5 minute read 26 Apr 2021
Integrating ESG into your business

Why integrating ESG into your business could be the key to its resilience

Authors
Chaitanya Kalia

EY India Climate Change and Sustainability Services Leader

Committed to sustainable development, a climate change expert, advisor on non-financial reporting. Digitally savvy and a nature lover. Amateur cyclist, swimmer and an ornithologist.

Shailesh Tyagi

EY India Climate Change and Sustainability Services Partner

Committed to ESG, decarbonization and safety performance transformation. Advocate for workplace diversity. Holds a blackbelt in Taekwondo and a fitness enthusiast.

5 minute read 26 Apr 2021

As businesses navigate through changes brought in by globalization, technology, society and consumer behavior, embedding Environment, Social, and Governance (ESG) factors into their core strategy can help deliver long-term value.

In brief:

  • There has been a growing impetus regarding building resilience and growing recognition of resilience in business communication.
  • Critically, long-term resilience advocates businesses that meet stakeholder expectations and have sustainable business models in addition to profitability.
  • The COVID-19 pandemic has reinforced importance of ESG framework as a key approach to long term business resilience and further accelerated the transition to multi-stakeholder approach.

The novel coronavirus has caused an unprecedented level of disruption in the ecosystem. The situation has been unpredictable with organizational exposure uniquely impacted by industries, geographies, and operating models. These factors have been compounded by complex supply chains and global travel. In this time of uncertainty, organisations with an agile and transparent system has been able to reshape and realign. This highlights why ESG is critical to business resilience. This article gives an idea about the practices that a business can imbibe to ensure resilience in the future.

  1. Clear communication with relevant stakeholders: An organization that is decisive and agile is based on a system of communication and stakeholder engagement which can be built by:
    • Innovating communication channels to minimize physical interactions
    • Involve and recognize employee contribution and keep them informed through communication
    • Stakeholder communication involving supply stock, contingency and risk planning
    • Involving and keeping stakeholders like government agencies, investors and creditors of necessary amendments
  2. Prioritizing people safety and continuous engagement: COVID-19 has made it even more clear about the social aspect of incorporating ESG in the business and employee safety. To build resilience, organizations need to adopt flexible ways to ensure the health and well-being of employees.
  3. Re-examining strategy for business continuity: Maintaining strict discipline on working capital and managing inventory build-up will help businesses to act during crises. Further, it is imperative to be creative and maintain regular contact with suppliers to identify any potential risks and enhance business resilience
  4. Technology and information security: To build business resilience and have an agile system, it is imperative that the infrastructure around technology that maintains utmost security should be built with hardware and software support to enable smooth operation.
  5. Redesigning risk processes for long-term: Risk management is directly linked with resilience in terms of planning and reducing vulnerabilities. Hence, it is imperative to assess risk for the long-term by integrating ESG into your business so that organizations can build resilience over a longer period of time.
  6. Maximize the use of government support policies: Organizations should track regulatory notifications to make necessary changes in the operating environment to maintain compliance and make informed decisions.

According to the survey conducted by EY, institutional investors are ramping up their efforts in assessing their performance by using ESG framework. Majority of investors (98%) assess non-financial performance by conducting a structured methodical evaluation. The survey also identifies a growing disconnect between the increased focus on ESG performance and the availability of structured and standardized non—financial data from corporates. The percentage of respondents who say organizations are not adequately addressing ESG factors, has increased from 20% in 2018 to 34% in 2020 for environmental risk. The number has also increased from 21% to 41% and 16% to 42% in case of social and governance risk respectively.

A testimony to the fact was during the global recession the ESG funds performed better than the normal fund as ESG ensures long term business resilience . The pandemic has acted as an alarming call for businesses, highlighting the profound and direct impact of integrating ESG on economic stability. During COVID-19, various indicators such as good company governance, and high social standards have emerged as key indicators of resilience. Additionally, highly advanced digital infrastructure along with digital standards have emerged as a necessity to absorb the shock of a global pandemic. Therefore, it can be concluded that the COVID-19 situation has drawn parallels between ESG driven investments and long-term value creation.

Integrating ESG in Enterprise Risk Management will improve the consistency and cohesiveness of sustainability-related risk management. This integration will help in decision-making and resource allocation, minimize the financial impact and improve stakeholder confidence.

Integrating ESG in Enterprise Risk Management
The world is now entering a new phase of climate change marked by exponential climate impact.
Chaitanya Kalia
EY India Climate Change and Sustainability Services Leader

ESG integration into a broader strategy can improve performance and enhance the competitiveness of an organization. It includes reconsidering and redefining strategy and operational processes to improve and sustain profitability. The probable value of integration of ESG strategy includes the following:

  • Long-term value by considering material ESG opportunities and risks
  • Improved brand reputation among consumers, employees and investors
  • Improved market differentiation through strategic position in sustainability
  • Improved relationships with stakeholders

As integrating ESG in business is evolving, ESG factors will play a vital role in creating long-term value creation. The prioritization of stakeholder and long-term value creation is achieved when the entire organization is aligned with ESG agenda. Further, it can also be observed that organization’s sustainability journey is a gradual and rewarding process. Considering the same, EY has developed a three-layer framework known as Sustainable Design to assist organizations in managing risk and opportunities arising from climate change. This framework enables organizations to integrate ESG framework  into their strategy, operations and value chain of the organization. It also enables organizations to develop robust governance mechanism, and risk management. Through this framework, organizations can gain both tangible and intangible benefits such as brand positioning, long-term value-oriented business resilience, market differentiation and operational efficiency.

ESG design Framework

Vision, mission and goal planning form the topmost layer focusing on robust governance for risk management and strategy planning with proper targets and metrices.

Implementation is the second layer which consists of detailed implementation roadmap with list of activities aligned with integrating ESG strategy. Organizations can create system and procedures to strengthen ESG performance of the entire value chain.

Measurement and communication is the bottom layer of the framework which emphasises on effective monitoring of ESG performance and communicating the same to different stakeholders.

Integrating ESG and communicating risks to stakeholder enables build a resilient business that can tackle crisis with proper governance.

Summary

With the increasing pressure for ESG disclosure, organizations can adopt various reporting frameworks such as Global Reporting Initiative (GRI), Integrated Reporting Council Framework (IIRC), and Carbon Disclosure Project (CDP) to communicate their strategy and intervention in different ESG areas. To enhance credibility, organizations can also support their disclosure with a third-party assurance of the ESG data.

About this article

Authors
Chaitanya Kalia

EY India Climate Change and Sustainability Services Leader

Committed to sustainable development, a climate change expert, advisor on non-financial reporting. Digitally savvy and a nature lover. Amateur cyclist, swimmer and an ornithologist.

Shailesh Tyagi

EY India Climate Change and Sustainability Services Partner

Committed to ESG, decarbonization and safety performance transformation. Advocate for workplace diversity. Holds a blackbelt in Taekwondo and a fitness enthusiast.