The COVID-19 pandemic exposed climate, nature and social fragilities and demonstrated how a global crisis could have profound consequences for regional economies and society at large. While social unrest amidst our Western political systems is challenging business leaders to act, the war in Ukraine itself is a social catastrophe, made worse by the energy and food systems crises it has created throughout the world. Similar disruptions are happening elsewhere with increasing frequency.
These crises reveal the fractures of our global markets and supply chains, the dependencies upon which we still thrive and the impending instabilities and challenges to business prosperity going forward. As a result, it’s clear that our global supply chains are under stress from these shocks, and we are ill-prepared for an uncertain future.
A maze of self-reporting on sustainability
At the same time, we’re experiencing an economic transformation mainly driven by businesses operating without strong government intervention. Sustainability has truly gone mainstream. Yet, there are many ways to assess a company's sustainability performance, creating confusion in both financial markets and the business community. At the World Business Council for Sustainable Development (WBCSD), we are addressing this issue head-on with, for example, the Partnership for Carbon Transparency (PACT) which is geared toward the creation of a global methodological and technological infrastructure to tackle and reduce emissions based on consistent and comparable data from suppliers. Together with Principles for Responsible Investment (PRI) and International Federation of Accountants (IFAC), WBCSD recently released a statement for a coordinated approach to provide a comprehensive global baseline of sustainability disclosures that capital markets need. Establishing global corporate accountability and transparency lies at the heart of many of our efforts at WBCSD.
Lack of government oversight has created a maze of self-reporting frameworks, with no agreement on a common data set and metrics to measure a company’s societal impact. Until such a uniform set of guidelines and data sets exists, investors will not be in the best position to allocate capital and companies will struggle to best position themselves for continued investment. Importantly, we’ll have difficulty convincing the public that this form of capitalism offers the best hope of improving how we all live, work, and play.
To compensate for the lack of regulatory oversight, capital markets today assess a company’s sustainability performance by using environmental, social, and governance (ESG) factors as a proxy for how well companies are run and risk-adjusted. For example, markets will tend to reward those with sustainability-linked bonds, where a lower cost of capital is tied to ESG performance. As a result, corporate boards are revising their roles and becoming more engaged in these issues, strengthening overall corporate governance by increasingly linking executive compensation to how well they address ESG issues.
Between transparency and criticism: a paradoxical situation
It’s still a “wild west” environment: whether it’s investors, financiers, employees, customers, suppliers, or regulators – all are imposing their conditions and requirements on businesses – inevitably reshaping how they participate in the market beyond bottom-line profitability.
To find what I call the “Truth North,” business leaders are asserting their role on these issues – owning company goals and metrics and providing full transparency to the capital markets on their actions.
Sustainability has gained significant influence and is shaking up the status quo, driving entire systems transformation in every aspect of our economy. For the moment, this increased response and transparency is creating somewhat of a paradox for leading businesses and capital market players moving forward with this agenda.
Increased transparency has exposed the “warts” in what we’re trying to measure and disclose, making it easier for opponents to criticize our business approach. In fact, the anti-ESG rhetoric we’ve experienced in recent months is fueled by the very disclosure of information that businesses provide; there is more to criticize because more information is being made available.
Yet, while much of this noise is generated by political and business interests, the train has left the station. Given the magnitude of dollars invested, capital markets today must stay resilient and become better informed. This anti-ESG rhetoric will not go away and if anything, will continue to accelerate as capital markets continue to use ESG as a proxy to assess the sustainability performance of the companies in which they invest.
Within this current paradox lies a financial market information system in transition. Business sustainability is moving from a largely informal state, one in which disclosure was voluntary with limited verifiability, to one that is material and measured through reporting standards and assured in the face of tightening regulations, such as by the U.S. Securities and Exchange Commission on corporate climate disclosures.
Finding your True North
“True North” will help reveal a company's “true colors”. In a common framework and measurements used by all, greater public transparency will expose the degree to which specific social and environmental issues impacting business success are being addressed. People can judge how well they think a company is being run; underperforming companies will either improve or cease to exist. For those companies performing well, this will allow them to compete for the best and the brightest talent and strengthen customer relationships and continued investments.
For all companies searching for their “True North,” here are three actions I urge you to take. In doing so, when your company’s “true colors” are revealed, investors and the public will have confidence that you’re a well-run company, positioned for long-term success, with a strengthened social license to operate:
- Find your starting point for the environmental, social and governance interests you materially control. This requires you to understand where you sit in your value chain, ask more from your suppliers, and educate your customers. As part of this effort, you will need to assess your risks while building resiliency, accountability and transparency as you move forward.
- Understand this isn’t just about climate but more importantly, the interconnected issues of climate, nature loss, and inequality. The actions your company takes will take impact all three.
- No one company can do it alone. It will require a culture that embraces collaboration with suppliers, peers, and yes – competitors – to untangle and address the intricacies in our current economic systems and how to work toward a world where all people can live well within the planet’s boundaries.
If you’d like to learn more about our organization and how we’re working with our members to address these issues, please contact Bill Sisson, Executive Director of WBCSD North America: sisson@wbcsd.org
