Unpacking the complexities of ESG and Sustainability
The impact of climate change has become a business and household reality, and the world as we know it has changed dramatically.In a recent article published by the World Economic Forum, which investigated the factors shaping the future of consumption and buying decisions, it was highlighted that consumers and employees, who form part of the critical stakeholders of any organisation, especially the next generation such as Millennials and Gen Z, have increasingly different expectations for both businesses they buy from, invest in and work for.
Leaders are under pressure from various stakeholders and the market to prove that their organisations are acting responsibly and sustainably amid rising concerns over climate change and the impacts of business on people and society.
Last year’s United Nations Climate Change Conference, more commonly referred to as COP26 and the recent World Economic Forum (WEF) has shown that there has been a visible step-change in the global financial industry’s support in the fight against climate change and their commitment toward reaching the Paris Agreement targets, ultimately reducing global greenhouse gas emissions by at least 45% by 2030 to reach net zero ambition by 2050.
Namibian financial services companies are not isolated from the global shift towards combating climate change and continue to play a pivotal role in achieving the 17 United Nations Sustainable Development Goals. More specifically, driving socio-economic development by providing access to favourable capital and enabling financial inclusion across the country.
Climate risks
Regarding sustainability, the African continent is susceptible to climate risks, social cohesion erosion and severe debt, which have been highlighted as the most critical global risks for the next decade.
Hence, financial services companies face increasing pressure from their stakeholders in the communities where they operate to proactively contribute and effectively address and disclose their commitment to the continent's interrelated sustainability challenges while demonstrating optimal financial performance. Now, more than ever, it is vital to embed ESG (environment, social, and governance) risk management, reporting and disclosure practices and other sustainability initiatives into business models and strategies to build resilient organisations that are set to thrive and that will remain relevant and competitive in the new reality and future we are facing.
It is well established that ESG and sustainability have become two popular but significant terms that are floated around the corporate sphere. Furthermore, ESG and sustainability reporting and disclosure are complex and constantly evolving due to the lack of consistent taxonomy, standards, and globally accepted and relevant guidelines. However, whilst many similarities exist between a business's ESG and sustainability aspects, these terms are not to be used interchangeably as their specific meanings differ.
Long-term value
The factors that relate to the three distinct Environmental, Social and Governance pillars comprise a wide array of core non-financial elements that represent risks and opportunities that will impact the ability of a company to create long-term value. These elements include climate change, carbon footprint and natural resource scarcity. The social dimension includes labour practices, employee and community wellness and data privacy. The governance pillar addresses board and executive management composition, ethics and transparency. In other words, these unique factors underlying each ESG pillar provide a practical framework for companies to identify material matters and evaluate, monitor, and report their impact and dependencies on the environment, society and corporate governance, and vice versa. The level and quality of ESG reporting and disclosure is ultimately used to measure the overall sustainability performance of an organisation.
Moreover, sustainability refers to the ability of an organisation to operate and conduct business without a negative impact on the environment, the communities in which they operate or society. Furthermore, sustainability is not about how a company spends its profits but how they generate them. Holistically, the aspects related to ESG and sustainability act as a guide to making informed decisions and ensuring that the short-term profits of the company or organisation do not turn into long-term liabilities.
Do good to do well
However, it is essential to note that social and environmental responsibility and sustainable profit go hand in hand; companies must do good to do well - a concept referred to as creating shared value for all stakeholders. Therefore, it is clear why investors, regulators and various other stakeholders across society are increasingly demanding greater transparency from organisations on their ESG and sustainability ambition, maturity level and impact to help assess any organisation's long-term value and overall performance. However, it is crucial that organisations venture on this complex but rewarding ESG and sustainability integration journey for the right reasons. This sustainability integration journey must not be seen as a compliance tick-box exercise, a nice to have or simply to get a picture posted on social media platforms.
Therefore, organisations that embark on this journey should showcase authentic and responsible leadership. Their commitment to making a difference must be communicated across all levels and become visible in the organisation's culture.
Sustainability is not about how a company spends its profits but how they generate them.
Ruan Bestbier is Capricorn Group’s Head: Sustainability.