February 2 2023
It is five minutes to midnight, at least when it comes to sustainability and corporate reporting. We are living in a time where demands from several stakeholder groups – be it NGOs, customers, investors or governments – have never been higher. To give you an example: no one wants to buy a T-shirt that has been produced (at any point in the value chain) under the involvement of child labor. And companies have to credibly communicate this not only in their marketing, but also reliably prove it in their non-financial reporting. This is where the acronym ESG comes into play.
ESG, which stands for environmental, social and governance, is not a lip service, but the legally binding (at least in some parts of the world, and in my opinion soon in all parts) pledge for companies to take responsibility for their actions.
In my experience, the most decisive factor here is transparency.
The next logical question then is: how do you measure transparency. With our project, the Global ESG Monitor, we firmly believe to have found an answer. In the Global ESG Monitor, we have analyzed 350 of the largest companies in the world, from four continents, on 180 different criteria.
That way, we were able to build a set of data, which allows us to compare companies that want to improve their ESG reporting with their peers or their sector benchmarks. That is the first step, to find out where the gaps are. The next step is how to close these gaps. The proper way to do this is to conduct a materiality analysis. Together with the client, we find out what is important tot hem, i.e. the company, as well as to its stakeholders. Here, we not only consider the impact the company has on its environment, but also vice-versa. By laying the results over each other, we come up with a so-called materiality matrix that clearly visualizes the most relevant – or just – material topics.
While this is a rather complex process, it is still just the beginning on the journey towards more corporate sustainability. Based on the findings from the materiality analysis, the company formulates its sustainability strategy. This means that the decision makers, i.e. the board members and ultimately the CEO, but also everyone else within the company, will have to change their habits and patterns. This is certainly not an easy process, but the number one reason corporations need to go through it is simple:
corporations who don’t do it will have it much more difficult in the future to find new capital, regardless of whether they are listed on the stock market or not.
And the reason why corporations that do not take ESG seriously will have a harder time finding new capital is that asset owners don’t want their money to be invested in corporations who cannot guarantee there is no child labor involved or who contribute to global warming by not reducing their carbon footprint. This is both due to a change in our society – and I mean on a global scale – as well as to prudent risk assessment by investors. Companies that are more prone to the impacts of climate change or that do not take precautions to prevent discrimination or exploitation bear an inherently higher risk.
What I also want to make clear is that the steps that I have described above apply to all companies, regardless of their size. While current regulations on non-financial reporting only affect a small percentage of all companies worldwide, this is about to change. And even today, small and mid-sized companies are already affected by regulations for larger corporations, as the bigger players already have to report on the processes in the selection of their suppliers. If somewhere down the value chain, law violations occur, this will recoil on the companies on top of the value chain. Hence, they will drop relations with suppliers that cannot prevent these violations – and prove that the measures they have taken are effective to prevent them.
In conclusion, no matter how you look at it, every company will have to tackle ESG.
They will have to put a lot of effort into this and be transparent about where they are today, where they want to be in two, five, ten or even thirty years, and they will have to be transparent throughout the way. I would be happy to see more and more companies do this, and of course, I would be proud if I can contribute to that.
On this week’s episode of PRGN Presents, I talk more about the importance of ESG and its impact on businesses and organizations.
If you enjoyed this episode, please follow the PRGN Presents podcast in Apple Podcasts, Spotify, Google Podcasts, or any other podcast app. We publish new episodes every other Thursday. To have them delivered automatically and free of charge, just choose your preferred podcast player from this list, open the app, and click the button to “Follow” or “Subscribe” to the show: https://prgnpodcast.com/listen