On the surface, ESG seems to be having a bad year. The political rhetoric in the United States has grown more bipolar, and the ESG agenda is increasingly a front in the culture wars. Terms such as "woke" are being attributed to ESG programs and used in ways to foster political divisiveness, rather than understand their underlying definition and application. The failures of multiple crypto companies and traditional banks, many which had trumpeted diversity and portions of the ESG agenda, have given those opposed to ESG principles a popular meme and running punchline.
Without getting into the merits of classifying specific failed crypto companies and banks as case studies in ESG gone awry (though I would say that proper controls and risk management should be a core component of any ESG program), pursuing a holistic and measurable ESG program is still essential for every business today to address current issues and increasing disruptions in order to track and generate tangible positive results—financial and otherwise—if pursued in the right way.
Importantly, consumer and investor demands that companies take a broader, stakeholder view to create enhanced value are not going away, and while the political environment creates a lot of noise and confusion, both implemented and forthcoming regulations create increasing ESG requirements for many companies. Proactively implementing ESG initiatives while addressing requirements results in a framework to capture enhanced value. In our Eighth Annual Private Equity (PE) Leadership Survey, 69% of respondents consider ESG a new lever for value creation (up 16 points from last year) and the same percentage of PE leaders are willing to invest in ESG initiatives without considering the potential for financial benefit. Whatever its political credentials, ESG creates value not otherwise recognized in today's traditional business models.
During times like these of evolving areas of concern and economic uncertainty, pressures to focus on short-term profitability will of course increase, but many of the supposed tradeoffs are, in fact, false choices, as you build toward a sustainable, long-term future for your company. ESG concerns now rival data privacy and cybersecurity as top potential areas of dispute, and among some industries, such as Energy, Mining and Infrastructure, and Healthcare and Life Sciences, concerns over ESG disputes now predominate. Understanding how ESG should be integrated within your business - prioritizing areas material to your strategy, operations, and stakeholders, while also mitigating risks – is critical to creating incremental profits while also building that denser more sustainable value.
Getting ESG right isn't about recreating the wheel. It's about making the wheel more resilient with better ROI. A pragmatic approach to ESG is mirroring an enterprise risk management framework to understand the strength of an organization's resilience as a result of ESG material impact and likelihood of occurrence.
Inherent resiliency is built by identifying key vulnerabilities to losing value and addressing the risk through implementing mitigating controls and strategic ESG program development. By pragmatically measuring resiliency and addressing resulting areas of vulnerability, an organization can quickly strengthen their residual resiliency and focus on key priorities aimed at creating more impenetrable economic and impact value for the organization.
Active governance at the highest levels (including the board) plus cross-functional coordination across an organization to capture not only risks but substance that increases ESG resiliency, is critical to holistically account for ESG throughout the organization and evidence value creation in ESG efforts.
Building a more resilient and sustainable future for your company isn't "woke," but understanding how societal facts and issues are and could be material your business should be considered. Developing a holistic and pragmatic ESG program isn't just prudent - it is increasingly essential and considered mandatory by consumers, employees, investors, and regulators.
Don't get tricked by the rhetoric. Build a stronger organization today.
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