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Organizations are setting a transformation agenda anchored on ESG metrics to thrive in the new normal and ensure long-term sustainability.
In brief
- ESG-centricity promotes long-term value creation across multiple stakeholders.
- With investors prioritizing ESG factors in their investment selection, demand for high-quality ESG data is likely to ensue.
The COVID-19 pandemic and climate change are accelerating the arrival of trends which have already been on the CEO’s agenda since 2017. These include digital transformation, changes in consumer behavior, rising stakeholder capitalism and corporate focus on sustainability and long-term value. With challenging externalities, environmental, social and governance (ESG) considerations have been thrust forward as a core pivot strategy in resetting business models and propelling long-term value creation.
ESG drives long-term value creation
ESG promotes long-term value creation through an integrated approach which considers both the financial and non-financial value contributed by people, customers, suppliers, shareholders, regulators and society, and which collectively shapes an organization’s total long-term value. Aside from identifying and addressing ESG risks, strategic focus on ESG factors can also lead to the creation of new business opportunities.
In response to the growing demands of multiple stakeholders and the need to build a sustainable business, organizations are not only looking to provide smarter solutions that amplify profits, but that are also good for the people, customers, shareholders and society, and that contribute to sustaining the resources of the planet. Key considerations in the creation of long-term value include business strategy and transformation, performance improvement of systems, processes and tools, risk management and compliance, and measurement, reporting and assurance.
Already, an increasing number of businesses are moving toward an integrated vision of value creation, including the dimension of shared values for multiple stakeholders.
Non-financial performance pivotal in investors’ decision-making
The current challenging externalities are also driving major institutional investors to prioritize ESG factors in their investment selection and portfolio allocations. As of October 2020, Malaysia’s 10 leading investment managers and asset owners have signed the United Nations’ Principles for Responsible Investment (PRI), pledging their commitment towards best practices on ESG and sustainable investing principles.
On the global front, a significantly higher proportion of investors is also moving towards a more disciplined and rigorous approach in their evaluation of corporates’ non-financial performance. The proportion of investors who apply structured, methodical evaluation of companies’ non-financial disclosures has more than doubled, from just 32% (2018) to 72% (2020)1. This directional shift to a formalized detailed approach is expected to extend to securing high-quality data. Over time, we anticipate that sophisticated long-term investors will rely on high-quality ESG data assessed through a formal structured approach to determine their portfolio selection.
With the directional shift to a structured evaluation approach, investors have also expressed their dissatisfaction with companies’ current ESG risk disclosures. Between 2018 and 2020, there was increased dissatisfaction among investors with risk disclosures – 26% increase in dissatisfaction with governance risk disclosures, 20% increase with social risk disclosures and 14% increase with environmental risk disclosures.
A key area of disconnect has to do with how companies are disclosing ESG risks and their impact on current business models. Investors believe it is critical, moving forward, for companies to improve and disclose how they identify, assess, manage and measure the impact of ESG risks, including climate-related risks, on their business.
Future enterprises to be ESG-centric
Today, more than half of CEOs are focusing on social factors such as prioritizing long-term value for stakeholders (73%), deeper customer insights (66%), upskilling talent (62%) and increasing investment in employees’ well-being (55%) as their top transformation agenda2. Key actions reflecting these priorities include breaking down organizational silos, increasing agility, improving innovation and leveraging data to ramp up organizational performance.
Over the medium to long term, most CEOs view ESG-centricity as a vital characteristic of the future enterprise3. About nine out of ten (91%) of CEOs surveyed intend to incorporate circular economy dimensions over the next five years. The majority of companies (80%) are considering taking higher responsibility for the social and environmental impacts of their operations and are also considering business innovations from green technologies and other outcomes from climate change impacts.
Of importance, placing people at the center of decision-making will be a core leadership value driver. Further, the adoption of new global standards for measuring and reporting long-term value creation will drive ESG to become the core DNA of the future enterprise.
Driving ESG-centric plans
Transitioning to the new normal calls for robust strategies, including a clear and committed focus on embracing the ESG agenda. Building resilience and accelerating organizational transformation require cultural shifts of people who are key and central to driving and adopting transformation.
Boards, in their oversight role, are integral in driving strategic action plans on ESG risks and opportunities with management, to ensure organizations are aligned in their business, strategy and financial planning to build resilience and steer long-term sustainability.
Organizations can consider three steps in re-modeling their business to be ESG-centric:
1. Reshape strategy
- Refresh market context, demand drivers and purpose definition
- Define business and/or organizational focus, strategic capabilities and competitive advantage
- Assess and prioritize stakeholder outcomes
2. Transform business
- Develop future scenarios and strategic planning across horizons
- Drive portfolio optimization in alignment with stakeholder risks and opportunities
- Set strategic roadmap, define and prioritize actions and initiatives
3. Demonstrate and measure impact
- Set improvement metrics in organization’s governance structure, including evaluation of ESG performance
- Performance evaluations of boards and senior management to include reviews of their performance in addressing material sustainability risks and opportunities
Download “Setting the ESG agenda to achieve sustainable long-term value”
Summary
With challenging externalities, ESG considerations have been thrust forward in resetting business models and propelling long-term value creation across multiple stakeholders. In this complex and fluid environment, boards and CEOs are prioritizing the reshaping of their organization’s strategy and adapting it as circumstances evolve. Further, demand for high-quality ESG data is likely to ensue with global and local institutional investors prioritizing ESG factors in their investment selection.