Insight Article: ESG As A Force For Business Transformation
ESG sustainability and climate change are increasing in prominence all the time. We look around us and see how citizens, governments, companies and investors – in fact the whole spectrum of society – are becoming more concerned about climate change. And the changes made by businesses in response to the coronavirus pandemic have given us pointers as to how companies can transform their business models over the next few years.
What is ESG?
Environmental, Social, and Corporate Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.
ESG & Climate Change
There has been much publicity over the past few years on the significance of carbon emissions and the effect of increased levels of atmospheric CO2 on the climate.
If humanity were to ignore climate change, it’s likely there would be 4 degrees of warming by the end of the century. To put this in context, -4 degrees was an ice age! Although the increase is above 1 degree so far, governments are aiming for 1.5 degrees maximum or well below 2 degrees average global temp increase.
What is often not discussed is the effect of even half a degree on the world; the WWF has forecast that moving from 1.5 degrees to 2 degrees warming has the potential to cause thousands of species to become extinct and possibly the loss of all coral reefs by the end of the century.
If we bring this back to people, that half degree means potentially 400 million people exposed to severe drought and millions of people potentially losing their homes and livelihoods from rising sea levels. And we are seeing the change already, with more extreme weather events all round the world.
However, one looks at it, climate change is a real social issue and a huge business and economic risk.
Some Good News
There is, of course, some good news. In particular, we continually see in the media how ‘citizens’ (or the general public) are becoming much more concerned about climate change, and there is certainly an increasing appetite for change.
One small example of this appetite for change is the enormous growth on Google searches in 2020 around sustainable lifestyles. This provides both a challenge and an opportunity for businesses… to work out how to transform their business models to be more sustainable and help people to ‘build back better’.
Whilst it is inevitable that 2020 will be remembered as the year of the COVID pandemic, it was also the first year of the year of the UN Decade of Action to deliver the UN Sustainable Goals. Whilst the decade of action inevitably took a back seat to COVID during 2020, it remains important as it emphasizes the importance of the next ten years in transforming how we use energy.
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Whilst some smaller countries, such as Suriname & Bhutan, claim that they are already carbon neutral, it is the larger economies that will have the most effect on climate change.
Fortunately, almost all the major economies have made commitments to get to carbon neutral. For example, the UK has set a specific deadline which is enshrined in law; whilst COVID and Brexit have delayed practical progress, it is likely that the run-up to COP26 Conference in late 2021 will drive significant government action.
At the other end of the spectrum, China has set a relatively relaxed target of 2060 to achieve carbon neutrality; an achievement which will be especially difficult given the reliance of the Chinese economy on coal for electricity production.
Having withdrawn from the Paris agreement, the USA is the great outlier, with currently no carbon commitment, although this will inevitably change under the incoming Biden presidency. But, even within the USA, there have been beacons of progress – they say everything is bigger in Texas, and it seem this also applies to wind power, with Texas now ranked as the 5th largest generator of wind power, an industry that employs some 25,000 people!
Technology as a Macro-Economic Partner For Change
On an international basis, we see that organisations such as The Word Economic Forum (the Davos-based forum for business and Government leaders) continuing to emphasise positive effect of digital technologies on people’s lives. And business organisations such as the Exponential Roadmaps Initiative are developing practical solutions that use technology to reduce carbon emissions.
Some examples of how technology is addressing climate change:
- Carbon capture: Capturing CO2 and injecting the carbon back into the earth is, in many ways, a technological marvel. Although it is probably not part of the long-term solution, carbon capture reminds us that some technology will be needed to manage the transition to a low carbon future.
- Artificial meat: Meat production is a major carbon emitter so a reduction in meat consumption will be really significant in getting to a low carbon world. But, whether it’s a juicy steak or a chicken curry, people like the taste of meat… Hence the investment currently going into the development of ‘artificial meat’ (that can be produced from plants).
- Safeguarding forests: Stopping deforestation is primarily a political and economic challenge. However, we are increasingly seeing charities and other NGOs using drones equipped with sophisticated cameras and LIDAR to monitor tree canopies along with the size of trees, etc., with the aim of providing the information needed to turn back the deforestation tide.
We all use data to create insights – both in our work and personal lives – and data is sometimes described as the “new oil”. From an ESG perspective there are lots of opportunities to use data analytics and AI to reduce carbon and replace the real oil.
A nice example of this is Oreoco who have a personal carbon tracking app, with the strap line – ‘Turning Green To Gold’.
Unfortunately, technology is not always the solution; even though governments sometimes act as if it is some kind of ‘silver bullet’. Ultimately, technology is most successful when there is a combination of Technology, People and Nature.
Unfortunately, technology (and the Internet in particular) uses significant amount of energy and thereby contributes to the climate change problem. By some calculations, if the Internet were a country, it would be one of the top ten largest emitters.
Even though, Internet and cloud providers are becoming more efficient, the energy consumption of technology will continue to be an issue.
The solution will require sustained effort by service providers, companies and users. And a starting point for all companies is to ensure their web sites are efficient and are powered by green energy.
Technology products are also depleting the world’s resources, with batteries being a particularly egregious offender. Whilst there may be long-term term solutions to this (graphene batteries, etc.), the only short-term response is to become much more efficient at recycling.
The Ugly – COVID 19
Not only did COVID create a global recession in 2020, it has also had a major impact on the world of work.
However, despite the economic turndown, it seems most people still believe that climate change is as serious a crisis as COVID. Indeed, in its 2020 World Economic Outlook, subtitled “A Long and Difficult Ascent”, the IMF included a whole section on mitigating climate change, looking for governments to create a ‘green fiscal stimulus’; something that will inevitably create opportunities for businesses that can successfully apply technology.
COVID has accelerated a number of trends that had already started, in particular working from home (or working from anywhere), tele-meetings replacing the travel needed for face-to-face interactions, increased ecommerce, etc. And COVID also generated its own descriptive tag for the future: ‘the new normal’.
And we know there is more to come, from virtual reality and other ‘spatial technology’, through the gamification of training and dramatic changes in the way that healthcare and other basic services are delivered.
COVID has forced companies to look at how they transform their service delivery and, in many cases, to question entire business models (for example, to address the question, “If I can’t go to the shops or a restaurant, how can they come to me?”). History tells us that crises are often the spark for dramatic increases in creativity, as people accept that the status quo is no longer an acceptable option.
The “S” for Social in ESG is encouraging companies to question their behaviour – especially as there is growing evidence from the media (e.g. the FT and the Harvard Business Review) and from investors such as JP Morgan that purpose-driven businesses outperform without a string sense of mission or purpose.
Ironically, it is sometimes the companies pushing hardest on ESG who are reluctant to over-publicise their ESG successes (perhaps because of concerns about so-called ‘green washing’). This is unfortunate because our experience has shown that to get the most ESG benefit, it is essential for companies to communicate ESG successes; and in engaging their staff and communicating about ESG with their customers and their supply chains, they can create a virtuous circle of improvements.
How Can Business Benefit From ESG?
A recent report by McKinsey, ‘Five Ways That ESG Adds Value’ was very clear on the business benefits of ESG. Two of the ways to add value were revenue growth and productivity. Both of which are closely linked to greater engagement with staff and communication with customers.
At SKCI and The Planet Mark, we have direct experience of how ESG adds value – as we work with companies who to help them develop their ESG strategies and become more sustainable. Our experience is that companies with a clear purpose and a good ESG strategy benefit from the “triple bottom line” effect, where they see a combination of increase revenue, reduced costs and greater talent retention.
The talent retention benefits from having a clear ESG strategy are likely to become increasingly important over the next few years, as companies seek to become more innovative and transform their business models.
Governments, businesses and individuals all have a part to play in addressing ESG and becoming more sustainable. Fortunately, the financial benefits from sustainability are such that it should make commercial sense for all types of companies providing they are prepared to be innovative. And, in the words of Sir David Attenborough:
“Humans are great problem solvers. We need to imagine a better future and work to create it.”