No one wants to get Environmental, Social and Governance (ESG) wrong. Poor handling of an organisation’s approach can lead to a fall-out so damaging brands can struggle to fully recover. But businesses in the middle market need to think beyond the risk of getting it wrong. ESG is the product of a changing society, and with change comes opportunity.
A business that has responded to these changes stands ready to benefit from the new forces shaping decision making. Those that have not risk being marginalised, fined and likely see their value falter.
So, we asked how businesses in the middle market are interacting with ESG and what they need to truly capitalise on the opportunity.
Proactivity in the middle market
Encouragingly, businesses in the middle market who are already familiar with ESG are being proactive. Of the businesses familiar with ESG:
- 74 per cent have a written plan or strategy;
- 57 per cent have a dedicated senior executive whose responsibility includes establishing and achieving a vision for ESG;
- 96 per cent have a corporate structure and reporting ability that incorporate their businesses social responsibility and/or environmental initiatives; and
- These are encouraging signs. The middle market appears to have recognised the importance of ESG and taken action to incorporate metrics and standards into their organisations.
There will naturally be a period where there’s an advantage to the businesses that have been proactive. But eventually having a credible, plausible approach to ESG will become a hygiene factor.
‘It’s a bit like what we commonly see with technological change. Someone gets a first mover advantage, but it can be closed down quickly. Then it becomes a staple of the operating environment - you've just got to have it,’ comments Mark Taylor, Partner, RSM UK. ‘There will be some advantage for a while in getting on this early, but now we're in a place where speed and limited focus can get you ahead. To differentiate over time may be more challenging and businesses will need to tackle the more difficult things to sustain that advantage when everyone has taken the straightforward steps.’
The 57 per cent of organisations that responded saying that they have a dedicated senior executive managing ESG are in a strong position. For those that have not established this role, the lack of responsibility assigned suggests a real issue for them in developing their strategy.
Growth and resilience
Over and above the advantage that the proactive organisations will experience, even for a short amount of time around their ESG activity, the link between ESG and business success will drive the behaviours of many.
More than 80 per cent of businesses familiar with ESG said that growth was relevant or extremely relevant to their ESG strategies.
‘The middle market is recognising the commercial drivers for embracing this agenda’, said Taylor. ‘Any business of reasonable sophistication needs to be considering ESG and the potential growth associated with it. They need to be considering their priorities, their plans and figure out what they are actually doing. Having a formal ESG strategy forms an important part of those considerations.’
A formal strategy at some level will require a business to measure their impact and interactions on the environment and society, and to be transparent about how it is governed. This demands a certain amount of structured data gathering from different parts of the organisation. Once equipped with this data the leadership team will have a clearer picture about what their business really looks like, where they could be doing more and, perhaps most importantly, where their weak points are.
Reporting on ESG forces businesses to shine a light on how they operate, but also provides businesses with a potentially revelatory insight into how their business operates, particularly with their supply chains.
"Using some of the frameworks that are out there can help improve a firm’s resilience. They will make organisations explicitly consider the risks that could develop with different scenarios. For example, questioning which physical threats you are at risk from in relation to your operations. Specifically, the resilience of supply chains as impacted by climate related issues. For example, crop yield changes linked to climate will be particularly pertinent for the food supply chain. The whole challenge around feeding the population and how that might impact businesses is so crucial for international supply chains."
Mark Taylor, Partner, RSM UK
Until recently, shareholder return has been the clear major priority for businesses in Western capitalist economies. And for those returns to be high, costs had to be kept low, with little consideration as to who was really paying the price for cheap goods and services.
Today business accountability is a greater point of focus than ever before. Everyone with access to a computer or a phone can research the organisations they interact with. If practices that fall below society’s expectations, including but not limited to improper waste disposal, poor engagement with diversity and inclusion or overly inflated executive bonuses, are discovered people can and will readily move on - and also potentially share damaging performance information on social media channels which can expose the business to reputational damage.
The most prominent issue up against society is the environmental damage being caused by climate change. This issue, which is often championed by younger generations, is becoming desperate and time for something to be done is running out.
‘There is an increasing pressure that the older generation probably sees, in the attitudinal shift in the younger generation. That's a driver to force action. No one wants to feel culpable. No one wants teenagers looking at them and asking, ‘what have you done about this?’, comments Taylor. ‘More and more people are waking up to just how serious the situation is. The events in the last year have been very harrowing and close to home, the flooding in Germany being a case in point. The situation is hard to ignore.’
Nearly half of the businesses familiar with ESG said that reducing their environmental impact was a motivating factor for engaging with it. Considering the bleak outlook for the planet if action is not taken, it is surprising to find that only 46 per cent of middle market businesses considered that a motivating factor. For any tangible impact to be made 100 per cent of businesses need to be on board.
Only considering profit and shareholders is out of touch, tone deaf and damaging. All stakeholders now have a voice around the table and their views and needs are being listened to.
‘The weight of different stakeholders’ views naturally fluctuates based on the decision or priority of the moment. But we now certainly see a more balanced consideration of everyone’s demands’, comments Taylor. ‘Of course, this does not mean that focusing on the bottom line is no longer a priority. But this is no longer the sole consideration or the only defining measure of success.’
This change in dynamic can be clearly seen when looking at the employee/employer relationship. As the younger generations enter the world of work there is a heightened demand for roles in purpose driven organisations.
In our survey 39 per cent of businesses considered enhancing or maintaining their working environment and culture as a motivating factor behind ESG. With the fierce war for talent intensifying in the wake of the coronavirus pandemic, employers around the UK are considering what they can offer potential employees and, as a consequence, what their businesses stand for.
‘Increasingly individuals are looking at organisations and saying, ‘it matters to me to work in a business, which takes diversity and inclusion issues seriously. You can see that shifts in society will mean that more and more people will consider those factors as an important part of the decision making when they're choosing where to work for and who to work with,’ said Taylor.
Grabbing the bull by the horns
Value and ESG come as a package. The UK’s economic activity and the ability for organisations to function and prosper is not compromised when engaging with ESG. In fact, the opposite is true.
‘Risk and growth are tied together because if you don't address the imperatives that are coming, then it's going to undermine your growth,’ said Taylor. ‘It's going to take a grabbing the needle type of attitude to engage with ESG successfully.’
For further information on the research please click here.