Today the influence of ESG continues to grow. Both strategically and culturally ESG is driving transformation across the entire business spectrum, and reshaping conversations at the boardroom and executive table. Here James Allen, a partner at Gerard Daniels, considers how and why the focus on ESG is growing, and the implications ESG will have for current and future leaders.
Why is demand for ESG growing?
To set a benchmark, ten years ago just 20% of S&P 500 companies measured and reported on sustainability. Now in 2021 this figure has grown to 90%. While the ESG agenda has been gaining momentum for some time, James argues that the events of the last 18 months have accelerated this transformation.
“The unique operating conditions during COVID have forced many businesses to rethink issues like sustainability, inclusivity and governance,” James explains. “And much like the digital transformation businesses have undergone in recent years, we are now seeing another wave of corporate transformation being led by ESG.”
“Demand for effective ESG policy is growing not only from shareholders and investors, but from customers, employees and other stakeholders too,” James continues. “Its clear that these changes represent a societal shift, just as much as a corporate one.”
While the environmental benefits of ESG have always been clear, growing appreciation for the commercial benefits of ESG is another factor driving this change.
“At board level there is better understanding of the positive impact ESG can have on long-term profitability and business performance, fuelling investment and strategic focus on this issue,” says James. “This sentiment is backed by growing evidence that the companies reporting on ESG will continue to outperform their peers. This is in part, stems from a cultural shift at Board level with a marked increase in highly skilled sustainability focussed Non-Executive Directors taking a critical seat in the Boardroom.”
The strategic influence of ESG
ESG is growing not only in focus, but in business influence too. “This issue is becoming more prevalent in the conversations we are having with CEOs and board members – in terms of corporate responsibility but also as a source of broader value creation for our clients,” says James. “Traditionally business success was aligned firstly with financial gains, but businesses are beginning to shift their focus and thinking around ESG to deliver value more broadly across all stakeholders.”
Setting clear and ambitious targets is becoming an important part of embedding ESG principles within businesses, and driving change. “ESG is no longer seen as an afterthought,” he says. “Setting aggressive targets is helping businesses to elevate the strategic importance of ESG. It also creates greater impetus for leaders to change the actions and culture of an organisation to ensure that these targets can be met.”
The mining sector provides some good examples of the growing strategic importance of ESG and the continued and increasing demand to utilise green energy. “Many major mining companies are now implementing and investing in new energy technologies, just to deliver on aggressive carbon reduction targets,” says James. “This sector is also increasingly building sustainability factors into new project assessments and allowing ESG to influence corporate investment and to shape project design and construction methods.”
“To align with the green energy transition we are witnessing an obvious shift with resources companies working towards more sustainable alternative fuel sources – like hydrogen – to power their existing operations,” James continues.
Demand for the raw materials that enable low-carbon technologies will continue to grow alongside the demand for these products and technologies, and many of Gerard Daniels’ clients will also continue to respond to this shift in mineral demand. “As a business it is a privilege to be involved in engagements that fuel the growth of frontier technology and renewable energy, and to support the groups that are leading the charge for climate change,” says James.
Leadership accountability for ESG
As the concept of ESG matures, James believes the role of business leaders in shaping this transformation and sustaining this change will continue to grow.
“A critical rethink is underway around what it actually means to be successful as a business, and as a business leader,” says James. “It’s no longer enough for business leaders to have good intentions. Today’s business leaders are not to be judged on their ESG aspirations, but on their ESG performance rating and their ability and willingness to act.”
The linking of executive pay with sustainability performance is one change that is driving business leaders to achieve better ESG outcomes. The growing seniority of ESG leadership roles is another important factor that is allowing this influence to grow.
“Much like the Chief Information Officer has become a critical role in an organisation’s leadership around digital transformation, some of the new and emerging senior leadership roles such as Chief Sustainability Officers will solidify the strategic influence of ESG, and new leaders’ ability to deliver on it.”
To discuss new and emerging leadership roles or for advice on growing the influence of ESG within your organisation, reach out to Gerard Daniels today.
