Sustainability is inextricably linked to value creation. However, organizations must realize that sustainability is a continuous process of improvement rather than a single objective. Many stakeholders are calling for businesses to become more sustainable, but most of them are still unaware of how quintessential this transformation is. According to the World Economic Forum, over 90% of businesses and corporate leaders believe sustainability is crucial to business growth; however, only 60% of them have a sustainable work plan.
Sustainability is a key value driver for corporate success, and hence it is no longer just about the environment. ESG considerations are being considered by businesses to ensure their long-term success. A 2021 SAP AEC report states that investments in ESG accelerated dramatically in 2020 and rose to $51.1billion compared to less than $5billion, five years ago. To produce value and results that stakeholders find acceptable, it is important to consider the integrated nature of environment, society, and governance. This means, businesses must endeavor to improve their social responsibility, foster an inclusive workplace, and maintain sound governance.
Challenges related to sustainability necessitate a shift in focus
Businesses today must prioritize sustainability. Threats from climate change, subpar working conditions, pandemic, and epidemic, among others, warn us against discounting it. A thriving sustainable market harmonizes financial and economic incentives, norms, and regulations to support widespread access to a generous inventory of reasonably priced and sustainable products.
Climate Change Risk: Owing to the challenges posed by climate change, businesses now need to emphasize lowering their carbon footprints. They should embrace methods that lessen environmental damage. The business leaders should play a proactive role in delivering meaningful ESG strategies, given that sustainability impacts an organization’s bottom line and its long-term viability. For example, a CFO can contribute to the development of comprehensive sustainable finance planning to ensure that the organization is doing its part in reducing greenhouse gas emission. Comprehensive strategies for the implementation of net zero targets will not only help the environment but also help businesses reduce cost by increasing efficiency and sustainability.
Growing existential threat of bio diversity loss: It is quintessential to build a sustainable future now, for tomorrow. There is a pressing need for cutting-edge methods to monitor ecological impact and manage risk, given the rapid decline in biological diversity. At the corporate level, biodiversity loss may lead to financial loss. The World Economic Forum Report 2021 states that investors are now mandated to include biodiversity loss in their portfolio decisions owing to stringent regulations. To quantify the impact of potential portfolio risks and stop the loss of biological variety, the organizational leaders may assist in adapting techniques like the ESG Sustainable Impact Metrics. These metrics will help investors choose companies that manage the ESG risks and opportunities, and thereby will equip the former to align with SDGs.
Sustainability-driven business transformation: In a sustainable culture, businesses may support the social and economic stability of their communities and nations. Such businesses will lead the way in the future. Organizations are entering an era of sustainability-driven business transformation. In this era, businesses must go beyond “turning their data centers green” and embed sustainability across their services and practices. Financial projections for unsustainable energy have ceased to attract new investors. Sustainability-adjusted financials have become the means to account for external and internal costs and liabilities on the bottom line, and they also add assets and revenue on the top line.
How can the C-Suite lead the Sustainability imperative?
As the world is becoming increasingly conscious of its environmental impact, sustainability has become a top priority for many organizations. Employees who work in sustainable environments tend to be more motivated, productive, and driven to succeed than other employees. A Deloitte survey shows that businesses with a sustainability culture see over 22% higher productivity and 27% higher profits than others. In this regard, the ESG transformation calls for a cultural and operational shift that needs to percolate from the leaders to the subsequent decision makers, translating into a companywide initiative. The initiative should be led by the CEO, who can embed ESG initiatives into the corporate strategy and lead by example. The CEOs are best positioned to take advantage of the possible economic and reputational benefits that ESG integration can bring to the enterprise and ensure that the company is doing its part in integrating sustainability measures into standard processes.
A sustainable framework and culture can position businesses for the future while allowing them to leverage opportunities available today. As per Gartner’s Research, over 85% of the investors evaluated ESG compliance and elements in their 2020 investment decisions. It has become imperative for companies moving forward with sustainability initiatives to share the added value story with the employees, consumers, and stakeholders. It is, thus, important to develop convincing arguments that represent the value creation in the company through ESG initiatives. At a growing number of companies, such efforts are led by the CMO who brings in conversations that set the company’s brand direction and build brand value. The CMO’s function has undergone a drastic evolution as a result of the sustainability push. CMOs are now the custodians of ethics, corporate behavior, and reputation management. Hence, CMOs must consider how an ESG-informed marketing strategy could offer a comprehensive company perspective to stakeholders, in order to explain the organization’s value efficiency and its reputation for sustainability.
As enterprises shift focus to ESG efforts, they must examine their values and risks in day-to-day business operations, in addition to financial KPIs. The chief financial officer plays a crucial role in assessing the long-term value creation opportunities from the ESG initiatives. As financial reporting expands to include non-financial ESG metrics, CFOs must shape ESG disclosures and define how the underlying data is captured and tracked. They are best equipped to integrate these non-financial metrics into the existing financial reporting processes and are perfectly positioned to help firms move towards ESG opportunities, since they are experts at measuring, reporting, and promoting transparency. From developing a strategy that involves building more agile and sustainable operating models to developing comprehensive risk management protocols which can assist organizations in achieving the sustainability goals, the CFO’s role has grown to explain the impact of ESG on enterprise value.
In fact, regulators and policymakers have made it imperative to include non-financial requirements (ESG) for compliance. In India, ESG is now mandated by law. The top 1,000 publicly traded firms are required to report their business responsibility and sustainability reports for every financial year. This is where the CFOs can provide insightful advice on how best to integrate sustainable practices into routine organizational activities. With the right system in place, the CFOs can ensure that the organization is taking responsible steps to a sustainable future while strengthening relationships with stakeholders. Moreover, cross-functional cooperation also crucial to effectively address sustainability concerns and the importance to include the Boards in such decision-making. In order to ensure that these goals are achieved, organizations could have a working committee comprising key board members and CXOs on it.
Next Steps
Companies moving forward with sustainability initiatives must define ESG objectives and be open about their workflow. They must develop a project roadmap where each achievement fuels the next. The goal must be to enable a new era to create a superior, inclusive environment for all while attracting, fostering, motivating, and retaining a diverse workforce to finance its future growth.