ESG DYNAMICS: SHAPING BUSINESS LANDSCAPES
Adapting to the demands of environmental and social consciousness
In today’s business landscape, it is not just about numbers related to revenue growth or profit and loss. Environmental, social and governance (ESG) considerations are becoming increasingly important to the success of any business.
It’s not just about playing a part in creating a better world either; it is also about future proofing organisations to ensure that they are more competitive in the marketplace.
A focus on ESG helps businesses navigate through intricate challenges and capitalise on opportunities, while fostering positive impacts on society and the environment.
Targeted ESG execution can help increase market share by tapping into the aspirations of a growing environmentally and socially conscious public while corporate ESG failure can have the opposite effect.
Therefore, doing nothing about ESG isn’t an option anymore – in fact, it erodes value.
Head of ESG, Government and Public Services
Consulting Deloitte Sri Lanka and Maldives
In addition, the demand for ESG is growing as stakeholders are placing a greater emphasis on environmental sustainability, social responsibility and transparency in corporate governance.
From influencing investment decisions and shaping corporate policies to driving regulatory changes, ESG is redefining the very essence of responsible business practices.
Therefore, it has become an essential part of brand building and public relations with a direct correlation to the bottom line.
Organisations understand their impact and dependence on the environment and society, and have engaged in initiatives that encourage environmental sustainability and benefit the community.
The difference however, is that it has changed from being an activity similar to CSR in the past to being part and parcel of mainstream business conversation about risk mitigation and value creation.
At the heart of this transformation is the reality that business purpose drives ESG strategy. Purpose is about why an organisation exists and the impact it has on the world.
Organisations that have got it right are those that have successfully linked the ‘why?’ with ‘what?’ they’re doing and made ESG part of their core business strategy. ESG commitments then become your targets, delivering on the goals your purpose sets.
Businesses must prioritise managing ESG issues by focussing on what matters most. Engagement with stakeholders – including investors, employees, customers, suppliers and local communities among others – is imperative to understand their ESG priorities and concerns.
Once identified, ESG priorities should be defined with associated objectives, time bound targets and key performance indicators (KPIs), in order to evaluate performance and be embedded into business strategy eventually.
What gets measured gets done! Therefore, having a robust data collection mechanism for continuous monitoring of ESG performance and seeking opportunities for improvement are crucial for companies to drive long-term value creation.
They should also explore avenues to transform business models and devise innovative solutions, to move towards ESG goals and targets. Accordingly, it is imperative for business leaders to prioritise raising awareness of ESG within their organisations.
Such efforts will help set the tone for organisational priorities, and facilitate the allocation of resources and strategic focus required to align business objectives with ESG goals.
For ESG efforts to bear fruit, buy-ins from all levels of the company must be forthcoming with top level leadership taking ownership of this process. Notably, leading global organisations are holding leadership accountable by even linking executive pay to sustainability metrics.
In today’s rapidly evolving business environment, the significance of ESG cannot be overstated. Evolving ESG trends and practices worldwide are having a profound impact on how businesses strategise and operate. It follows that organisations must take proactive steps to adapt to these changes.
The global ESG disclosure and reporting risk landscape is an area that’s ever evolving as regulators have issued or proposed new rules mandating environmental, social and governance disclosures. Staying informed about the global regulatory landscape is crucial, especially for local companies operating across borders or those seeking to attract foreign investors.
In 2021, the International Financial Reporting Standards Foundation (IFRS) announced the establishment of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high quality sustainability disclosure standards to meet investors’ information needs.
In terms of local adaptations, the Chartered Accountants of Sri Lanka (CA Sri Lanka) has issued standards designated as SLFRS S1 and SLFRS S2, which will be mandatory from 1 January 2025 for the first 100 companies by market capitalisation with others to follow on a staggered basis. The Colombo Stock Exchange (CSE) has also provided general guidance on the information that companies should consider and disclose under ESG issues.
Therefore, it is apparent that organisations will require solutions for reporting ESG data across multiple regulatory frameworks in the foreseeable future.
Sustainable finance trends also have a profound impact on businesses, influencing their access to capital, risk management practices and market positioning. The sustainable finance landscape has shifted in many countries as they’ve introduced their own green or sustainable taxonomies.
Initiatives like the Roadmap for Sustainable Finance introduced by the Central Bank of Sri Lanka in 2019, followed by a Sri Lanka Green Finance Taxonomy and Banking Act Directions in 2022 at national level, enables finance sector actors to raise capital for green activities in both local and international markets.
Integration of AI with ESG factors is another pivotal global trend reshaping business operations today. Artificial intelligence systems offer new benefits and efficiencies, enabling organisations to tackle far-reaching challenges with greater social and environmental impact. Therefore, the mandate for business and the tech industry in ESG is non-negotiable, and the opportunities are endless.
Furthermore, governments worldwide are intensifying efforts to decarbonise their economies as the global energy mix is shifting from fossil fuels to renewables. It is evident that strict regulations will be implemented to mitigate the dire impacts of climate change.
Businesses will be compelled to take steps towards achieving decarbonisation by shifting to renewables, developing new energy carriers, improving energy efficiency, reducing emissions, and creating new markets for carbon and other by-products as part of an increasingly circular economy.
Innovation is crucial for businesses to transition to a low-carbon future with key technological developments such as batteries, hydrogen, intelligent grids and more.
