Accelerating the ESG revolution

By Jon Chadwick

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Is Australia ready for the ESG revolution? While many local and international companies are transforming their organisations to align with the intersections of societal and business opportunities, many are still racing to catch up.

ESG (Environment, Social, and Governance) is rapidly gaining momentum across the Australian landscape. This business imperative is placing greater expectation on organisations and leaders to reframe their role in society, as well as the ways social and environmental challenges are addressed alongside existing commercial considerations.

Organisations are faced with a stark choice: join the revolution, or lose relevance in the marketplace.

ESG is no longer a ‘nice to have’ - it is a business imperative.

Australian businesses are now realising that to thrive in the economy of the future, they must authentically incorporate ESG considerations into their organisational DNA to meet growing stakeholder expectations, stay competitive, manage key risks and contribute to a prosperous and sustainable world.

The recent PwC article, Are you ready for the ESG revolution highlights the way societal needs and business opportunities are coming together to transform business, reporting and strategy.

Organisations that have developed and implemented strong ESG strategies, measurements, and transparent reporting into their business models are set to realise enhanced opportunities, displaying greater resilience and preserving long-term value.

However, the degree to which businesses have embedded ESG into their strategy is highly varied, and there is a strong case for this journey to be radically transparent.

Organisations are increasingly being asked to disclose the metrics and targets they use to assess and manage their ESG risks. While investors, consumers and stakeholders are holding businesses accountable for meaningful and transparent progress on their ESG profiles and commitments. Data on carbon emissions, pay equity, reconciliation action, diversity, inclusion and wellbeing are now being recognised as key determinants of long-term financial strength and resilience.

To better understand ESG reporting in Australia, PwC analysed Australia's top 200 companies (ASX 200), finding a broad range of maturity in both quality and consistency. The analysis revealed that, despite growing demand for ESG disclosure, 42% of the ASX 200 had insufficient reporting on ESG performance to warrant inclusion in the analysis.

The measurement and reporting of ESG performance is more important than ever. In PwC’s 24th CEO Survey it was shown that Australia’s CEOs trail behind global CEOs in thinking they should do more to measure their environmental impact (29% locally versus 39% globally) and report on this impact (27% locally versus 43% globally). Without sufficient transparency and accountability Australian companies will likely be at a disadvantage when competing on the global stage.

Fuelling momentum toward the ESG revolution

Disruptive and transformative change - that is, embedding ESG into the long-term core strategy, creating accountability structures for ESG integration, and building a purpose around ESG - is necessary to sustainably deliver greater returns for shareholders and broader stakeholder groups.

PwC has identified three dimensions of the ESG revolution to drive momentum across Australia.

Strategic reinvention
Business transformation
Reimagined reporting

The three dimensions of the ESG revolution

_{Source: PwC analysis}

Reimagined reporting

The most immediate call for action often is some combination of heightened regulatory requirements, risk awareness, and demand for data and transparency to enable the management and disclosure of ESG factors. Everything from carbon emissions to racial and gender balance to the sustainability of sourcing strategies is under the microscope; investors, governments, and other stakeholders are interested in assessing whether businesses have identified and are managing ESG risks. As companies reevaluate what they report publicly, formal nonfinancial disclosures are starting to augment or replace nonbinding frameworks.

Strategic reinvention

In some cases, reimagined reporting will convince companies that to make progress against new metrics, they must rethink basic strategic questions about where and how to compete. In other cases, companies are moving aggressively to redefine their strategy with ESG at its core before grappling with changes in the reporting environment. Management teams are taking a fresh look at difficult strategic trade-offs in response to both new opportunities and external pressures, such as concerns about heavy carbon emissions (very much on the radar, for example, of energy companies and cement manufacturers) and about a range of social concerns, including health, race, gender, and inclusion and inequality. If its current strategic priorities are resulting in outcomes that are increasingly viewed as unsustainable (or even unacceptable), a business needs a strategy that addresses such concerns, exploits different opportunities, and, ultimately, redefines not only what the business does, but how it does it.

Business transformation

A business that begins to report against broader nonfinancial metrics will quickly find that it needs to define objectives to manage these metrics, and therefore to drive change—transformation—to achieve these objectives. Similarly, a business that has had to redefine its strategic priorities to ensure its sustainability and relevance will urgently need to transform if it is to deliver on the new strategic objectives. Either way, businesses will have to actively manage ESG outcomes by internalizing ESG into strategy, by transforming to implement the related change, and by reporting on both progress and outcomes. Senior leaders have a critical role to play in driving this agenda for transformation, which is not separate from ongoing digital transformations, but which will inform and build on them, redefining their context (and their purpose).

Every company is uniquely situated, and so is the scope of change it needs. Strategic reinvention may be inspired by an ambitious emissions reduction target, a roadmap to convert climate-related risks to business opportunities, deals to exit or restructure businesses that cannot influence downstream production methods, ambitious diversity, equity, and inclusion priorities; or a supply chain overhaul. Regardless of the motivations, the resulting ESG agenda will eventually encompass reporting, strategic, and business transformation initiatives. The multifaceted effects of ESG transformations mean success is heavily dependent on the focus and drive of senior leaders and a broad understanding of ESG through the business.

Committed leaders are driving the change

Key executives are driving the agenda, and ESG considerations will need to be tied to their values and aspirations, as well as the imperatives and values of the organisation. This is leadership by inclusion; a shared belief that breaks down the wall between personal and professional to help leaders bring their own passions and purpose into business; leaving room for great people to steer and enable this ESG agenda and build a team aligned to those values and aspirations.

This was reinforced in PwC’s 24th CEO Survey, which found climate and ESG issues rising up executive agendas - even as companies grappled to stay open for business and, in some cases, pivot their entire business models. Notably, 62% of local CEOs and 60% of global CEOs now plan to change their long-term investments in sustainability and ESG initiatives over the next three years, as a result of the COVID-19 crisis.

Committed leaders can create real difference by focusing on two priorities:

connecting ESG initiatives with an organisation's overall direction
backing up their ESG initiatives and aspirations with real resources.

The need for business to address ESG issues and opportunities will grow. How organisations align business models with the needs of society, what is reported and measured, and how organisations engage their people and stakeholders will only increase in importance. The ESG revolution is here to stay.

Accelerating the ESG revolution