Robust integration of sustainability into business operations is a powerful tool for business transformation
Hardly a day goes by without financial news reporting backlash from corporations, investor groups, trade associations, lobbyists, think tanks and politicians around the world regarding the requirement for business entities to file reports revealing the extent to which their activities affect or will affect environmental, social and governance (ESG) issues in the national or global economic landscape.
Arguably, these sentiments are now strongest in the United States after the Securities and Exchange Commission (SEC) issued in March and May this year two sets of proposed regulations for publicly traded companies as well as investment funds, respectively, for mandatory disclosure of the ESG impacts of their business operations. Of course, this phenomenon is not unique to the United States. Similar constituencies are expressing similar concerns in Canada, Europe, the UK, Australia and many other places.
It’s hardly unexpected. After all, these parties are generally anathema to these government requirements insofar as they believe that reporting on these actions (or inactions) – insofar as they are judged to compromise the achievement of ESG or contrary to ESG principles – could harm profitability. their engagements with investors, customers, suppliers, workers, business partners and other stakeholders on whom they depend for their business.
Given the public outcry over ESG reporting and disclosure requirements, it’s fair to say that these results are assumed to be prominent.
But the reverse may also be true: government-mandated disclosures by companies whose activities are in alignment with ESG objectives and principles would likely benefit investors, customers, suppliers, etc. in the market. The bet, of course, is that the probability of such a turn of events is said to be much lower on the obverse.
This raises two fundamental principles regarding the modus operandi that underpin the rationale for pursuing government-mandated ESG reporting and disclosure requirements.
First, there is a presumption that imposing such requirements in itself will create the necessary incentives for the desired changes in corporate ESG behavior.
Of course, such changes will rarely, if ever, manifest themselves in the short term within a modern company; indeed, they are usually complex, complicated and multi-faceted undertakings. The process tends to be evolutionary rather than revolutionary, especially in large multinational companies, and especially those that provide multiple products or services.
But the crux of the matter is this: whatever reporting obligations are considered, there is a strong belief – almost zealousness – that mandatory disclosures and the reports generated from them are in themselves agents. directly propagating fundamental information. business transformation leading to better sustainability of the business. After all, it would seem to be the grape to be for demanding such disclosures.
Yet, even if this reasoning becomes reality, the key takeaway is that mandatory ESG reporting and disclosure are simply NOT substitutes for both embracing and actualizing sustainability in business operations. Durability is a market action; that’s not a report an action. In my view, in the plethora of discussions about pursuing mandatory ESG disclosures among trade associations, policymakers, regulators, standard setters, activists – and even in the trade literature – this equivalence is assumed.
To be frank, all the pats on the back, hugs and handshakes between ESG advocates induced by such disclosure requirements becoming the rule of the day are out of place, no matter how much they feel good. This does not mean that these requirements are not valid objectives. Indeed, they must be prosecuted. What this means, however, is that they are at best a intermediate step for sustainable development practices to become an integral part of a company’s operations. And many things can happen along the way to derail such an outcome becoming a reality.
Secondly, is it not excluded to believe that in certain cases, ESG disclosure commitments obligatory reported by companies might already turn out to be in the long-term commercial and social interest of companies, investors, workers, consumers and society?
In other words, what should be the position of public policy that requires ESG disclosure even in cases where companies are already undertaking such reporting and disclosures? voluntarily or unilaterally—who is absent from regulatory mandates—and whose market operations are already imbued with sustainability practices?
Arguably, the existence of such instances – which in some sectors are likely to be more pronounced than in others – means that government regulation of mandatory ESG reporting and disclosure should not be monolithic or uniform. At the same time, public officials may very well want to give appropriate recognition to such cases so that peer companies in this sector or companies in different sectors can learn how operational sustainability performance best practices are executed.
It is difficult to overstate this point. It shouldn’t be seen as a heroic – or naive – feat for the C-suite and the modern corporate boardroom to fully embrace and execute sustainability as a kernel, maybe the kerneloperational mandate of the company for which they are responsible.
What does this mean concretely? As I explained earlier in this space, pursuing corporate sustainability involves undertaking operational the decisions which are at the heart of the daily functions of a company which, taken togetherserve to maximize the profitability of the company long term growth as well as to assess their impacts on the company’s long-term performance across a range of dimensions, both financial and non-financial.
The emphasis being on taken together and long term This is the key. The companies that operate most effectively in a sustainable manner are those that consistently and consistently make decisions in a way that maximizes long-term business profits. and non-economic, i.e. ESG-related, returns on the use of their assets, human and non-human.
There is a major catch here, especially in the case of the United States. Our dominant market policies, institutions and expectations are embedded in “short-termism”. The SEC’s requirements for quarterly financial reporting create powerful incentives for myopia in business strategy and shareholder expectations. In the absence of change in this area, which many of us have been calling for, the inertia to overcome and adopt a long-term time horizon is both ingrained and formidable.
If these proposals are accepted, two key ideas should emerge.
First, successful achievement of ESG and sustainability objectives requires a fundamental understanding that ESG and sustainability are it is not just about engaging in risk mitigation, but also about pursuing growth maximization. In a nutshell, business leaders, directors and investors should view ESG and sustainability initiatives as opening new doors of opportunity for business growth, not as constraints to be met with as little effort as necessary to fulfill them.
Second, a true embrace of sustainability means that C-suites and boards carry out their missions through a integrative objective, that which covers the main functions of a company; its markets, both in terms of inputs and outputs; and its geographic footprint. Thus, the company’s Chief Sustainability Officer (CSO) should be located in the C-suite and its role should truly be a globally integrated one — in every sense of the word: in product and input markets as well as in geographic markets. It’s no exaggeration to think of the role of the CSO as the “chief integrator”.
Likewise should be the role of boards’ Sustainability committees, which unfortunately are seen as new in boardrooms. Indeed, in the United States we are far (in fact very far) from an SEC requirement that public company boards must have directors who are “qualified sustainability experts”, similar to the SEC’s rule that boards have “qualified financial experts” spawned by the Sarbanes Oxley Statute emerging from the 2007-2008 financial crisis. While it may seem extraordinary that US securities law would develop mandates for non-financial experts in corporate boards, we may soon see one for cybersecurity.
The SEC’s proposed regulations for ESG reporting and disclosure by public companies and investment funds are a watershed moment in the growing importance of sustainability in U.S. businesses and markets.
But as salient as a development is for the world’s largest economy, it’s really just the beginning of a long list of critical elements of the sustainable development agenda that the United States and others must tackle. advanced countries:
· ESG reporting and disclosure is not a substitute for companies engaging in meaningful action to improve the sustainability of their operations through business transformation.
· At the same time, harmonization of the different sets of existing sustainability standards and reporting requirements around the world is becoming urgent.
So does the need for senior executives and boards to shape the systemic integration of financial and “non-financial” corporate metrics and performance, each of equal importance to the soul of modern business. and the ecosystem in which it evolves.
Equally critical is the development and training globally of qualified professionals who are experts in monitoring and evaluating corporate progress in improving sustainability, whose skills differ markedly from carrying out financial audits , which are centered on retrospective assessments, whereas progress in achieving sustainability is both retrospective and prospective and inherently interdisciplinary.
· The need for an unbiased forum to foster the exchange of ideas, learn from each other, and form consensus on ways to accomplish common critical tasks.