A global consensus has emerged in recent years that environmental, social, and governance (ESG) issues are crucially important for the corporate world. In a recent PwC survey, global investors placed ESG-related outcomes such as effective corporate governance and greenhouse-gas emissions reduction among their top 5 priorities for business to deliver. However 81% went on to say they would accept only a single percentage point or smaller reduction in returns to advance ESG objectives, both those that are relevant to the business and those that have a beneficial impact on society. And roughly half of that group were especially unyielding and would not accept any decline in returns at all. This is true even in Malta where traditional investors tend to buy-and-hold their investments and be averse to bearing losses.
For CEOs and boards, the disconnect with investors presents a dilemma: can their company perform well for investors and pursue a clear ESG strategy at the same time? We believe the answer is yes, if companies find the right balance between short-term performance requirements and the investments needed to meet longer-term ESG goals. To be sure, as companies invest in ESG initiatives (for example, in the technologies and systems needed to support future regulations and any net-zero commitments they have made), they may face pushback and short-term share price swings. But in the long run, as climate change increasingly affects enterprise value and the ability to deliver sustained profits, the total accumulated value of not investing in ESG will be significantly lower than a successful ESG approach.
The key is to craft a convincing long-term ESG path to create value within the boundaries of the short-term KPIs that address investors’ performance expectations. Taking stakeholders, in particular their shareholders, along the journey toward that longer-term vision is how companies can address the disconnect between short-term pressures and longer-term opportunities. So where does your company lie?
Getting your ESG stance right helps you think through another key consideration: the broader value chain or business ecosystems of which you are, can, and should be a part of. Competition is increasingly won or lost on the basis of the stakeholders within the value chain. These networks of companies and institutions help coordinate multiple participants, which may offer the only way to tackle complex, far-reaching challenges such as ESG. The importance of the value chain is growing in relevance, particularly when it comes to companies creating and capturing value. The opportunity lies in the fact that many stakeholders necessary to advance ESG goals (for example those in transportation and energy, or those working to reduce Scope 3 emissions in supply chains) are only in their early stages of formation or will need to be built from scratch.
To shape the development of your value chain and access the value pools emerging around them, many companies will need to develop, perhaps for the first time, the ability to manage the interplay between their organisation and the broader set of stakeholders, be they upstream or downstream. This ability goes beyond the ad hoc approaches to partnering most companies have taken in the past.
The good news is that by leveraging the value chain, you don’t have to provide and scale all the capabilities for ESG on your own. You can access the capabilities others are building, including the complex combinations of talent, technology, processes, and insight that these partners provide. Once you do, you can look to refine the ways in which your company represents itself to investors and other stakeholders. In the ESG world, as elsewhere, a strong corporate strategy and robust narratives will be key to mobilise investment and value chain participants in commonly beneficial directions.