Fundamental choices are needed for sustainable value creation
15/04/22
Strategy in the ESG economy
New urgency and ambitions regarding ESG require many companies to make far-reaching changes in their strategic choices, the way they manage and set up their organisation and the way they report on ESG. Together, these changes represent a true ESG revolution. Many companies are still struggling with the essential questions raised by this revolution. What do we stand for? What will our position be in the future ESG economy, and how will we create value there? Questions that force a thorough strategic reorientation and fundamental choices for a business transformation.
Viviana Voorwald, partner PwC
'There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG.'
Creating sustainable value
The pressure on almost all companies to improve their environmental and social impact and their corporate governance has been growing for years; with laws and regulations, customers, investors, employees and other stakeholders all contributing. ‘Yet there are large differences in the way companies have responded to that pressure so far. There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG', says Jeroen Crijns, ESG Lead at Strategy&, part of PwC. ‘They may have appointed people to work on sustainability or made some changes in their reporting in recent years because new regulations required it, but they are still struggling with the really big questions about how to create sustainable value in the future and how to fundamentally adapt.’
From plain reporting to being part of the strategy
This aligns with the observation from the previous story in this series: 'ESG reporting - a necessary means to a greater end'. For many companies, ESG adjustments start as a reporting issue and a step to comply with new regulations, but it quickly becomes a much more encompassing theme. Viviana Voorwald, ESG Lead for PwC Europe and the Netherlands: 'ESG reporting is not just about how you report, it starts with the question of what you report. ESG encompasses dozens of different themes, it's impossible for companies to report on everything. Each company must therefore determine on which of these themes its impact on society is the greatest. ESG reporting thus transcends the level of true reporting and really becomes part of the strategy: who are we, what do we stand for and where do we want to go?’
Jeroen Crijns, ESG Lead Strategy&
ESG more urgent due to climate policy and extreme weather phenomena
When talking to clients, it becomes clear that the urgency with which they are considering these strategic questions has increased considerably. ESG has been on the agenda for years, but I think there was a turning point last summer', says Jeroen Crijns. 'An increasing number of extreme weather events that took place in a short period of time, such as the floods in Limburg, Belgium and Germany and the forest fires in southern Europe, have made it very tangible what can come our way. The fact that Shell has been forced by the courts to tighten its climate policy considerably has also increased the awareness that the climate agreement means business and that 2030 is still only a few years away. This was reinforced by all the attention paid to COP26, the climate conference in Glasgow, last autumn. These developments have taken away a lot of doubt. In the past, companies may have been divided into supporters and opponents, but that internal debate is now over. That process definitely has accelerated the thinking about ESG.
Commercial opportunities or destruction of value
I fully recognise this change', agrees Viviana Voorwald. Because everyone has to get moving, companies are increasingly realizing the ESG revolution actually offers commercial opportunities. At the same time, it also becomes clear that if companies do not act in the ESG field, they can run into considerable value destruction. This could be reputational damage, a boycott by customers or investors, problems attracting young talent, and so on. What also strikes me about this ‘revolution’, is that many board members are pressured to change by their own children. Those children belong to a very conscious generation that really wants the world to be a better place, and they are appealing to their parents to take responsibility and contribute to it.
PwC's annual CEO Survey shows what strategic choices the growing sense of urgency about ESG - the identification of commercial opportunities and pressure from stakeholders - have already led to: 25 per cent of Dutch CEOs have committed to a 'net zero' target and another 36 per cent are in the process of doing so.
'ESG is not only complex in terms of content. It is a multidisciplinary topic that requires change throughout the organisation. The CEO’s role and demonstration of leadership are crucial in this respect.'
Coherent story and authentic identity
The results of the CEO Survey show how complex and far-reaching the issues of CO2 emissions and ESG are for many companies,' says Jeroen Crijns. We may have reached that tipping point and the theme is more urgent, but it takes time for that to sink in. It is about essential strategic questions that companies have to answer for themselves. What does ESG mean for us, where exactly are the pain points, why do we want to do this? What does our value creation model look like in the longer term in the sustainable ESG economy? How will the needs of our clients change and what products and services do we want to offer? In order to market this credibly, a coherent story is needed which is linked to an authentic corporate identity. Few companies are still thinking about and building this in a thorough, structured way.
A good start can be found in 'A CEO guide to today's value creation ecosystem'. This Strategy& article describes the creation of company value - a term that encompasses more than shareholder value - as the interplay between financial performance, social embedding and the ability to respond adequately to disruptions and megatrends.
ESG requires entrepreneurship and conscious leadership
ESG is not only complex in terms of content. It is a multidisciplinary topic that requires change throughout the organisation', adds Viviana Voorwald. The CEO’s role and display of leadership are crucial in that respect. Jeroen mentioned a small number of front runners. These are the companies that initiated a transformation over ten years ago, when there was almost no obligation from a climate agreement or regulations. You can only take such steps if you have visionary leadership, guts and the inner conviction that you are doing the right thing. Of course, you also need a well thought-out strategy and a sensible business case, but if you wait until you can calculate and allocate everything fully, you will never get into a gear. As far as I am concerned, entrepreneurship and conscious leadership are more important.'
From strategic choices to business transformation
Struggling with the strategic questions raised by the ESG revolution is difficult. The choices companies have to make are often painful, but crucial for the company’s future success. No matter how thoroughly the business case behind these choices has been developed, it never tells the whole story; conscious leadership with guts and the power of persuasion remain indispensable elements. Because after all the thinking that is needed to take the right strategic decisions, action is needed to implement the changes that have to be made as a result. In financial terms, this is when it really starts to hurt: as a rule, some three-quarters of investments and costs for a large-scale transformation are made in this phase. This particular phase is the main topic of the next, concluding article in this series: the business transformation required to realize a successful ESG strategy.
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