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Emerging trends in ESG

Emerging trends in ESG

26 Sep 2022

A pertinent question around environmental, social and governance (ESG) issues is whether ESG performance should be linked with board remuneration to help accelerate the process of change.

While some may argue that management should not be rewarded for doing the right thing, companies find that aligning executive pay with ESG measures helps to speed up the process of change.

Boards need to ensure that ESG and sustainability is a core part of business strategy and not just a box ticking exercise, an initiative or activity.

Sustainability is a specialist responsibility; boards must quickly get up to speed on the science behind it, and they should be climate literate if not climate experts.

ESG or sustainability committees – apart from those in audit, risk management, remuneration, nomination and governance – should be set up to deep dive into these complex issues.

ESG is more than disclosures and regulatory compliance; companies must move beyond the moral imperative and focus on the tangible business benefits, said WTW managing director, global leader – executive compensation & board advisory – Shai Ganu.

Progressive boards align bigger goals with long-term incentive plans and milestones, while selecting the right metrics, for example, on reduction of carbon emission or board and leadership diversity targets, added Ganu, a key speaker at the International Directors Summit 2022 (Sept 26-28), hosted by the Institute of Corporate Directors Malaysia.

“What gets measured, gets done, and what gets rewarded definitely gets measured,’’ said Ganu, adding that this measurement of performance should not be seen as an exercise to make it easier to earn incentives.

Not all non-financial key performance indicators are ESG measures.

In view of emerging trends and threats amidst the rapidly evolving business environment, it is urgent for boards to embrace new thinking on ESG, step up and act immediately.

For many businesses, the understanding of the five megatrends in ESG plus technological (ESG+T) issues is critical to the development of a resilient and sustainable business strategy, said GEC Risk Advisory founder and CEO, Andrea Bonime-Blanc, another key speaker at the summit.

This awareness of ESG+T should be translated into actionable tactics, with a leadership blueprint under each megatrend that leaders should consider.

Against the catalysing of geopolitical shifts, a member of management, backed by internal and external resources, should be specifically asked to oversee geopolitical risks and opportunities.

While many of the geopolitical shifts – the Russian invasion of Ukraine, US-China tensions as well as the strengthening of the European Union and the North Atlantic Treaty Organisation – have been in the works for several years, they have catalysed this year, sparked by the Russia-Ukraine conflict.

Following this conflict is the worldwide domino effect on energy, food, supply chains and inflation.

The worsening global climate crisis and war are propelling complex risks; boards need to be aware of how these risks affect their businesses, and help management plan strategically and tactically.

Climate and geopolitical issues should be made a permanent part of a company’s enterprise risk management.

From ESG to ESG+T shocks, businesses are faced with disruptions from virtual games, social media, metaverse of an immersive virtual world, non-fungible tokens of assets on blockchain, and cryptos.

Digital distortions such as cross-border cyber attacks and misinformation, are becoming more entrenched in our daily lives.

As these technological changes unfold, leaders must understand the various dimensions in artificial intelligence, biometrics, nanotechnology, biotechnology and others.

They must also ensure that the appropriate governance, risk and ethics lenses are applied to the research, development, manufacturing and/or application of their products and services, added Bonime-Blanc.

Traditional shareholder-centric capitalism of the past half century is giving way to a broader set of shareholder considerations, expectations and interests where employees, customers, regulators, suppliers and others are playing more important roles.

Resolving the risks and pitfalls of this convergence may signal new opportunities for organisations.

In terms of leadership and institutional trust which had been declining over the past decade, a recalibration of trust in the business community has been evident in the past two years, said Bonime-Blanc.

Trust by stakeholders in leaders and institutions is underscored by transparency; to nurture this trust requires deliberate, conscientious action and tone from the top, both in words and deeds.

ESG is not corporate social responsibility and must be embedded into the fabric of the organisation.

Many businesses have taken proactive steps to integrate ESG and sustainability principles into their business strategies but they have to ensure that their ESG integration is meaningful and sustainable.

There is no time to waste as investors and consumers respectively place top priority on ESG and sustainability in their investment and consumption decisions.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.

Source: The Star