Many recent discussions around ESG and sustainability have focused on the semantics of how a business can describe itself as being ‘good’, or just plain investable. Language and stories are critical for Boards and Executives to ensure that both sides of that conversation have a common understanding of inputs and outcomes.
At its heart, this is a consistent roadshow narrative around what sort of business you want to build, how you are going to get there and the measures you are using to ensure you stay on track. Looking back to Michael Porter's work in 1985 on competitive advantage, the discussion around cost, focus and differentiation remains. However, the world today has added a huge menu of ingredients to company reporting and disclosure against which companies will be judged.
This battle of semantics has led to a huge over-simplification of sustainability with attempts to find a quick fix, supporting number or ‘tick’ to justify the (understandable) challenge of comparing decisions across complex functions and geographies. A simple example of this is the emerging topic of biodiversity where the language can easily be driven by charismatic flora and fauna or by large creatures such as elephants or lions. However the vast majority of the planet depends on the fungi and bugs that build the basis of our eco-system and sit largely in the unseen depths of the balance sheet of our planet.
As the reporting standards and frameworks for disclosure and compliance are still being established to define everything from carbon and water to goodwill and brand value, the task of marrying good narrative, good governance and good data is on many Board agendas.
It is therefore unsurprising to read in the recent Norman Broadbent and BDO survey report that the focus for many Boards is returning to risk and what this means for their commercial model.
So, what does it mean, and what can you do?
The discussion on materiality can often be wafted away with a wave of the risk register. That said, how many of the controls in place really change the risks? Or are they merely data and reporting? Do they dare to delve into the business supply chains and challenge the value chain of your business so that you can really differentiate … with evidence?
Good governance is by its nature forward-looking and, as part of the company strategy, can really help a business with a global footprint understand where they are doing the bare minimum, or whether there is alignment of principles with appropriate standards and accountability. The greater transparency on how this is achieved is akin to a paraphrase of a quote from St Matthews gospel that “A business built on a hill cannot be hidden”.
The elite climber Alex Honnold, known for his solo free climb of the nearly 3000ft El Capitan rock face, talks a lot about risk and consequence. For many business leaders, the example of his ability to see a goal, recognise the risks inherent in that challenge and build capabilities so that he can do things that others thought impossible has a strong logic. For Boards, this means a deeper understanding of what context they are operating in, their operational intensity, actions being taken and what opportunities remain that align to their values.
The context for these risks and how they impact the resilience and sustainability of a business is significant. For a heavy industry this may be capex/ opex planning and HSE, or the investments to deliver an energy transition: a consumer and services business may wrestle with data, human rights, supply chain and consumer brand loyalty. These all have a great story to tell to show how you can de-risk an investment better than the next person and build a resilient licence-to-operate. There is now a greater appreciation that you do not have to throw the kitchen sink at disclosure with an attempt to try and cover everything.
The climate crisis may have gained focus in recent years, however finance cannot get ahead of the real economy. As the former Chair of the SASB standards Robert Eccles puts it1, climate can pose financial risk, but not always, and managing that risk is not the same as managing climate impact and a business can have high impact even when financial risk is low. Furthermore, events such as the war in Ukraine and geopolitical tensions between US and China impacting global supply chains show that the social and political risks are just as critical to manage and have real business impact when not addressed.
Boards need to look behind the labels of their business brands and test how their values align to the value creation model. Sustainability is a topic that sits in every function and managing the risks associated with it is increasingly recognised as a being integral to business strategy and value creation. A challenge for many Boards is whether it has that capability in place, where to build it in the Executive team and then to have the right tools in place to support and validate progress and performance.
1Source: Forbes (April 2024), “Untangling Climate Risk, Financial Risk and Climate Impact. Robert Eccles: https://www.forbes.com/sites/bobeccles/2024/04/18/untangling-climate-risk-financial-risk-and-climate-impact/?sh=6eafcf393a28