From pledge to progress: how businesses can take transformational ESG action
The future of profitability is sustainability. It’s time for companies to push beyond climate pledges and take real, transformational action. Boards and leadership committees are uniquely positioned to help drive world progress by planning and implementing a science-based net zero roadmap with ESG strategy reflected throughout all business activities.
Over a decade ago, I worked with the UK Government to help establish the world’s first Green Bank, providing financing for green infrastructure at a time when the private sector was not (in scale). Now there are many Green Banks around the world and a broad focus on sustainability in both the private and public sectors. I’m truly encouraged by how much the momentum for ESG has increased in recent years.
On the other hand, as I reflect on the outcomes of 27 annual UN climate change conventions, we’re not yet seeing the genuine, all-out effort that is required to reduce carbon emissions worldwide and stay below 1.5ºC global warming. For example, a recent study by Chapter Zero and Kantar found that 43% of non-executive directors say one of more of their boards has not yet or does not intend to approve a transition plan in the next financial year. While there’s still uncertainty about how world leaders will regulate climate action, the private sector simply cannot wait for all the answers. Here are my recommendations for how leaders can begin undertaking the technical planning and tough work required to achieve sustainability goals.
1. Embed ESG across the organisation
A recent survey of corporate directors found that only 16% of leaders reported having a strong understanding of climate risk and strategy. And while many companies may want to make positive changes, the lack of skills and knowledge at the highest levels are holding them back. Too often, organisations designate ESG as a separate business unit, operating in a silo with the main purpose of compliance and reporting. Instead, ESG must be systemic and integrated into every layer of the company.
For this to be successful, senior executives must believe in, own and practise ESG themselves. They can then bring their shareholders along on the journey and explain why ESG matters to future profitability. Furthermore, company leadership must be willing to acknowledge that the expertise that has served them in the past may not be enough to carry the organisation forward. A sustainable future requires a growth mindset that embraces change and diverse perspectives.
2. Collaborate with the public sector to drive change
Climate change is a global challenge and one of the most significant issues facing humanity. We all have a responsibility to act – especially the developed world and larger economies. Greenhouse gas reduction needs to take place across the whole economy and be supported by all of us, not just specific industries. Consumers and investors can demand information; governments can regulate to force action. As such, government regulators must set standards for more sustainable ways of doing business, in particular for those key emitters. It is critical that corporations join these conversations as collaborators.
Turning the focus on five industries (representing 98% of methane emissions) could reduce global annual methane emissions by 20% by 2030 and 46% by 2050, enough for a substantial shift toward the 1.5ºC warming pathway. These are:
- Agriculture (40-50%)
- Oil and gas (20-25%)
- Coal mining (10-15%)
- Solid waste management (7-10%)
- Wastewater management (7-10%).
What’s often lost in the debate is that ESG can be a financial opportunity for the private sector. Global spending on physical assets in the transition to net zero would amount to $275 trillion until 2050 or about 7.5% of GDP p.a.. If governments consistently support environmentally conscious businesses, the impact can be a lower cost of capital that enables these businesses to continue driving a cleaner and more planet-conscious agenda. In the absence of a mandated global carbon price, markets can reward companies that reduce their carbon footprints with higher asset valuations and lower cost of capital.
3. Improve transparency with simplified ESG reporting
The International Sustainability Standards Board (ISSB) is making progress in setting global sustainability reporting standards. This effort should give investors the sustainability information they need to assess a company’s value and appropriately allocate capital to support ESG objectives. It’s vital that companies report beyond simply the impact of climate change on business. For example, in relation to the environmental component of ESG, clearly state:
- Can or does the company significantly contribute to accelerating climate change?
- Can the company make a meaningful contribution to mitigate climate change through its products and services or improvement of processes?
Companies and organisations should be held accountable for negative externalities. However, the demands on them should also be manageable – especially while we are experiencing skills and supply chain shortages in the global decarbonisation industry. Quality ESG reporting reduces management burden and increases transparency to investors. We must have a simplified and focused approach that’s relevant for industries, avoiding a complex “alphabet soup” with potentially hundreds of KPIs of limited value.
Above all, remember that we won’t arrive at perfect solutions right away. Action is an opportunity for continuous learning.
My own understanding of ESG and transition has evolved over the decades I’ve worked to create change in this space, since starting originally as an environmental engineer. Ultimately, I’ve found that by applying an ESG lens to business decisions we will be able to more consistently make a positive societal impact with capital. Our global warming problem won’t resolve on its own but we can reduce the need to make very radical and costly changes with quicker intervention. Start today, because the future profitability of business depends on long-term sustainability.
Start today, because the future profitability of business depends on long-term sustainability.
Our “Fellow’s perspective” series
Our Fellow’s Perspective series shares the views and expertise of the climate and business leaders who are the Chapter Zero Fellows.Read more about our Fellows
The Taskforce on Nature-related Financial Disclosures (TNFD): a briefing to address nature in the boardroom
In September 2023, the TNFD published its final Recommendations for businesses and financial institutions to disclose material interactions with nature. These aim to inform better decision-making by companies and capital providers, and contribute to a shift in global financial flows toward nature-positive outcomes and the goals of the Kunming-Montreal Global Biodiversity Framework. This briefing, produced by the Climate Governance Initiative, explains what the latest TNFD recommendations mean for you as a board director and key questions to ask in the boardroom to ensure your organisations can benefit from the opportunity to make impactful changes for business and nature.
Analysis of 2022 UK Company Annual Reports
A UKEB analysis of 2022 UK Company Annual Reports: A Study in Connectivity.
Five tips for your annual reports
With extensive expertise chairing multiple FTSE350 boards, as an investor and pension fund trustee, Chapter Zero Supporting Chair Sarah Bates shares her top five tips for this annual reporting season.