ESG: A new dialect within the sustainability vocabulary
In recent years, the UN Sustainable Development Goals (SDGs) have almost grown into adulthood. With the SDGs, organizations align their business strategies with the greater good, and commit to a positive impact on the environment and society at large. In recent years, the SDGs have provided a unique target framework and served as a common sustainability vocabulary between governments, businesses, and investors. But now the sustainability vocabulary might get a new dialect.
ESG: reporting beyond the balance sheet
Previously used only as a financial term in the investment market, ESG defines how investors evaluate the impact (and risks) of organizations on society at large. ESG refers to an organization’s commitment to contributing positively to Environmental, Social and Governance factors, and subsequently reports on the organization’s corresponding activities via standard ESG criteria. A focus on ESG can therefore help an organization understand the positive impact it makes, as well as manage the risks that its operations have on customers, employees, communities, and investors.
Investors have increasingly realized that a strong ESG proposition can safeguard an organization’s long-term success – and this has only increased during the COVID-19 pandemic. More and more, investors are calling for a shift in focus to long-term value creation. The Netherlands is no exception in this regard. Eumedion, the interest group of Dutch institutional investors, is for example strongly committed to sustainable business operations, focusing on long-term value creation for a broad range of stakeholders (including customers, employees, suppliers, communities, and shareholders). Recently published research by Meaning2Numbers and Hill+Knowlton Strategies has shown that for Dutch institutional investors specifically, assessment of ESG elements appears to be increasingly decisive for many in their final investment decisions.
The potential to go mainstream
Looking beyond investors, the importance of ESG has also been driven by increased social, governmental, and consumer attention to the broader impact of organizations. With this, stakeholders increasingly expect transparency in an organization’s business practices, including their whole supply chain. Research by ABN AMRO bank shows that nearly 40 percent of Dutch consumers consider themselves to be conscious and sustainable in their purchasing behavior. And 40 percent also say they are willing to pay a higher price for the certainty that a product was made under fair conditions. Consumers are therefore paying more attention to sustainability disclosures on communication publications such as product labels and websites, in order to determine an organization’s trustworthiness and integrity. Oat drink company Oatly perfectly responded to the growing need for transparency by presenting its carbon dioxide equivalents on its packaging – and the expectation is that many other organizations will soon follow suit.
In addition to consumers, it also seems that employees increasingly seek to work for virtuous organizations – companies that they believe serve a greater social purpose, are transparent in their ESG practices, and share their values. This is especially true of younger generations of workers. As Feike Sijbesma, former CEO of Royal DSM, acknowledged in an interview with the Dutch news outlet NRC Handelsblad: “It is also necessary to remain relevant to the next generation. We notice this with the Millennials who come to work with us. During job interviews, they ask about the purpose of the company, the contribution that is made to society. When I went to work more than thirty years ago, no one asked questions like this. Back then it was more like: what products do you make and what do you earn with it?”
Therefore, an organization that reports clearly via ESG criteria on communications publications can not only increase its trustworthiness and integrity among investors, but possibly also consumers and employees.
The new sustainability vocabulary
Today an organization’s valuation is not just based on profit. Stakeholders are looking to organizations to align their business strategies with environmental, social, and governance factors, and to make a positive impact. By addressing issues such as income equality, gender diversity, product safety, and environmental sustainability – and subsequently communicating activities and performances on these issues in a transparent way – the belief is that many organizations will enjoy a greater chance of long-term success.
And while its original purpose remains relevant today, ESG reporting is evolving from an accountancy practice into a more leading business strategy for organizations. Together with the SDGs, ESG reporting could become the common and internationally accepted vocabulary for all stakeholders through which sustainability goals, performances, and results are being justified and communicated.
Senior Account Executive