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How to become a competitive and attractive business partner of the future using ESG

A major problem in management has always been that unless you can measure the problem, it is difficult/impossible to manage it. This has been particularly so in running an Environmental, Social and Governance compliant businesses/organisation and proving that this is a profitable and economically effective sound business strategy.  It is also, probably, management’s biggest problem today.

'Convergence Cometh, Know Thy Blind Spots'

This report by CRISIL GR&RS, covered in CTMfile on 18 June, identified the 45 KPIs likely to be included in the potential global framework of ESG reporting standards. International Financial Reporting Standards (IFRS) are likely to roll out such standards in collaboration with standard-setting bodies and regional regulators.

For the first time, different strands of reporting standards are finally congregating so investors could get standardised data on ~45 sustainability indicators.

CRISIL conclude that

  1. “We do not see consensus building on sector-specific sustainability reporting standards across global regulators and standard-setting bodies currently. While stock exchanges and regulators might gradually provide guidance on sector-specific metrics for corporates to report on, a full-fledged integration of sector KPIs into mandatory international standards is a long way off.
  2. A globally legitimate standard will bring both benefits and challenges to firms. Asset managers (AMs) will be able to leverage convergence to overcome missing data, and add substantial depth to proprietary frameworks and impact assessment techniques. Nevertheless, the lack of consistent sector-specific metrics at a global level may create blind spots that will have a bearing on ESG integration, and drive demand for proxy and specialised data sets.
  3. For banks, convergence will influence term sheets, and drive two-way climate risk stress testing and innovative social products. However, they will need to address blind spots on sector expertise, external verification, ongoing monitoring and know-how of specialised data-sets and models.”

As we move closer to accepted/recognised ESG comparative reporting standards, is ESG way of operating a ‘good thing’ both economically and practically?

‘Sustainability in the supply chain: The risks and the rewards’

Arthur D Little’s recent report on the level of sustainability in the supply chain and the risks and rewards involved, points out the difficulties in achieving performance in this area which is often plagued “by inadequate transparency, the difficulty of control, and, in many cases, a lack of trust” due to the lack of adequate and recognised ESG standards and measures. But they believe that there “is the potential for true value creation in an increasingly sustainability-aware business environment.”

They continue that, “Companies are asking some fundamental questions today about why they exist (other than simply for creating wealth for investors) and are looking at sustainability across the entire supply chain. In a global landscape where sustainability is considered by some as an essential part of the business but to others it is just a second thought, how can a company manage the risks and upsides associated with sustainability across their supply chain?”

The confusion surrounding sustainability risk

ADL believe that companies need to focus on much more than on environmental risk. These include many different aspects and sources, such as:

  • Health and safety
  • Environmental
  • People
  • Ethics
  • Regulatory
  • Reputation and finance – providing the organization with a positive brand image and reputation – attracting customers, investors, and employees and enhancing competitiveness; ultimately protecting a company from a damaged reputation and financial loss.

Combatting supply chain sustainability risk

Implementing a supply chain sustainability risk management framework (including a defined risk appetite) and supplier engagement strategy require collaboration and communication between numerous functions and stakeholders across the supply chain.

ADL then go on to argue that companies need a supplier qualification and performance management programmes, including pre-assessment, due diligence in collecting information, etc., and then prioritizing suppliers based on risk.

The business case for sustainability

ADL have found that the “The global sustainability landscape is constantly evolving, with (some) governments and multinational companies leading the way to generate real business advantage. On the other hand, there is evidence that poor sustainability performance is becoming very costly, and proposed regulations will potentially make it more so.”

And that sustainable investing is becoming a prominent feature across various investment banks and investment management firms.

ADL CONCLUSIONS

  1. The global sustainability landscape is ever more complex, and sustainability is becoming increasingly important due to an ever-changing regulatory environment, higher societal and shareholder expectations, greater scrutiny, and competitors that gain advantages by exploiting the positive aspects of sustainability in the supply chain.
  2. This complexity can lead to a lack of transparency in sustainability risks across the supply chain, putting organizations in danger of unwitting exposure to risks.
  3. Without careful management and control, organizations may be exposed to significant financial and reputational risk that could cause very serious damage. At the same time, organizations that do have an effective sustainability strategy that covers both internal and external supply chains, combined with effective and proactive risk management systems, will become more competitive and attractive as business partners in the future.

CTMfile take: These two important reports show that ESG only makes sense if ‘done right’. This requires organisations to use appropriate and effective: standards, objectives and disciplines/methodologies. Then and only then, investors and partners will come knocking at your door.  ‘Done wrong’ ESG can very expensive for little or no return.

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