Environmental, social, and governance issues are increasingly important for businesses. As consumers, investors, and stakeholders demand greater accountability and sustainability, companies are recognising the need to incorporate ESG into their value systems. Companies that embrace ESG considerations in their decision-making process are better positioned to create long-term value for their stakeholders, including customers, employees, and investors. Furthermore, the adoption of ESG principles can help mitigate risks, increase resilience, and foster innovation.
A value system is a set of principles and beliefs that guides the behavior of individuals and organisations. In a business context, a value system is crucial for establishing a culture of ethics and integrity, which is essential for building trust and credibility with stakeholders, including customers, employees, and investors. Furthermore, a strong value system can help companies navigate the complex and evolving ESG landscape, ensuring that they operate in a responsible and sustainable manner.
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ESG in corporate value system
From an ESG perspective, a value system that prioritises sustainability, social responsibility, and good governance is essential for addressing some of the most pressing challenges facing society. Climate change, social inequality, and governance issues pose significant risks to businesses, and addressing them requires a concerted effort from all stakeholders.
Incorporating ESG considerations into a company’s value system can help align business objectives with social and environmental goals, ensuring that the company operates in a responsible and sustainable manner. For example, a company that prioritises sustainability may set ambitious targets for reducing its carbon footprint, sourcing renewable energy, and minimising waste. Similarly, a company that values social responsibility may establish initiatives to improve the lives of its employees, customers, and communities.
A value system that incorporates ESG considerations can also help companies navigate the complex and evolving ESG landscape, ensuring that they remain compliant with regulations and best practices. For example, companies that prioritise good governance may establish strong policies and procedures for risk management, compliance, and ethical behavior, reducing the risk of legal and reputational harm. The incorporation of ESG into the value system of businesses is not without challenges and difficulties. Here are some of the reasons why:
Lack of standardised ESG metrics: There is currently no universal set of ESG metrics or reporting standards, which makes it difficult for businesses to measure and report on their ESG performance in a consistent and comparable manner.
Limited ESG expertise: Many businesses lack the expertise and resources to effectively incorporate ESG into their operations and decision-making processes. This can lead to inconsistent or incomplete ESG reporting, or a lack of understanding of the potential risks and opportunities associated with ESG issues.
Short-term focus: Businesses often prioritise short-term financial performance over longer-term ESG considerations, which can result in a misalignment of priorities and a failure to address ESG risks and opportunities effectively.
Resistance to change: Incorporating ESG into the value system of businesses may require significant changes to operations, culture, and strategy. This can be met with resistance from employees, shareholders, or other stakeholders who may not fully understand or support the business case for ESG.
Limited stakeholder engagement: Effective incorporation of ESG into business operations requires engagement and collaboration with a wide range of stakeholders, including customers, employees, suppliers, and communities. However, limited stakeholder engagement can make it difficult for businesses to fully understand and address ESG risks and opportunities.
According to a study conducted by McKinsey & Company, companies that prioritise ESG factors enjoy higher profitability and valuation multiples than their peers. The study found that companies in the top quartile for ESG performance were 5% more profitable than those in the bottom quartile. Additionally, companies with a strong ESG focus had higher market valuation multiples, indicating that investors are willing to pay a premium for sustainable and responsible companies.
One example of a company that has successfully integrated ESG principles into its business model is Unilever. The consumer goods giant has made sustainability a core component of its strategy, committing to sourcing 100% of its agricultural raw materials sustainably and reducing its environmental footprint. In addition, Unilever has set ambitious social goals, including improving the livelihoods of millions of people through its products and services.
Another example is Microsoft, which has made significant strides in reducing its carbon footprint and advancing renewable energy. The technology company has committed to becoming carbon negative by 2030 and has established an internal carbon fee to incentivise business units to reduce emissions. Microsoft has also launched several initiatives to promote sustainability, such as the AI for Earth program, which uses artificial intelligence to address global environmental challenges.
Here are some ways that businesses can incorporate ESG into their value systems:
Set clear ESG goals and targets: Companies should set specific ESG goals and targets that align with their overall business strategy. These goals should be measurable, time-bound, and communicated clearly to stakeholders. This can include reducing carbon emissions, improving worker safety, or increasing board diversity.
Integrate ESG into decision-making processes: ESG should be integrated into all business decisions, including product development, supply chain management, and investment decisions. This means considering the environmental and social impacts of business activities, as well as governance issues such as ethics and transparency.
Engage with stakeholders: Businesses should engage with stakeholders, including customers, employees, suppliers, and communities, to understand their ESG concerns and incorporate them into business decision-making. This can include conducting regular stakeholder surveys, holding public forums, or establishing formal stakeholder advisory committees.
Develop ESG metrics and reporting: Companies should develop ESG metrics and reporting systems to track progress towards their ESG goals and targets. This can include measuring carbon emissions, tracking employee diversity, or reporting on supply chain sustainability. Companies should also disclose this information to stakeholders, such as through annual sustainability reports or integrated financial reports.
Embed ESG in company culture: Finally, companies should embed ESG into their company culture, ensuring that it is reflected in the behaviors and values of employees at all levels of the organisation. This can include training programs, incentives for ESG performance, and regular communication and engagement with employees.
Incorporating ESG factors into a company’s value system is not just good for business, but it is also crucial for addressing some of the most pressing challenges facing society. Climate change, social inequality, and governance issues pose significant risks to businesses, and addressing them requires a concerted effort from all stakeholders. Value system and behaviour led values drive the valuation of the business. ESG is at its core, Doing good & being good.
Srinath Sridharan is a strategic counsel with 25 years experience with leading corporates across diverse sectors including automobiles, e-commerce, advertising and financial services. He understands and ideates on intersection of finance, digital, contextual-finance, consumer, mobility, Urban transformation, and ESG. Actively engaged across growth policy conversations and public policy issues.