By now, it’s no secret that corporate environmental, social and governance (ESG) initiatives have become highly politicized. The latest example comes in the form of a July 30 letter from the US House Judiciary Committee, which was sent to about 130 institutional investors, asking them to explain the basis for their ESG goals. Suggesting that participation in some climate initiatives may run afoul of US antitrust law, the letters illustrate the challenges facing business today, balancing sustainability goals and stakeholder demands with politically charged rhetoric.
Right now, the news cycle is filled with stories about ESG initiatives not gaining much support in proxy votes, declines in new ESG fund launches, and other anecdotal examples that might lead one to believe the world might lose interest in sustainability.
It is not.
Despite the anti-ESG rhetoric, sustainability has never been more important for businesses.
ESG is seen as a risk metric
In fact, when you look at the data, you find that sustainability has never been more important to businesses. However, unlike the politicized narrative, which is based on emotionally charged rhetoric, the business case for sustainability increasingly focuses on impacts, risks and opportunities. After all, businesses exist to create value. Anything that can impede that function is a risk, and these risks must be managed.
Consider the results of Deloitte’s recent 2024 ESG in M&A Trends Survey as proof. It finds that more than 70% of companies surveyed have abandoned potential acquisitions due to ESG concerns. Additionally, companies would be willing to pay a premium for acquisition targets with strong ESG credentials.
The facts are clear. In investor and stakeholder parlance, sustainability risks are still risks and should be treated as such.
Even companies that aren’t out there waving the green flag for sustainability or positioning themselves as environmental crusaders are looking at ESG issues as a risk metric when evaluating potential acquisition targets. If they don’t like what they see, they’d rather walk away than mess with the very real regulatory and reputational risks that can come from being associated with a company that doesn’t take sustainability seriously.
Regulatory realities
This is an important point. The political side of ESG — the part that tends to feature terms like “smart capitalism” and “climate cartel” — fades with changes in the news cycle. The real business risks, however, the ones that can harm a business’s ability to operate in certain parts of the world or buy goods from certain suppliers – those are already written in stone. The European Union (EU) Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive have both introduced strict sustainability reporting requirements for certain businesses operating in Europe. On a global basis, the sustainability reporting standards developed by the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards Foundation (ISSB), have introduced climate disclosure requirements for businesses around the globe.
IFRS, which created these international standards based on the structure of the G20 Task Force on Climate-Related Financial Disclosure (TCFD), and the G20 itself, are not bastions of “smart” politics. These reporting standards are core financial reporting methodologies that have been developed and adopted following the same protocols used to establish the accounting standards used by the world’s largest businesses. They come with specific guidelines that businesses simply cannot afford to ignore.
Failure to comply with these regulatory reporting requirements may also be subject to heavy penalties. In France, for example, the penalty for non-compliance with transposed CSRD legislation can be up to €75,000 with an additional threat of five years in prison for corporate directors who fail to provide essential information to third-party insurance providers or obstruct the work of auditors . Talk about a business risk that should keep the C-suite up at night!
Data will set you free
As I’ve reported before, businesses are now in the process of implementing the sustainability transformation that football and rugby fans fondly call “hard yards”. Faced with a very real set of regulatory requirements that require strict standards for sustainability reporting and target setting, they must also understand that every step they take will be scrutinized by regulators, legislators and consumers.
This is where data becomes essential. Beyond bold statements, lofty ESG targets or mission statements, there is only one thing that will assuage critics, satisfy regulators and resonate with consumers and investors: proof that efforts to improve sustainability are producing results objectively better business. Companies that can clearly demonstrate the investments they are making in terms of sustainability and the positive impacts they have will be the ones that ultimately rise above ESG politics and define the future of business.
It is evident that even in the case of the aforementioned letter to US institutional investors, members of Congress are looking for hard evidence behind each company’s ESG intentions. When ESG is linked to hard-and-fast business and financial risks and objectives, it’s much harder to argue against.
The key to doing this is to treat ESG and sustainability-related issues as potential business risks, which must be measured, managed and clearly communicated to all stakeholders. While the nomenclature may change depending on the spokesperson’s agenda, the risks remain the same.