Environmental, social and governance (ESG) issues are becoming more-prominent yardsticks, against which both investors and customers evaluate the performance and 'personality' of a firm. Steve Holt explains how responding appropriately to ESG concerns can add value to your business.
Profit aside, what does your firm stand for?
Building purpose into your business' culture and aligning your corporate interactions with those values can bring your target market and potential investors to your door. This goes beyond doing simply what is legal, but your definition of what is ‘right’ will attract investors and customers who agree.
A focus on getting ESG right doesn't just mean making a series of hollow promises or conducting a few tickbox exercises. It means embedding your ethical values into the organisation’s DNA with a meaningful and transparent ESG strategy that filters through all levels of the business. It also means understanding the risks that inaction poses and the need to right your course when things go wrong.
In the past, a proactive ESG stance has been seen as just a ‘nice to have’ that was wedded to climate change and sustainability concerns, yet distinctly separate from financial performance.
This perception is flawed, and ignores the broader social and governance framework in which businesses operate. A business’ stakeholders see the financial performance of a firm as intrinsically linked to the market's perception of it and the extent to which its clients want to do business with it.
Further, those with demonstrably stronger governance processes on ESG matters are considered less likely to find themselves embroiled in scandal.
While profit and market valuation used to be the primary concerns above everything else, there's an increasing expectation from investors that this profit should be made in a way that's mindful of reputational and ethical concerns.
What to do when ESG goes wrong?
As the proverb goes, prevention is better than cure. Embedding a culture and environment that's focused on staying true to your ESG values goes a long way to protect a business.
For example, taking simple steps to make sure you have rights of access to relevant information throughout your supply chain. Conducting in-depth due diligence aimed at understanding potential issues and monitoring ESG issues in real-time will get you a long way to minimising risk.
Sometimes, however, things going wrong is beyond your control. When that happens, you mustn't bury your head in the sand. It's important to ‘face in’ and demonstrate the much vaunted ‘tone from the top’ to show that potential governance breaches are being appropriately considered and addressed.
From our experience in assisting the independent review into Boohoo Group PLC’s Leicester supply chain, we know that addressing market concerns, particularly in an ESG context, can be challenging. But taking the right steps ultimately leads to improved confidence and value in a business model, and can satiate investor clamour for clarity.
What are the most likely sources of ESG concern?
Based on my experience of ESG investigations, I've set out below a few of the most-frequent sources of concern that companies and their trusted advisors should be aware of:
Simply put, you can’t control the actions of others.
While you can set in place frameworks to ensure you partner with suppliers or service providers that can demonstrate a commitment to operating in an appropriate manner, from time to time, elements of your supply chain will come under pressure. This will lead to a risk exposure to the business, particularly for companies with complex, cross-border supply chains.
The exposure or incident could be intentional or unintentional, such as the result of internal or external bad actors, changes in market conditions making previous methods of operation unprofitable, changes in legislation or government, poor operational decisions by the supplier unseen by the business, an unexpected occurrence or natural disaster, or plain bad luck.
Well-publicised internal issues
Any internal issue that's debated in public is likely to require some degree of corporate-level intervention. The issue could originate from many sources, such as whistleblower reports, an internal actor or professional adviser leaking information, or the result of involvement or connection with a scandal, regardless of whether such involvement is peripheral in nature.
Market concern over the veracity of trading and operational updates
When institutional shareholders start to ask awkward questions and challenge the veracity of statements put out by management, who are often considered to see the world through a rose-tinted lens at the best of times, disclosure of ESG-related issues often follows closely behind.
Demonstrating an appropriate 'tone from the top' or management culture is vitally important in convincing investors that important decision-making processes are made in an informed manner that won’t lead to reputational (and as a result, financial) damage.
Listed businesses, or those with defined profitability expectations, often have to walk a complex and moving tightrope to create a high-performance environment that balances a commitment to strong governance, while simultaneously placing an appropriate degree of pressure on its team.
Some of the world’s largest and most-notorious ESG issues arose as a result of a company and its leadership failing to adequately spot that it was falling off this tightrope and applying too much pressure to meet unrealistic or unobtainable results.
Getting ESG right
The key message to all companies, particularly those with an ESG focus or priority is that walking the walk means potential issues can't be swept under the carpet.
If you see warning signs of an issue starting to rear its head, it's key to face into the issue – bring in the expertise to conduct sufficient investigation to understand whether there is a problem that requires a resolution, and then take the appropriate steps to resolve, report (where necessary) and remediate.
For support in dealing with ESG issues, get in touch with Steve Holt.