Beyond Compliance: How Boards Can Drive Real ESG Value
If you’ve been following business news and reports, you’ll know that ESG and sustainability are prominent discussion points. For some, this is fuelled by a hidden push by actors with a vested interest in both concepts. However, the reality is that these concepts have evolved from regulatory requirements into essential strategies for any organisation’s long-term success.
For instance, a 2024 KPMG survey found that 90% of organisations plan to increase their ESG investments in the next 3 years. 2 out of the top 3 investment areas are dedicated ESG personnel and employee training and education. This highlights a shift in approach as organisations move from viewing ESG as compliance to viewing it as a crucial part of business strategy.
While more companies are beginning to understand ESG’s importance, implementing proper ESG strategies can be difficult. Challenges include navigating changing regulations, balancing short-term financial targets with long-term sustainability goals, and embedding ESG into overarching strategies and business plans.
Changing Regulations and Compliance Pressures
Different regions and industries have their specific standards, making it difficult for international organisations to keep up. For example, the EU’s Corporate Sustainability Reporting Directive (CSRD) will require over 50,000 companies to report detailed sustainability information by 2026—up from the 11,600 firms previously covered.
However, staying ahead of these changes isn’t just about avoiding penalties. Companies that proactively address these regulations can turn compliance into an opportunity for innovation and build a sustainable, future-ready organisation.
Balancing Short-term Financial Goals with Long-term ESG Objectives
Through our work with clients, we have found that organisations struggle to balance short-term financial goals with long-term ESG initiatives. This is a critical challenge for organisations as their stakeholders increasingly expect them to take specific actions towards different ESG issues. Sometimes, championing ESG can hurt the short-term bottom line.
However, to put things in perspective, research from the World Economic Forum shows that companies with strong ESG ratings outperform those without, generating higher returns during crises. However, ESG initiatives often take time to deliver measurable financial results, creating tension between short-term expectations and long-term sustainability.
Finding this balance is a real challenge for many organisations but companies like Microsoft have shown that it’s possible. Take the tech giant’s commitment to becoming carbon-negative by 2030, for instance. It may have initially seemed like a hefty investment, but it has sparked green tech innovation and attracted environmentally conscious customers and investors.
Integrating ESG into Business Strategy
As mentioned earlier, organisations make the mistake of treating ESG like just another compliance box to tick instead of integrating it into their business strategy. When an organisation approaches ESG this way, it misses out on key growth, innovation, and even disruption opportunities.
We’ve studied many brands, and Unilever is a perfect example of what’s possible when you integrate sustainability and ESG into your overarching business strategy. They’ve made sustainability a core part of their operations, cutting down their plastic waste and supporting fair labour practices. What’s impressive is that these efforts don’t just enhance their environmental and social reputation; they’ve also driven long-term growth and boosted profitability.
Overcoming Key ESG Challenges
Despite clear benefits, many executives struggle to fully embrace ESG due to a short-term outlook, lack of expertise, and difficulty measuring performance:
- Short-term outlook: Boards often face pressure to prioritise immediate returns over long-term sustainability. Clear communication of the long-term value of ESG is essential to balancing short-term performance with sustainable growth.
- Lack of ESG expertise: Many board members lack deep or applicable ESG knowledge. A Harvard Law School study reported that 33% investors desire an increase in ESG education and training. Boards need to recruit directors with ESG expertise, invest in training existing members, or outsource to more experienced ESG professionals.
- Measuring ESG performance: ESG metrics are harder to quantify than financial metrics. Establishing clear, consistent reporting systems is critical. Unilever’s transparent reporting on its sustainability initiatives has helped gain consumer and investor trust.
Why ESG Value Creation Matters
Focusing on ESG isn’t just an act for compliance; it’s also about unlocking new growth opportunities. Boards that go beyond mere compliance and focus on creating real value can reap significant benefits. Here’s how to do it:
- Operational efficiencies: Environmental initiatives like reducing carbon emissions often cut costs. Unilever’s efforts to reduce plastic waste, for instance, lowered its packaging costs while boosting its brand reputation.
- Risk management: ESG can signal potential risks, like climate change or regulatory shifts. Integrating ESG into risk management allows companies to stay ahead of these challenges. Microsoft’s carbon-negative goal, for example, helps mitigate environmental risks and appeals to sustainability-focused investors.
- Access to capital: Investors increasingly prioritise ESG performance. According to a PWC report, ESG-focused institutional investments are projected to reach $33.9 trillion by 2026. Strong ESG strategies attract capital and build relationships with stakeholders who prioritise sustainability.
How Companies Can Drive ESG Value
- Embed ESG: Make ESG a regular part of governance. Set up dedicated board ESG committees and integrate them into existing structures.
- Align ESG with strategy: Ensure sustainability goals align with broader business objectives for impactful results.
- Encourage innovation: Use ESG as a springboard for innovation, investing in solutions that address environmental and social challenges.
- Enhance risk management: Incorporate ESG into your risk strategies to anticipate and mitigate potential issues.
- Incentivise leadership: Tie executive compensation to ESG outcomes to ensure long-term value creation.
Boards drive ESG value, as ESG demands a top-to-bottom approach. By embedding ESG into core strategies, they can unlock new growth, manage risks, and ensure resilience. Now is the time for boards to become proactive leaders—the organisation leading in ESG would meet regulations and create meaningful and lasting value for their businesses and society.
