The growing significance of ESG
Dr. Glenn Agung Hole
Associate Professor in Entrepreneurship, Economics & Management | Tax, Economic & Corporate Advisor | Digitalization, SCM & ESG Expert | Mentor | Former CEO & Executive Leader | Engaging Public Speaker
Today we see more significant demands for sustainability through a focus on ESG (environment, social and governance). More and more companies are hiring sustainability directors or ESG directors. ESG refers to a way of doing business that considers environmental, social and governance elements, focusing on conducting business ethically in all three areas.
Until quite recently, the focus has been on traditional business development, and the pursuit of profit is being challenged by a new business logic where value creation is not only about the financial bottom line but, to a large extent, also about consideration for the climate, environment, and society and how the business manages its resources drives innovation and affects the environment. Running a sustainable business has become a prerequisite for operating profitably in many industries. Sustainable companies and companies that work strategically with sustainability are increasingly attractive to investors. It is also claimed from more and more quarters that the capital will be mobilised towards companies that work strategically with sustainability.
Background
The concept of sustainability was first mentioned in "Our common future", which the World Commission presented on Environment and Development, better known as the Brundtland Commission, in 1987. "Sustainable development is a societal development that meets today's consumption needs without impairing the opportunities for future generations to meet their needs". In 1993, author and entrepreneur John Elkington launched the three-part bottom line (People, Planet and Profit) in social economics. Traditionally, the bottom line in a business had only focused on the financial results. A company can make large profits yet be damaging to society. Or vice versa, the company may struggle financially but have positive ripple effects on other conditions.
The UN's sustainability goals, which came into effect in 2016, have provided a framework for nations, municipalities, and companies in their efforts to understand how they can contribute to solving some of our time's biggest sustainability challenges. In 2019, the EU also launched its sustainability strategy, the "EU Sustainable Finance Action Plan". Over the next few years, action plans and legislative changes will be rolled out to affect companies in all industries. The EU’s action plan has made the financial sector wake up and see its role in the transformation to sustainable development.
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An essential tool for the green transition
The EU is doing important work in facilitating the financial industry to contribute to the transition to a low-emission society and to manage the climate risk. With its action plan for sustainable finance, the EU aims to divert capital towards more sustainable investments, manage financial risk from climate change and environmental and social problems and promote transparency and long-termism in financial and economic activity. The framework for sustainable finance will also apply to Norwegian actors through the EEA agreement.
The economic sectors that account for the most significant emissions of greenhouse gases in the EU have been prioritised in the taxonomy. The taxonomy is under constant development. The EU is putting weight behind its action plan. The classification system will become essential for freeing up and moving investment capital to green industries and transition.
We are already seeing examples of companies with green products attracting attention in the media and connection with stock market listings. Still, the taxonomy does not only emphasise that the final product or service must be green or that it contributes to solving a social challenge. Sustainability must be integrated into business management and day-to-day operations if the company is to gain points in the EU's new classification system.
For economic activity to be defined as sustainable, it must contribute significantly to achieving at least one of the six environmental goals below. The action cannot significantly impact the other ecological objectives and must meet minimum social and governance conditions requirements. According to the taxonomy, financial market participants and large enterprises must report whether their investments and activities comply with sustainability criteria.
The regulation establishing the framework for the taxonomy defines six environmental objectives:
? Limitation of climate change
? Climate adaptation
? Sustainable use and protection of water and marine resources
? Conversion to a circular economy, waste prevention and recycling
? Prevention and control of pollution
? Protection of species diversity and healthy ecosystems
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C-Level executives need to understand sustainability trends.
Earlier, I lectured on the green transformation of businesses at Inland Norway University of Applied Sciences (INN University). What I wondered about was the absence of c-level executives in the program. If there is anyone who should take the course in the green restructuring of businesses, it is precisely employees who have a c-level position or have the ambition to enter the c-level. Since sustainability is raised as a topic in legislation and changes to the financial markets, this is increasingly on top managers' agendas. Sustainability is seen as a premise for profitability - from a long-term perspective. It is about being relevant tomorrow by dealing with a new reality, where we see increased attention to sustainability - whether it concerns the climate, environment, or social conditions. It requires a new mindset, knowledge, and courage to implement the necessary changes that take the company in a new direction, preferably a focus not on the syllabus at business schools in three decades from the 70s until the 20s.
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How can sustainability be integrated into strategy work?
Spotlight on sustainability from investors, customers, employees, authorities, and other "stakeholders" means that the sustainability discussion is increasingly being moved into boardrooms. The company's management and board representatives feel they must understand sustainability trends and how to reorient the company's activities in a more sustainable direction. If the business is to drive sustainable development that produces concrete and measurable results, it must think strategically and holistically and set itself up for rapid change. It requires insight, expertise, and suitable investments –often lacking in management groups and boards.
There is an increasing degree of companies working to integrate sustainability into the strategy process. We will highlight some important conditions for this to give a satisfactory result. Lack of insight and good intentions to get sustainability on the agenda can lead to companies not always getting a holistic approach to how they can contribute to a better world while developing more sustainable business models.
There are several relevant questions that senior management and the board should ask themselves in the process of integrating sustainability into the strategic work:
? How does the business handle financial and physical climate risk?
? Do the products produced or sold contain a raw material that will be in short supply in the future?
? Are goods produced in countries with a risk of human or workers' rights violations?
? Do investors demand ESG reporting?
? Are the customers interested in sustainability?
? What expectations do own employees have of the company's spotlight on sustainability and is the management's spotlight real?
? How do the competitors position themselves about sustainability?
It is essential to have sufficient insight into the expectations of key players in the company's environment and value chain for working with sustainability. To gain the necessary understanding, key actors must be involved to identify and prioritise objectives within sustainability that are most relevant to the company and where the positive impact can be most significant. The table below illustrates an example of conditions and priorities that the various actors may typically be concerned with.
Gaining insight from the company's central players can be done in several ways in the form of conversations, interviews, or dialogue in connection with other meetings. Some actors also explicitly express their expectations of different actors with whom they must interact.
A business interacts with many actors, suppliers in its value chain, central authorities, customers, and owners. Therefore, it is essential to have a good and close dialogue on sustainability issues. Changing a culture in "established" businesses can be challenging, and sustainability initiatives require the company to work differently than before. Thus, a close and good dialogue with the company's environment can contribute to getting support in launching sustainability initiatives.?
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Strategic ESG work
As former CEO of Norway's largest second-hand retailer with 50 retail shops around Norway and a textile collector, I introduced ESG goals to the group. The work was both about seeing the business's positive and negative impact on the goals and using the goals as levers for sustainable business development in the retail group. We selected five of the UN's sustainability goals as the framework for further work of the group, with sustainability as an integral part of the group’s business strategy. During this period, I also wrote two scientific articles about the textile industry and its enormous environmental impact on the world.
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Any business can take an outside and inside perspective and consider which sustainability challenges it will most likely contribute to through its product, service, or business model. Many businesses have already seen the value of using the UN's sustainability goals as a framework to identify relevant challenges that their business can help solve.
The business can also take an inside and outside perspective - starting from the products or the business model on which the company is founded. How can a spotlight on sustainability create a business return in the form of, e.g., achieving preferred supplier status, a differentiated profile compared to competitors, operational savings, or attracting new customer segments?
As a management consultant and associate professor within digital business transformation and sustainability, I now work to assist businesses with both digital and, finally, green shifts. It is about understanding that every context is dependent on each other—the world's impact on a business - and the business`s impact on the planet. A good strategy is about understanding developments in the market and moving the company in step with the changes.
A comprehensive transformation
As a thought leader in business transformation, I always underpin the importance that any change must start from a business's vision. This means that sustainability should be reflected in the company's vision because the company's vision provides direction for the future and should show where the company wants to be. It's about thinking longer and bigger.
Sustainability initiatives have little value if they remain visions and ideas on paper. Enterprises should be operationalised, and since the company's employees are an important stakeholder group, it is vital to launch internal initiatives quickly, especially if there are low-hanging fruits - or measures that the internal organisation has pointed out on several occasions. Within today's textile industry, large-scale greenwashing is currently taking place to appear more environmentally friendly than they are, which I know well from my time as CEO of Norway's largest second-hand retailer of textiles. It all boils down to whether there is a match between words and actions. Small measures, such as the business taking its own medicine, mean a lot in terms of credibility, and the management is profound. A mistake some companies make is that they start with external communication or buy advertising space in prominent newspapers and thus get beaten up by their employees because they don't see that it relates to the practice they are experiencing. As former CEO, I spend much time in the strategy process, building competence internally and giving employees across the organisation responsible for pointing out areas they believe the organisation should improve on and getting input on future business opportunities through sustainability.
Strategic sustainability does not come with a ready-made recipe or a set of ready-made objectives and KPIs. Therefore, it is about learning and allowing the organisation to make mistakes.
Key Performance Indicators (KPIs) are metrics used to evaluate goal achievement. KPIs help to ensure that the strategy set is achieved. To operationalise the strategy, it is essential to set KPIs that work. You often end up with many KPIs without knowing what the organisation wants to achieve. A short strategy definition makes it easier to define goals and how they will be achieved.
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How to use the UN's sustainability goals as a framework for strategy work
One of the first things I did as a former CEO was registered the business in the UN Global Compact Norway and implement the UN's sustainability goals as a framework for the business's strategy work. It’s a great way to use the UN's sustainability goals as a framework for strategic work with sustainability. Initially, it may be good to conduct an overall survey of the following:
? Which sustainability goals does the business contribute to through its core business? Such a simple exercise can kick-start the work and create pride and recognition of existing initiatives that have already been established.
? All businesses hurt the environment and society, and the sustainability goals can also be used to understand better where the operations negatively affect the business’s value chain plans. This essential risk survey can open your eyes to current or future business risks.
? Behind each of the sustainability goals are business opportunities. The value of the work on the sustainability goals is estimated at 12 trillion dollars in savings and new business opportunities by 2030. Therefore, the plans are well-suited as levers for business development and innovation. Using the goals as a market arena helps future-proof the business and can support the business focus on developing new services and products that the global community will need.
? The sustainability goals are also suitable as inspiration for thinking more extensively and more prolonged in work with sustainability - preferably in partnership with others. Going ahead and being an inspiration for other businesses can partly give national and international recognition and increase competitiveness and access to new markets.
Using the UN's sustainability goals is about not gaping at too many purposes but selecting plans with both upsides and downsides that should be worked on.
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What will a successful integration of sustainability in the strategy entail?
It is demanding to work with strategy and make the right choices to succeed in the market. Integrating sustainability into the company's business strategy can create success in several areas.
? The company that has a strategy where sustainability is an essential factor - clearly increases the "survivability" of the company.
? The company will differentiate itself from competitors through strategic attention to sustainability.
? Environmentally friendly products and services meet the needs of key "stakeholders" and customers (which they may not be able to meet today).
? It will contribute to a strengthened brand and reputation.
? Better relations with "stakeholders" who gain more trust and insight into how the company works with sustainability.
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Critical characteristics of future C-level executives
Changing the company's current business model and culture takes time and effort. The company's top management, especially the managing director, plays an essential role in bringing about a value-creating and involving change process. From my perspective as a former CEO and now as a management consultant and academician, future C-level managers need the following qualities to bring a business into the future to transition to sustainable business success.
Conclusion
There is undoubtedly a growing interest in ESG and sustainability from investors, private equity funds and family offices, and companies experiencing increased demands and expectations from foreign investor communities. The companies that manage the transformation in a good way and, in addition, adapt their business model to help solve sustainability challenges now receive a premium in the company’s valuation, thereby creating increased competitiveness.
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2 年Thanks for posting
Competence is about motivation, not age. Social sustainability must be the foundation we build both a secure digital society and cognitive recilience/security.
2 年Thanks for sharing Dr. Glenn Hole, Ph.D. I belive that both the tripple bottomline, and ESG are good principal frameworks for designing future workinglife. I have had dialogs with different people regarding tendencies one can see emerging. "The big escape, Quiet quitting, etc.", all more or less grounded in the changed expectations from customers and staff alike. For that reason I can not understand the resistance one can see in exutives, leaders and management, regarding these concepts. At least one could expect curiosity, but it seems like even this is absent. Writing, and talking about it is a necessity. So, again, thanks for sharing your insight Dr. Glenn Hole, Ph.D.
Regnskapsleder/controller i Universitetet i Bergen (UiB)
2 年Enig med deg Lars-Arne Pettersen
Tidligere Assisterende leder ?konomi i Oslo kommune - n? uf?retrygdet
2 年Sustainability is the most inflated word there is. There are generally very few people who are able to explain this in a good enough way. Everything should be sustainable today, even if that is not the case at all. Here I think you have a good explanation and visual display of what you think about sustainability.
Create job satisfaction and get engaged employees! | Strategy | Facilitation | Coaching | Teaching | Consciousness | Mindfulness | Human Design
2 年Dr. Glenn Hole, Ph.D. I am actually building an alternative model to the People, Planet, Profit. It definitely has its value, but also some flaws. People and the Planet are complex, organic systems that are connected. People are in fact many systems, and the Planet is (as far as we know) the largest of them. Profit is only "fuel" to make the systems work, circulating through all the systems. In the people dimension of sustainability, I find that "well-being" is what we are looking for. I think this is another circuit, well-being circulating through all or systems. We shouldn't optimize the flow for only one, but both of these. Also, we have a couple of other flows that are not shown in this diagram: operational and informational flows. These are "engines", driving the other flows, but also the ones increasing the value to be distributed in the systems. Sustainability in this matter is optimizing for maximum flow in all these flows, in parallel, where well-being considers both individual, team and all the way up to planet. I'm not done thinking about this, so it's incomplete. It's partially inspired by the concepts of Tameflow by Steve Tendon, but I've added my own thoughtwork to it as well.