ESG expectations and obligations are rising. Unfortunately, this can be perceived as a negative: a cost to be faced, a risk, and an annoying box-ticking exercise. However, it’s time to flip the script and seize this opportunity to build a better, more resilient enterprise.
There are major long-term benefits to embracing ethical environmental, social and governance (ESG) factors. It might be tempting to think, ‘It’s not worth the time and effort implementing changes that won’t make a difference.’ But your business isn’t a set of scales with profits on one side and people and the planet on the other. It’s a complex and productive machine, where higher-quality inputs result in better outcomes - sustainability feeds success.
ESG reporting is a valuable tool for winning business
If your business wants to sell in Australia, Malaysia, the EU, the UK or the USA, you can now expect to face some mandatory ESG reporting. It might not be a direct requirement - your organisation might be exempt - but most major distributors and stockists have regulatory obligations to meet. They typically want to examine ESG factors throughout their supply chain. Want your product to be stocked in a major retailer overseas? It would be surprising if they didn’t have questions about your emissions, for instance, or diversity among your team. If you’re not already producing sustainability data, now is the time to start.
Here in Aotearoa, for the past five years there has been a huge shift toward demanding ESG credentials for those bidding on big contracts. It started with government work, spread to councils, then to large corporates. Now almost every tender asks questions about responsible practices.
There are also mandatory climate-related disclosures for New Zealand’s financial sector, which includes investment managers, insurers and banks. These institutions now need to know more about where their money goes, so they will have questions for their suppliers, corporate borrowers, and other partners. If your business is transparent and has the right sustainability data available, you could get preferential treatment, and favourable lending terms and rates. That puts you on the front foot, with more capital available and potentially lower loan servicing costs.
The cost of inaction could outweigh the cost of changes
Of course, you don’t have to make any changes, but you might find that failing to take action quickly starts to become costly. Many intergenerational businesses in Aotearoa have been running successfully for decades, and see no pressing need to change the way they operate. But they might find themselves left behind when their competitors establish strong sustainability credentials. It could be something as simple as recruitment: if your business has a reputation for an outdated, inflexible working style, you may lose workers to your rivals and struggle to hire people.
More direct pain could come if your customers and clients start voting with their wallets in favour of more sustainable competitors. Businesses which fail to meet their stated social responsibility goals experience a drop in customer satisfaction that is “economically significant”, according to the authors of a research paper about greenwashing.
In the worst-case scenario, the penalties for misrepresenting sustainability actions can be acute.
A win-win-win for shareholders, employees and the planet
On the flipside, if your company performs well and accurately communicates that success, the rewards can also be significant. The Chia Sisters have created a widely respected, zero carbon superfood drink business starting from an ethical business framework. Fix & Fogg’s award-winning nut butter range is now stocked in several countries. Silver Fern Farms' point of difference in the market is to be world's most successful and sustainable grass-fed red meat company. On its journey towards that goal, Silver Fern Farms achieved Toitū enviromark diamond certification in 2021, the highest New Zealand-based environmental certification.
Alliance Group and AFFCO are also on sustainability journeys towards the goal of helping New Zealand build a reputation as the world’s premier provider of sustainable food and solutions. The message is clear: “Not only can you do well while doing good – you can do better,” is how one recent McKinsey report puts it. “Companies that achieve better growth and profitability than their peers while improving sustainability and ESG outgrow their peers and exceed them in shareholder returns.”
Low hanging fruit: Start with maximising strengths and identifying weaknesses
Improving a business’s ESG performance is a journey, and starting to assess and measure ESG performance is a big project. If you’re just starting out, you can’t tackle everything at once – you need to identify achievable targets and have a process to reach them.
On the Environmental front, many organisations start with understanding their greenhouse gas (GHG) baseline and setting some reduction targets. Understanding your energy efficiency and setting goals to reduce consumption can produce some quick wins. Considering your use of and impact on natural resources can be illuminating.
In terms of Social, a good place to start is looking in the mirror – how do you stack up in terms of living wage, health & safety and employee development? Then, turning your gaze outward and considering how you set targets for good performance from your suppliers. A supplier charter or code of conduct is a great place to start.
For Governance, consider Board education about relevant topics such as the diversity and inclusion of the organisation and the Board itself. Board education can cover modern slavery, anti-corruption, lobbying, cyber-security and data privacy, as well as how the Board thinks about risk management.
Some easy wins likely already exist in areas where you might be doing more than you realise. For example, we work with a client with a team gradually restoring a nearby wetland. They hadn’t really thought about this as a climate change action, they just saw it as a volunteer activity. But after having all their activities assessed more closely, they were able to see this as a valuable part of their ESG programme.
Step back and look at where you want to be. Then you can start taking steps towards solving the thorny issue of what you need to do to close the gap between where you want to be and where you currently are. Take stakeholders like your employees, clients and suppliers along on your journey by asking them what their expectations are about your organisation’s impact on the environment, behaviour in the social space and approach to governance. Do some benchmarking to see what others are doing about ESG. You might also wish to conduct an ESG risk assessment to ascertain the likelihood and potential impact of ESG risks and decide how you are going to manage them in your risk management plan. Proactively managing risk helps a business avoid costly disruptions, legal issues, reputational damage, and ultimately increases the probability that it will remain a viable business.
New Zealand has fallen behind its international counterparts on sustainability factors, but momentum is slowly growing. The sooner you take action, the sooner you can start reaping the rewards.
