Environmental, social and governance (ESG) risks are the largest threat facing corporates today. Image: Unsplash/Austin Distel
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- Environmental, social and governance (ESG) risks are the largest threat facing corporates today.
- The global economy must rapidly transition from a ‘take-make-waste’ model to one that accounts for the impact of every product we produce, consume and discard.
- Here are three considerations executives should keep in mind to go beyond talking about ESG and start making it a reality.
What happens when the scale of the industrial revolution meets the speed of the digital revolution? We’re about to find out as we enter a new era that promises to transform the way we live and work. Call it ‘Industry 5.0’ or the ‘Sustainability Revolution,’ the writing is on the wall. Environmental, social and governance (ESG) risks are the largest threat facing corporates today. With assets set to reach $50 trillion by 2025, there’s no shortage of capital flowing into the space. Yet, the vast majority of initiatives have failed to deliver the expected return.
Just as the last decade transformed every business into a digital business, the decade ahead will transform every business into a sustainable one. In short order, companies must find new ways to drive growth with the same or fewer resources. To this end, the global economy must rapidly transition from a ‘take-make-waste’ model to one that accounts for the impact of every product we produce, consume and discard. Companies that adapt to this new paradigm first will be the market leaders. But the path to achieving this goal remains opaque.
Key considerations for executives to make ESG a reality
Inflation, supply chain, the fight for talent — companies face a complex web of challenges that can make it impossible to know where to begin. Here are three considerations executives should keep in mind to go beyond talking about ESG and start making it a reality.
1. Move from cost to investment
Historically, ESG has been viewed as a cost centre designed to address regulatory compliance, rather than as a source of value. Many companies have taken the step of hiring a chief sustainability officer, but that’s where it ended. For ESG to be commercially viable and respond to the growing need for new business paradigms, corporates must start thinking about it as an investment with measurable strategic and financial outcomes. Those that can reframe their thinking in this way have the opportunity to tap into multi-trillion-dollar industries, such as clean energy, regenerative agriculture and sustainable water management, to name a few.
Take the global food production industry. Crop and livestock agriculture are two practices that have an outsized impact on the environment, accounting for 26% of global greenhouse gas emissions, 70% of global freshwater withdrawals and 50% of the planet's habitable land use.
Farms are producers’ assets and, along with other external factors, climate change is reducing yields, increasing input costs and making access to the right resources a necessity. Connecting industry participants with the necessary financial, legislative and consumer demands can help make the entire supply chain more sustainable, while also improving producers' livelihoods and opening up new sources of revenue.
2. Focus on long-term value creation
Many companies still think of ESG as year-over-year reporting metrics. Those that succeed long into the future, however, will be the ones that recognize the permanence of ESG and lay the foundations for resilient value creation in this new reality. To do this, they must first consider how an increasingly ESG-focused market will react to the outputs of their businesses.
They must then be able to clearly articulate the ESG impact of their activities and provide proof of its material value. Once corporates take these steps and the markets accept them, they will be positioned to take full advantage of the opportunity ESG has created.
Let’s look at the example of food production again. To create lasting value, producers must be able to measure the worth of more than just food harvested, but of the carbon offsets, biodiversity and societal impact directly attributable to the sustainable nature of the business.
With this data, they must then assign a material value to their ESG impact. The markets will be forced to pay attention to these proof points and provide signals to guide producers’ future ESG strategies. Food production accounts for nearly 10% of the global economy, so the opportunity space is enormous for those who focus on long-term value creation over incremental gains.
3. Collaborate at scale across the value chain
ESG is not about betting on unicorns and it’s not something that can be done in a vacuum.”
To achieve the grand scale required to address the world’s most complex challenges, corporates must take an ecosystemic approach that aligns incentives throughout the entire value chain. As a first step, they need new strategic platforms that can provide the governance and engagement structures required to facilitate system-wide collaboration. Once in place, these structures will position companies to achieve their ESG goals and drive growth.
Food production is a prime example. To go from raw agricultural materials to the products that sit on supermarket shelves, food must move through the hands of producers, processors, distributors and retailers. Each player has its own unique ESG challenges and each must be able to make money from initiatives related to solving them.
Otherwise, they simply will not participate, which could indirectly impact the most vulnerable members of the chain. When you consider the fact that 27% of the world’s total employment is in the agricultural space, it becomes clear that reaching a few thousand farmers is not enough to drive real impact. By taking an ecosystemic approach, the world’s food system can be transformed into one that restores nature and reduces societal harm, all while generating new sources of revenue.
This is what it means to make ESG commercially viable.
The path forward
Global markets are irreversibly orienting towards ESG and no industry will be immune to this change. As business leaders, we have the opportunity to alter the trajectory our world is headed, but we must be able to achieve ESG goals. The good news is that there are trillions of dollars of unlocked value in ESG — we just need a new roadmap. One that will enable us to measure and assign value to ESG impact and unlock the barriers preventing the successful commercialisation of ESG initiatives.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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