Environmental, Social and Governance

The most immediate call for action often is some combination of heightened  regulatory requirements, risk awareness, and demand for data and transparency to enable the management and disclosure of ESG factors. Everything from carbon emissions to racial and gender balance to the sustainability of sourcing strategies is under the microscope; investors, governments, and other stakeholders are interested in assessing whether businesses have identified and are managing ESG risks. As companies reevaluate what they report publicly, formal nonfinancial disclosures are starting to augment or replace non-binding frameworks.

In some cases, reimagined reporting will convince companies that to make progress against new metrics, they must rethink basic strategic questions about where and how to compete. In other cases, companies are moving aggressively to redefine their strategy with ESG at its core before grappling with changes in the reporting environment. 

Management teams are taking a fresh look at difficult strategic trade-offs in response to both new opportunities and external pressures, such as concerns about heavy carbon emissions (very much on the radar, for example, of energy companies and cement manufacturers) and about a range of social concerns, including health, race, gender, and inclusion and inequality. 

If its current strategic priorities are resulting in outcomes that are increasingly viewed as unsustainable (or even unacceptable), a business needs a strategy that addresses such concerns, exploits different opportunities, and, ultimately, redefines not only what the business does, but how it does it.

A business that begins to report against broader nonfinancial metrics will quickly find that it needs to define objectives to manage these metrics, and therefore to drive change—transformation—to achieve these objectives. Similarly, a business that has had to redefine its strategic priorities to ensure its sustainability and relevance will urgently need to transform if it is to deliver on the new strategic objectives. Either way, businesses will have to actively manage ESG outcomes by internalizing ESG into strategy, by transforming to implement the related change, and by reporting on both progress and outcomes. 

Senior leaders have a critical role to play in driving this agenda for transformation, which is not separate from ongoing digital transformations, but which will inform and build on them, redefining their context (and their purpose).