Taking sustainability into the boardroom
Corporate sustainability should be at the heart of boardroom activity, says Zoi Kontodimou, Chair of the CQI’s Sustainability special interest group.
ESG – Environmental, Social, and Governance – is a term coined in 2004 in a report from the United Nations entitled Who Cares Wins. Companies were expected to implement ESG policies and principles, as well as report relevant challenges and results, using the same investor relation communication channels, such as their annual reports.
By managing its ESG risks and embracing relevant opportunities, a company could manage such issues properly, while also driving shareholder value. Good ESG performance was considered relevant to reduced risk levels and management quality – the usual determinants of a company’s long-term success.
The main idea was that by implementing ESG criteria in its operations, including client assessment, the financial industry would become more resilient and contribute to sustainable development by managing ESG risks in their portfolios of investments, lending or asset management. The ESG acronym was developed to focus on issues that have, or could have, a material impact on a company’s investment value. The term ‘materiality’ was used more broadly, with longer-term horizons of about 10 years, but only financial materiality was involved.
The term ESG slowly became a topic discussed broadly in the boardrooms by C-suite executives. Today, 18 years after the term was coined, and with more than 30 years of efforts to reduce environmental damage, is it still considered enough, or should we now bring sustainability and double materiality to the boardrooms?
Now or never approach
After this year’s annual report of the Intergovernmental Panel on Climate Change (IPCC), where a ‘now or never’ approach to a low carbon economy and society is needed, the answer seems to be clear in environmental terms.
In social terms, the answer remains pretty much the same. More than 85% of global consumers have a greener approach to purchasing decisions, with younger consumers taking the lead. In governance terms as well, 71% of investors consider companies with good sustainability strategies to make good investments.
After all these years, it is yet another moment for a change. The time window is closing rapidly, and companies once again have a major part to play in regard to contributing to sustainable development. We must speed things up when it comes to assessing not only the elements that have an impact on a company’s financial performance, but also the elements a company impacts with its operations, in environmental, economic, and social terms.
"For companies to lead the sustainability race, they must bring sustainability rather than ESG in the boardrooms."Zoi Kontodimou, Chair of the CQI’s Sustainability special interest group and Corporate Sustainability PhD Researcher
It is time for double materiality to enter the boardrooms, and for sustainability management to take the lead. Viewing sustainability only through an ESG risk and financial materiality lens is to underestimate future financial risks and fail to identify and seize emerging opportunities.
Good corporate sustainability should be managed through a systems approach. That means several inter-dependent processes should be governed in such a way that not only economic, environmental, and social risks are minimised and opportunities are taken advantage of, but also that a company has a positive impact regarding those elements.
A regenerative approach is in order. It is not just about stopping damage to the Earth and pushing environmental system boundaries, but also about reducing the damage already done.
The EU mandatory reporting guidelines adopt a double materiality approach to sustainability disclosures. This means that, slowly, a change is occurring. ESG served its purpose – and will continue to do so. But for companies to lead the sustainability race, they must bring sustainability rather than ESG in the boardrooms.
They must adopt a regenerative approach instead of a reactive one, in terms of environmental and social issues. They must integrate various processes so that they operate as a system to resolve pressing problems such as carbon neutrality, equality, diversity, and inclusion, as well as good financial results.
The business case for corporate sustainability is backed by evidence and research. Companies that perform well in environmental and social terms also perform better in economic and business terms. Bringing corporate sustainability into the boardrooms is next year's competitive advantage.
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