By: Jamie Gamble, Managing Director, PwC US
Companies have always been accountable to their stakeholders. Shareholder value has been at the center of accountability for decades now. But the long term success of every company has always also been dependent on the ability to recruit and retain talent, to build brand identification, to maintain the social license to operate and to build resilient relationships with customers and communities. Investors, talent, customers and communities today want to work for, buy from, invest in and associate with companies that align with their personal values. Today, particularly among people in their 30s and younger, the quality of a product or of a company includes environmental sustainability and economic justice. An effective approach to Environment, Social and Governance (ESG) issues is a core part of the value chain.
For creative and forward thinking management teams, the expanded set of metrics that stakeholders consider is a huge opportunity. Those metrics represent a new set of ways that the company can differentiate from competitors and build long-term value. The flip-side to that opportunity is that any company that isn’t recognizing the change in the business environment and integrating ESG into its core long term value strategy will fall behind those that are.
There is no one right way to bring ESG into core strategy. Each individual company needs to find a path that is appropriate to its business and culture. But every company can benefit from a governance framework that allows leaders to set clear goals that are aligned with and support their business strategy.
There are four steps that can help a company integrate ESG into its governance and take advantage of the opportunities created by changing stakeholder demands:
- Create a sustainable values matrix that reflects how the company’s actions affect environmental and social issues and how those issues affect the company and its stakeholders.
- Develop a plan to take action on the sustainable values identified as critical to stakeholders and long term value.
- Build the internal accountability structures necessary to measure and manage the plan and to publicly report on progress.
- Create an internal reporting process that brings together the company’s sustainability work into a coherent story and provides senior management and the board the necessary information to oversee it.
None of these steps are easy. Stakeholder engagement will have to be deeper and more frequent than it currently is at most companies. The different types of knowledge needed will require multi-disciplinary teams. Organizational silos will need to be broken down or connected. Comp and incentive programs will need to incorporate ESG. And boards and senior management will have to expand their thinking about what drives long-term value and builds a strong company.