ESG BACK TO REALITY #2 – Only profitable ESG risk* mitigation works
Only Profitable Sustainability Initiatives Can Be Expected from Businesses
No private enterprise will sacrifice margins for lofty global goals. Behind the communication about the UN’s Sustainable Development Goals (SDGs) in sustainability reports lies a different reality: Only profitable sustainability initiatives will lead to actual change.
Focus is profitable ESG risk mitigation
Companies often strive to appear progressive in terms of sustainability. They warmly discuss their contributions to the UN SDGs, usually without explaining how, and their initiatives in environmental, social, and governance (ESG) matters. But upon closer examination, it becomes clear that this seldom reflects a genuine desire to improve the world but rather a rational cost-benefit assessment.
In reality, the contributions presented are largely and at best a secondary effect of the company’s primary efforts to reduce its own sustainability risks, also called ESG risks. A company’s real motivation often revolves around securing predictability, avoiding reputational damage, attracting capital on favorable terms, keeping costs under control, and ensuring good develoment of demand. Sustainability initiatives or goals that cannot be expected to improve the bottom line—whether through increased sales, reduced costs, or lowered risks—simply will not be prioritized.
The Disparity Between Intent and Outcome
There lies a stark contrast between intent and outcome. When a company claims a positive impact in line with the SDGs, it is often because such effects come as a byproduct (outcome) when implementing measures to ensure long-term value creation, including mitigating ESG risk (intent). Regrettably, companies often focus their communication on the outcomes that are side effects, instead of being honest about the real intentions behind them. The result can quickly become #greenwashing and #socialwashing.
Lacking Understanding of ESG Risk
Many leaders know too little about the ESG risks they face. How do environmental risks affect company asset values, raw material access, energy costs, supply lines, and customer behavior over time? How do social risks impact reputation, recruitment, and sales processes? What do changes in governance and regulatory expectations mean for the ability to operate in specific markets? This knowledge is often outdated, fragmented and inadequate, leading to suboptimal strategic decisions and prioritisations.
What Companies Must Now Do
To ensure that companies’ intentional sustainability related actions are effective—not merely symbolic—better knowledge, analytical tools, and management processes must be developed internally. It involves integrating sustainability risk into the business strategy in a far more precise manner. Properly managed, sustainability aspects can be broken down into concrete, quantifiable scenarios for earnings, cost structure, and market position. This requires investment in competence, data, and analysis models tailored to the company’s reality. It must start with the board of directors.
Companies must also elevate sustainability from the communications department into the core business. This requires interdisciplinary cooperation where various departments must interact to quantify sustainability challenges. With the right approach, management can see how defined sustainability risks affect everything from supply chain robustness to brand positioning. When sustainability risk assessments are incorporated into strategic decisions, profitable measures become easier to identify and implement.
A New Era Requires New Approaches
The future will demand that companies navigate a landscape shaped by climate shifts, geopolitical unrest, demographic changes, technological innovation, and ever-changing demands from various stakeholders. In such a world, only sustainability initiatives that are profitable, or likely to ensure future profitability, will be prioritized. A company that truly wants to succeed over time must therefore thoroughly understand how sustainability risks affect their business model and then implement targeted measures (intent). This will sometimes also contribute to some of the UN SDGs as a side effect (result) of intent.
A new era requires new approaches—based on sound business sense. Only by understanding and quantifying ESG risks can businesses translate lofty speeches about sustainability into lasting, profitable results in practice that, simultaneously, as a side effect, may contribute to a better world. The only thing one can expect from private enterprises is thus profitable sustainability initiatives, like profitable ESG risk mitigation.
*ESG risk is the same as sustainability risk, as defined in EU SFDR Level 1 article 2(22); ‘sustainability risk’ means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.
