History has it, sustainability has predominantly been a case of voluntary business efforts. However, new sustainability regulations and standards are on their way, such as the increasingly known Corporate Sustainability Reporting Directive (CSRD). will affect most companies. While the name suggests that it’s merely a reporting directive, we rather view such an regulation as a tool for transitioning. And so should you.
The key reasons for this are found in the letters E(nvironment), S(ocial) and G(overnance). ESG are factors applied by investors as part of their risk and growth opportunity assessment, and thus decision making.
ESG measures are designed to boost investment in activities aligned with sustainable practices. In other words, a company’s ESG strategy can result in significant opportunities to finance not just operations, but perhaps more excitingly: innovation.
In 2021, a quarter of the world’s professionally managed investment funds only invested in companies that demonstrated solid ESG credentials. This indicates that funders are now increasingly anticipating and preferring companies with a plan to find environmental, socially responsible and well governed ways out of business as usual.
For this to be possible, innovation is necessary.
The market is responding
The market has already started responding to this change. Companies are integrating their ESG functions in financial departments or increasing the number of employees working on ESG. Some companies are fully integrating their sustainability department into all operations.
We’re seeing this shift from voluntary to mandatory ESG practices across the board. Companies have started to adapt and invest in ESG efforts despite the world’s current state of economic turmoil.
So, how do we ensure that our ESG investments result in more than legal compliance, or put differently: How do we ensure increased value creation?
How to create ESG value
Somewhere between lofty sustainability ambitions and tomorrow’s complex regulatory requirements arises a world of actionable innovation opportunities.
To unlock these opportunities, companies need to create new structures and processes for how they work with ESG. We need a system that enables us to address these factors long-term and short-term.
Such as innovation processes. We believe them to be a key to create value from ESG work beyond legal compliance. Innovation processes enable us to treat ESG as business critical, transformational work. We’ve named this approach ESG Transformation, but you could simply call it value-adding compliance.
Through innovation processes, we find it possible to unlock ESG value creation in the following ways:
Point 1: ESG regulatory compliance requires a reorganization of business functions, including finance and legal functions as well as the sustainability department. A proper reorganization can create internal efficiency and better communication across previously siloed departments. This, in turn, will most likely prove decreased costs.
Point 2: A successful ESG strategy often requires the involvement of an entire business’ ecosystem. Such high degree of involvement allows different subsidiaries of a corporate group or different actors of a value chain to gain collective returns of investments. This is, in fact, a crucial point in preparing for the soon-to-be-standardized double materiality analysis, and the reporting of relevant due diligence disclosure elements.
Point 3: ESG data paired with the power of AI can identify ESG innovation opportunities and predict future business impact in a time-cost-efficient way, and, perhaps more importantly: Uncover inefficiencies, biases, and potential outcomes for various stakeholders in said opportunities.
Point 4: A strategic understanding of ESG regulations will play a crucial role in attracting funding. Efforts to improve the acquisition of ESG data that subsequently informs sustainability reporting can result in greater opportunities to advance into new markets and segments, and thus secure future growth.
Point 5: Committing to investing in sustainable innovation means a new world of business models – many yet to be explored by your competitors. A solid ESG strategy backed up with sufficient ESG data can unlock funding for new R&D projects where such models are then possible to explore, eventually resulting in a shift from old practices to new.
Ultimately, viewing ESG investments as an opportunity to innovate now will result in a competitive advantage. Early movers in this field will accommodate to the demands of funders, customers and employees short- and long-term.
You might be planning a strategy review and you’re now wondering how ESG can be well integrated into the process. Or, you need help with developing your double materiality analysis. Perhaps your business needs updating or training on ESG relevant topics for your industry. These are among the things we offer within Strategy & Business Development.
If you need guidance in identifying how your business can create value from this ever-evolving regulatory landscape, contact our experts on ESG Transformation below, and we’ll help you out.
Photo created using MidJourney