ESG and value creation

Stakeholders have become less tolerant of corporate ESG incidents in recent years with the increased transparency and access to information globally.

Research (1) has shown that a company with high ESG profile can experience lower costs of capital (debt and equity) as compared to companies with poor profiles.

In a survey of business executives conducted by Deloitte Global and Forbes Insights on the impact of their sustainability efforts, more than half of the 350 respondents indicated a positive impact on revenue growth and overall company profitability.

Even smaller companies can benefit from a focus on ESG. For example:

  • initiatives that reduce waste and the amount of materials used, such as in packaging, can reduce costs;
  • reducing energy costs, such as switching to LED lighting, could also lower energy bills;
  • research (2) has shown that a higher ESG profile is associated with higher EV/EBITDA multiple, and a company that increases its ESG profile year-on-year experience an even higher EV/EBITDA multiple.

Reporting on ESG metrics is becoming mandatory for large organisations, but a voluntary adoption by smaller organisations can enhance reputation and help access alternative sources of finance such as green and social loans. It can also help organisations measure their contribution to the UN Sustainable Development Goals.

Adopting a Corporate ESG Approach

Assess materiality

Organisations should assess material ESG factors for their industries using relevant frameworks such as the Sustainability Accounting Standards Board (SASB) Materiality Map. SASB’s standards are being integrated into a newly established international reporting framework developed by the IFRS Foundation’s International Sustainability Standards Board (ISSB).

The Materiality Map will provide a set of sustainability-related risks and opportunities relevant to each industry. Individual organisations may choose to report beyond the different sustainability-related risks and opportunities provided by the Materiality Map, based on their unique business model.

Engage stakeholders

Organisations must embrace engagement with different stakeholder groups to understand their respective values and requirements. Stakeholder engagement can help identify focus areas with greater clarity.

Assess past ESG profile

With the new General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1), organisations have a framework to assess their past ESG profile in alignment with their statutory reporting period. Many organisations would already have gathered the vast majority of historical data on ESG risks and opportunities, but IFRS S1 provides a consistent approach in measuring ESG performance.

Develop a roadmap with measurable actions

An ESG strategy should be embedded within the organisation’s business strategy. Organisations must endeavour to create roadmaps that identify ESG-related risks and opportunities and establish actions that will mitigate those risks, whilst capitalising on the opportunities in order to deliver long-term value.

Adopting the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) will help organisations set up clear and quantifiable ESG targets.

Measure and communicate progress

Organisations should develop processes to monitor and report on ESG progress. Communication of the organisation’s ESG progress should be an ongoing process, helping stakeholders to stay updated in the sustainability journey, while sustaining confidence in the organisation’s commitment to its ESG values.

Establish ESG incentives

Last but not the least, what is a manager’s motivation to meet ESG targets? The first (and perhaps the only relevant) point in setting ESG incentives is to create awareness that ESG goals and other corporate objectives such as profitability are not mutually exclusive. Instead, a strategy of ‘layering’ every corporate decision with an ESG mindset can enhance profitability. For example, would Kelloggs‘s “Same Weight, Less Packaging” campaign make the organisation incur more cost? Or alienate customers? This is an example of a “win-win-win” strategy.

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