How could it be that in a world where most are still thinking that purpose of companies is to make profit, the new buzzword in the business world, ESG, does not have another “E,” Economic, in it?
The term has come about in a world where finance already dominates, and profits are in serious peril if companies are not taking care of their environmental, social, and governance risks.
More recently, in the last three years, the world’s largest institutional investors have started to act on the insight that they cannot sustainably invest their clients’ money, because there is no way to diversify away from ESG risks – the whole world is in peril.
As a result, investors have demanded that their portfolio companies create value beyond profit. So companies must remain profitable, but now profit must be created by generating wellbeing for people and regenerating the environment. In order to achieve profit without harming people and planet, governance provides the framework.
Beyond finance – double materiality
Through governance, you determine what impacts on people and planet are acceptable. You also determine the implication that changes in society and the environment have on the companies’ purpose, how they generate value, and through what strategies you achieve your goals. In this way, boards determine what’s material, or important, in both financial and non-financial terms (eg greenhouse gases, waste and pollution, resource depletion, working conditions, health and safety, employee relations, etc).
In other words, boards determine what risks and opportunities, financial and non-financial, are important and should be acted on – that is known as double materiality.
Relevant? Surely this is a fad
The relentless rise in ESG references, conditionalities for receiving investments, regulations, consumer demands, and high-risk liabilities for directors will only accelerate for the foreseeable future.
Why? Companies’ philanthropic activities – "giving back" to communities – were always welcome, but did they affect the fundamentally unsustainable nature of the core business?
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We are experiencing the results of the unsustainable nature of our growth, consumption and incomplete accounting. UN secretary general Antonio Guterres called on all of us to "get serious" because the recent Intergovernmental Panel on Climate Change report is a "code red for humanity."
Guterres said a recent UN report made it clear that if countries adhere to their present national climate commitments, emissions will go up by 16 per cent by 2030, and that will condemn the world to a temperature rise of at least 2.7 degrees above pre-industrial levels – "a catastrophe."
To have a chance to limit temperature rise to 1.5 degrees, as agreed in Paris in 2015, we need to achieve a decrease in emissions by 45 per cent by 2030!
Gradually and then suddenly
Er
