a decisive behavioral change that needs to be adopted in order for the long-term survival of their organizations. Corporate sustainability models are thus being strategically embedded from the top of the organization (Boards and Senior Management) down to/across the entire supply chain and its diverse actors. During Lubber’s conversation with Mehmood Khan, Vice Chair & Chief Scientific Officer, PepsiCo, the latter explained how PepsiCo has no one specific position in charge of sustainability and that there is no separation between the sustainable policy area and the operational side of the business. Quite the contrary, sustainability is integrated into the structure and operations of the company, supervised by the Board of Directors through a specific subcommittee, and directly managed by the company´s Executive Board. Not a single strategic decision is made or important projects (including R&D ones) considered without first being filtered through sustainability lenses.

In a complementary way, individual and institutional investors (e.g., CalPERS, Norway’s Oil Fund, and the like), asset managers, and other actors in the investment community are increasingly demanding companies to report ESG information in order to make investment decisions that take into account non-financial risks and opportunities they face in the short-, medium- and, especially, long term. Asset managers such as State Street, BlackRock and Vanguard are actively engaging with companies they invest in, requiring them to take into account, report, and make changes if necessary on aspects related to a broad array of ESG issues, from climate change (e.g., de-carbonization, transition to non-fossil energies) to gender and diversity (e.g., number of women in senior management and Board positions) up to the quality of governance (e.g., CEO duality, reputational risk, culture of integrity) within their organizations.

In her presentation and also in her interview with +SocialGood during the Social Good Summit held last September 17th in New York, Rina Kupferschmid-Rojas, Head of Sustainable Finance at UBS & Society, detailed the spectrum of actions investors can follow in order to ensure that they take ESG dimensions into account: from the exclusion of certain companies or entire sectors from their portfolios — due to their negative reputations or whose contribution is regarded as negative in terms social impact — through the integration of some or several ESG factors into the analysis up to a comprehensive strategy of “impact investing” where both financial results as well as a positive ESG performance are sought after. According to Global Sustainable Investment Alliance’s recent report, sustainable investing is one of the fastest-growing segments in finance, with assets under management that have increased 61 percent between 2012 to 2014, totaling up to USD 21 trillion.

Companies, their leaders and their employees, and a vast array of stakeholders, most importantly investors, are already getting on board in the search for strategic sustainability integration and reporting, and ESG is proving to be the new framework and lingua franca within which this multi-stakeholder dialogue and engagement is successfully taking place.