It is by now no secret that corporate environmental, social and governance (ESG) initiatives are highly politicized. The latest example comes in the form of a July 30 letter from the US House Judiciary Committee, which was sent to about 130 institutional investors, asking them to explain the basis for their ESG goals. Suggesting that participation in certain climate initiatives could run afoul of US antitrust law, the letters illustrate the challenges facing businesses today, balancing sustainability goals and stakeholder demands with politically charged rhetoric.
Right now, the news cycle is full of stories about ESG initiatives failing to gain much support in proxy votes, declines in new ESG fund launches, and other anecdotal examples that might lead one to believe the world might loses interest in sustainability.
it is not.
Despite the anti-ESG rhetoric, sustainability has never been more important for business.
ESG viewed as a risk indicator
In fact, when you look at the data, you find that sustainability has never been more important to business. However, unlike the politicized narrative that relies on emotionally charged rhetoric, the business case for sustainability increasingly focuses on impacts, risks and opportunities. After all, businesses exist to create value. Anything that can interfere with this function is a risk, and those risks must be managed.
Check out the results of Deloitte’s recent 2024 M&A Trends Survey for proof. It found that more than 70% of companies surveyed have turned away from potential acquisitions due to ESG concerns. Additionally, companies would be willing to pay a premium for acquisition targets with strong ESG credentials.
The facts are clear. In investor and stakeholder parlance, sustainability risks are still risks and should be treated as such.
Even companies that don’t wave the green flag for sustainability or position themselves as environmental crusaders look at ESG issues as an indicator of risk when evaluating potential acquisition targets. If they don’t like what they see, they’d rather walk away than deal with the very real regulatory and reputational risks that could arise from being associated with a company that doesn’t take sustainability seriously.
Regulatory realities
This is an important point. The political side of ESG – the part that tends to include terms like “woke capitalism” and “climate cartel” – ebbs and flows with the changes in the news cycle. However, the real business risks, those that could harm a business’s ability to operate in certain parts of the world or to source goods from certain suppliers, are already written in stone. The European Union (EU) Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive have introduced strict sustainability reporting requirements for certain businesses operating in Europe. Globally, sustainability reporting standards developed by the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards Foundation (IFRS) have introduced climate disclosure requirements for businesses around the world.
IFRS, which created these international standards based on the structure of the G20 Task Force on Climate-Related Financial Disclosure (TCFD), and the G20 itself are hardly bastions of “woke” policies. These reporting standards are basic financial reporting methodologies that have been developed and adopted following the same protocols used to establish the accounting standards used by the world’s largest businesses. They come with specific guidelines that businesses simply cannot afford to ignore.
Failure to comply with these regulatory reporting requirements can also result in severe penalties. In France, for example, the penalty for non-compliance with transposed legislation by the CSRD can be up to €75,000 with an additional threat of five years imprisonment for corporate directors who fail to provide material information to third-party insurance service providers or obstruct the work of auditors . Talk about a business risk that should keep the C-suite up at night!
Data will set you free
As I have previously reported, the business is now in the phase of implementing a transformation related to sustainability, which football and rugby fans fondly refer to as the “hard yards”. Faced with a very real set of regulatory requirements that require strict standards for sustainability reporting and target setting, they must also deal with the fact that every step they take will be scrutinized by regulators, legislators and consumers.
This is where data becomes indispensable. Beyond bold statements, lofty ESG goals or mission statements, there is only one thing that will assuage critics, satisfy regulators and resonate with consumers and investors: proof that efforts to improve sustainability lead to objectively better business results . Companies that can clearly demonstrate the sustainability investments they make and the positive impact they have will be the ones that ultimately rise above ESG politics and define the future of business.
It should be noted that even in the case of the aforementioned letter to US institutional investors, members of Congress want hard evidence behind each company’s ESG goals. When ESG is linked to hard and fast business and financial risks and objectives, it is much harder to argue.
The key to making this happen is treating ESG and sustainability issues as potential business risks, ones that need to be measured, managed and communicated clearly to all stakeholders. While the nomenclature may change depending on the speaker’s agenda, the risks remain the same.