Companies see ESG as opportunity to rise above competitors

Conversations around environmental, social, and governance issues (ESG) are shifting from compliance and corporate responsibility to competitiveness as businesses increasingly see ESG as an opportunity to stand out to investors, customers, and talent.

At a recent panel discussion on ESG metrics during Davos Agenda 2022, a virtual event organised by the World Economic Forum, CEOs said a focus on ESG has helped companies become more attractive to investors, customers, and prospective employees. For Philips, the home appliance and health technology company, implementing ESG and a circular economy model led to increased customer loyalty.

A crucial first step to embracing ESG is to track and report the right metrics, the panellists said. And there has been positive development in the past year to converge the many ESG reporting frameworks in the market.

Last year, one major announcement was the merger of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) to create the Value Reporting Foundation in the middle of last year.

In December during COP26, the UN summit on climate change, the IFRS Foundation announced the creation of an International Sustainability Standards Board (ISSB) that was created to provide a uniform set of rules for reporting on ESG.

The panellists agreed that such developments towards a common set of ESG metrics are good steps in the right direction.

Getting started on the ESG journey begins with a commitment to measure and use the data to meet sustainability targets, said panellist Julie Sweet, chair and CEO of Accenture. She explained that the shift from merely reporting ESG metrics to using that data to measure performance is key to making sustainability work.

"My top 500 leaders are measured by not only financials but how we're meeting all of those sustainability goals," Sweet said. "Our investment priorities reflect investing in this [sustainability] on behalf of our clients, whether it's building algorithms to see child labour and supply chains or to measure the reduction of carbon emissions."

"This is about a decision, this is not rocket science," she said, adding that it took Accenture 15 months to progress from reporting on three sustainability frameworks to six frameworks and to get the data needed and assurance on its reports.

Gaining customer loyalty

After Philips adopted the circular economy model to reduce waste and increase the use of recyclable materials in its supply chain, it realised that the more sustainable model didn't increase cost or reduce profitability, said panellist Frans van Houten, CEO of Royal Philips.

"Customers want to be a part of it, and the loyalty of our customer base has gone up as a consequence," he said. "If you fully embed it into your operation, this [sustainability] is not an obligation like CSR [corporate social responsibility] was, but it's a fundamentally different way of running your end-to-end supply chain."

The company implemented a standard set of ESG metrics that is used across the organisation in the 150 countries where it is present. This emphasis on ESG means that all employees are familiar with their task to achieve ESG targets.

"We already moved beyond only measuring and rewarding on financial metrics, and we have embraced this wider set of metrics," van Houten added. "Our external accountant provides assurance on these numbers. There are controls in place … so that the assurance review is easier for the accountant. We should not overcomplicate this topic, I think it's quite doable."

Attracting investments in emerging markets

Alain Bejjani, CEO of Majid Al Futtaim Holding — a developer and shopping mall operator based in the UAE — said that embracing ESG can help companies, especially those in emerging markets, to broaden their investor base to ensure sustainable growth.

In 2019, Majid Al Futtaim issued a $600 million green Islamic bond, the first in the Middle East region. Its green bond was oversubscribed by almost six times with two-thirds of investors from outside the company's region, signalling strong global investor interest in funding companies that care about ESG issues.

"It's possible, technically and practically, on the ground," said Bejjani, speaking on the panel. "It's possible to measure it, it's possible to drive the cultural transformation — driving ownership, giving people tools to do it — and it's possible to transparently report into it."

But Bejjani stressed that it's critical for companies to also disclose actual changes that improved environmental and social conditions.

"We have to be transparent on the full spectrum. We cannot just choose to be transparent on one end and not the other end," he said.

ESG is about aligning the organisation

Chair and CEO of Bank of America Brian Moynihan said on the panel that ESG reporting is about an organisation bringing its business activities in line with its sustainability goals on everything from how resources are consumed and products are made, to how supply chains are run.

"The difference people miss when they get caught up in accounting is what we're doing is aligning the entire of capitalism towards the tasks that people want capitalism to do."

Van Houten of Philips said that his organisation achieved carbon neutrality in five years after it began measuring ESG metrics and held its employees accountable to sustainability goals.

"I would like to exude the confidence that this is eminently doable, you just need to get on the learning curve so that you make progress," van Houten said. "There's no time to lose because, if you think about the whole climate debate, then we're going way too slow to get to carbon neutrality."

— To comment on this article or to suggest an idea for another article, contact Alexis See Tho at Alexis.SeeTho@aicpa-cima.com.