Companies must be prepared for an ESG revolution

ESG has been on the agenda of many Dutch companies for years. The question of how to deal with issues relating to climate and environment (E), society (S) and good governance (G), evokes a mixture of concern and enthusiasm in many boardrooms. What risks do we run? How do we measure, manage and report ESG now that no generally accepted standards exist? What should we focus on while there is a long list of possible issues? 

Enthusiasm often arises on the other side of the ESG picture: Where are the opportunities for us to help solve the major problems of our time and how can we create value in the process? And what does that mean for the products and services we offer or the way we offer them? 

The force field

Various developments make these questions topical:

• An increasing group of socially-minded consumers are more likely to put their money where their mouth is. Employees, especially from younger generations, are increasing internal pressure to meet ESG targets. Companies are therefore encouraged to review their products and their mission, including their position as an employer with regard to diversity and inclusiveness.     
• Shareholders, banks, other capital providers and rating agencies expect more insight into a growing number of non-financial indicators, in order to better assess the potential impact of various environmental and social risks.
• Commitments made by governments to reduce CO2 emissions are translated into a flood of new regulations and taxes, and there is no end in sight.
• Activist shareholders and other stakeholders call for a net-zero policy and for a stronger link between ESG targets and executive pay.

By 2021, these forces seem to have resulted in a tipping point. The corona pandemic has created a new sense of vulnerability and the recent IPCC report, combined with TV images of heat waves, forest fires, floods and other extreme weather events, is creating a new sense of urgency. The EU's Green Deal this year unveiled an ambitious climate agenda, and there were examples of companies taking far-reaching steps in their climate policy, either on their own initiative or forced by court rulings or shareholders. Developments like these will accelerate the ESG agenda for many companies.

The three dimensions of the ESG revolution

Companies will therefore have to be prepared for fundamental changes in virtually all aspects of their organisation, in what we call the three dimensions of the ESG revolution: reimagined reporting, strategic reinvention and large-scale business transformation. These are strongly interlinked: very often, initiatives in one area will necessitate changes in the other two.

• Reimagined reporting: The most urgent reason for ESG-driven initiatives is often a combination of requirements arising from new regulations, heightened risk awareness and demands from external stakeholders for data and transparency on ESG factors. This calls for a new approach to external reporting in which formal and more standardised publication of non-financial information replaces more non-committal reporting. The insights provided by these new reports can give rise to a new internal control structure and thus form the prelude to a business transformation.
• Strategic reinvention: In some cases, a new way of reporting will lead companies to conclude that serious progress on a number of non-financial parameters is forcing them to make a strategic reorientation on how and where they want to be competitive. Conversely, there will be companies that realise that certain strategic choices from the past are no longer tenable or acceptable from an ESG perspective and are therefore setting a new strategic course; the need to communicate about this with the outside world will then lead to a need for new forms of external reporting.
• Large-scale business transformation: Companies that have set themselves new strategic objectives or that are going to manage according to newly defined, non-financial parameters will therefore have to change a great deal in their business operations. Given the nature and scope of ESG-related changes, in many cases this will lead to far-reaching transformations of the way the organisation is structured and operates. ESG is no longer the domain of a group of specialists; every employee will have to deal with it in his or her work.

ESG agenda will ultimately encompass all three dimensions

ESG means something different to every company. Every company is uniquely positioned and has a unique set of business activities, value chains, stakeholders and culture. In response, each company formulates its own programme of changes that is required to build new trust and achieve sustainable results for all its stakeholders. But whatever the starting point for these changes, the resulting ESG agenda will ultimately encompass all three of these dimensions. Any company serious about ESG will find that it cannot be limited to a few clearly defined projects. Rather, taking ESG seriously means starting a revolution. Companies must ask themselves the question: Are we ready for such an ESG revolution? And if the answer is no: What do we have to do to be ready? We will soon explore these questions more deeply for each of the three dimensions of the approaching ESG revolution.