Momentum around environmental, social and governance (ESG) frameworks within organizations is gaining steam and a group of Ernst & Young (EY) advisors also made the business case for implementation.
What to integrate and how to do so effectively when it comes to ESG are questions gaining ground across industries. That push is also leading to more questions around the murky subject of how those efforts can actually be measured, particularly in the world of finance.
A group of EY executives aimed to offer clarity during a talk at CES 2023, the annual tech trade show taking place in Las Vegas this week, with green a major trend across the show floors.
“A lot has been said about ESG and sustainability as a significant burden in terms of compliance and reporting,” EY global advanced manufacturing and mobility leader Randy Miller pointed out. “Naturally, there’s challenges around the world to deal with that.”
There’s been plenty of momentum around the topic for varying reasons, noted Constantin Gall, the head of EY’s European automotive practice and regional managing partner of the strategy and transactions practice for Europe West.
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“What we can see is that a lot of companies that we are working with is that ESG pretty much is a compliance exercise. So, you need to comply with, you need to report out because that’s what people expect. And, in our view, it’s one of the missed business opportunities.”
That mentality has shifted in a major way in the past 12 to 18 months, however, Gall said.
Part of that is driven by consumer behavior.
“For the first time, we really see customers changing the way how they see companies, the way how they purchase products and also have the scrutiny in place around how sustainable is your product, especially American people: what is the purpose of the [company], how do they treat their workforces and so on,” Gall said.
The current economic environment, with high inflation and financing costs, is prompting new ways of consumption, with Gall saying more consumers are trending to more sustainable products with a longer lifespan.
The regulatory environment is also forcing many companies to change.
If tax breaks and more programs to help subsidize or accelerate change are not enough of a carrot, EY’s advisors offered ESG’s business case.
“What we’re currently seeing is a fundamental shift in how the capital markets are perceiving ESG and ESG performance of companies,” said Sebastian Binder, EY strategy and transactions practice senior manager. “And what we’ve been seeing over the last three years [is] that we are transitioning away from a green discount… to a green premium, where companies that have better ESG performance are appreciated by capital markets and, therefore, attached to higher revenues. And we believe that this is the future state, so that’s not a temporary effect.”
Binder said ESG is increasingly viewed as a key driver of per-share value, with credit and debt markets offering more favorable interest rates to more sustainably minded companies.
For businesses keen to take the next step, Binder cautioned the approach “must be an integral part of the entire portfolio” and executives should think about the full product life cycle when creating strategies.
The executives underscored each industry and company will have different ways of implementing strategy, with no one-size-fits-all approach.
“How to keep up with [ESG] is even harder because there’s lots of momentum and regulation,” said Andrea Weinberger, who heads up sustainability consulting for EY’s automotive clients in western Europe. “There’s lots of momentum in the world economy.”
Executives should be mindful to stay flexible and responsive to changes in standards and regulations.
Making ESG an aspect that filters throughout an organization is also key, Weinberger said. A company should not look at sustainability as a pet project that lives within its own department and interfaces with no one else.
“Don’t build parallel worlds,” Weinberger cautioned. Doing so, she said, creates frustration among employees and could lead to additional costs.
She used the example of one of her mid-cap clients that has a chief sustainability officer and an ESG strategy. The company’s procurement team had not yet been integrated with the ESG framework and was not aware of renewable energy targets. As a result, procurement ended up signing a contract with a non-renewable energy company.
“When we speak about something like sourcing and circular economy, then it probably becomes quite interesting to have that car at the end of the life cycle and to do something with it, to use it,” Weinberger said, using the automotive industry as an example that broadly applies across sectors. “And this would be another shift in strategy that you have to make clear to your company.”