The meaning of integrating ESG

ESG has become the new black of corporate business. On the backdrop of the latest IPCC report from the UN, weather disasters during the recent months and with COP26 in Glasgow coming up in November, many executives and boards are grappling with how to anchor strategic thinking on climate change and sustainable business more broadly in their existing governance set up.

Everywhere I go there seems to be unanimous consensus that the answer to how to anchor ESG is integration: Fully integrating ESG in the business model of the company and ensuring that environmental, social and governance issues are considered across the board. But the devil is always in the detail, so the question is what it really means to integrate ESG across the business. There might be many answers to this question, but in my mind, there is only one efficient way forward which is a full and complete integration.

ESG starts with strategy – not with reporting

ESG must be anchored first at the strategic level in the purpose, governance and corporate strategy of the company. Next, cascaded across the organisation into R&D, production, quality management, training, remuneration, Corporate Finance, etc. And finally, into stakeholder activities such as reporting, marketing and partnerships. Producing an integrated ESG report is great, as long as it is the means to the end – and not the other way around. Start with strategy – not with reporting.

Go for it 100%, or fail

ESG could be compared to digitalisation that emerged as the big new theme for boards and business executives 10 years ago. Just like ESG, digitalisation does not work unless it is fully integrated into strategy, operations, and company culture. Companies will not get return on investments unless full integration has succeeded. Top Management needs to fully go for it 100%, or else it will fail.

Where to anchor ESG governance

These days one of the hot topics is how to best anchor ESG in the governance model. Some businesses are establishing a specific board sustainability committee, others are integrating climate change and sustainability into existing board committees such as the audit, nominations, or governance committees. Other companies are adjusting the annual wheel to ensure that more time is allocated on the main board to dig into ESG issues.

Each of these solutions might work very well, depending on the nature and strategy of the company.

The main point is to ensure that each company makes an informed choice and selects a model that is truly able to help drive the sustainability transformation of the business in the right direction fast. The alfa and omega of this is if the company – at its highest level of governance – has decided to go for a 100% full integration of ESG – or not. If yes, you’re all set to go.

Read the full article on LinkedIn here.

Leading in a fundamentally changing world

“What is responsible leadership?

That’s the big question that takes center stage at the recent annual conference hosted by Imperial College Business School. It is the first time I have spoken in my capacity as chair of the advisory board of Imperial’s new Leonardo Centre, a research facility for sustainable business, which will formally launch in June. With this cross-disciplinary, multi-faculty and stakeholder-oriented center of excellence, the Leonardo Centre is setting out to explore what defines the new logic of business enterprise and the new type of responsible business leadership the world needs in this Decade of Action.

I am stepping into this role in the hope that we can close the gap between rhetoric and action and promote a radical rethink of the role of board directors and C-suite leaders as drivers for sustainable change.”

Read the full article from GreenBiz here.

ESG has become a strategic leadership agenda

“These days many global executives are waking up to a new ESG reality: investors and shareholders expect them to better manage their ESG risks as systemic conditions for their companies in a changing world; stakeholders reward brands that proactively contribute to fairer, more sustainable and regenerative futures, and legislators require businesses to disclose how.”

Read the full article here.

The time has come for climate competent Board Directors

There is never a dull moment in the board room. The world is changing at an incredible pace and in the midst of the pandemic, global executives are ranking climate change the most serious societal threat to their business over the next decade according to Deloitte, the WEF Risk Report and many other sources.

Read the full blogpost from Boards Impact Forum here.

COVID19 – Is a firedrill

The coronavirus pandemic is “just a fire drill” for what is likely to follow from the climate crisis, and the protests over racial injustice around the world show the need to tie together social equality, environmental sustainability and health, the UN’s sustainable business chief has said.

“The overall problem is that we are not sustainable in the ways we are living and producing on the planet today,” said Lise Kingo, the executive director of the UN Global Compact, under which businesses sign up to principles of environmental protection and social justice. “The only way forward is to create a world that leaves no one behind.”

She said there were “very, very clear connections” between the Covid-19 and climate crises, and the Black Lives Matter protests around the world, which she said had helped to reveal deep-seated inequalities and “endemic and structural racism”.

“We have seen illustrated to everyone that social inequality issues are part of the sustainable development agenda,” Kingo said.

Human rights were “inseparable” from dealing with climate breakdown, she told the Guardian in an interview. “This horrible racism [seen in the killing of George Floyd] is about human rights. We have to make sure that we give the social part of the agenda equal focus.”

She called on business leaders to take heed. “We want all chief executives to become social activists – to understand social equality,” she said. Not only was this the right thing to do, but “it creates stable markets for companies around the world” and reflects the desires of young people.

“Young people are so engaged, so dedicated to this agenda, they don’t want to work for companies that do not have a solid responsibility strategy,” she said.

The UN secretary general, António Guterres, said building a fairer society would be essential to the world’s health, as well as to saving the planet from climate breakdown and ecological destruction.

“Today, the fabric of society and the wellbeing of people hinge on our ability to build a fair globalisation,” he told the two-day UN Global Compact virtual conference of business leaders, which started on Monday.

“Where once ‘do no harm’ was a common approach for the business community, today we are arriving at a new landscape of elevated expectations and responsibilities. But despite progress, serious threats would undermine our future, including climate change, poverty, loss of biodiversity and widening social inequalities. The pandemic has underscored the world’s fragilities, which extend far beyond the realm of global health.”

Mark Carney, the former governor of the Bank of England, told the conference that the Covid-19 crisis had shown how urgent it was to tackle global heating. “This is a crisis that will involve the whole world and from which no one can self-isolate,” he said.

He called for all companies to provide clear information to customers, the public and investors about how they plan to move to net zero greenhouse gas emissions by 2050.

More than 10,000 companies are signed up to the UN Global Compact, and they are being urged to strengthen their commitments to cutting greenhouse gas emissions. Many have pledged to cut carbon in line with the Paris agreement goal of holding global temperature rises to no more than 2C.

But scientific studies show that this may not be enough to stave off disaster, and that the consequences of even 1.5C of global heating will be severe. Kingo wants companies to revise their business plans in order to reduce carbon in line with a 1.5C goal. “We need to see leadership to drive this,” she said.

A report by the UN for the 20th anniversary of the Global Compact found that only four in 10 companies had targets that would enable them to meet the UN’s sustainable development goals by the 2030 deadline, and fewer than a third thought their industry was moving fast enough.

While 84% of companies participating in the UN Global Compact were taking action on the goals, fewer than half were “embedding” those targets into their core business activities, and only 37% were designing their business models to meet the goals.

“The human community is completely interconnected and interdependent,” Kingo said. “Without solidarity, especially with those most vulnerable among us, we all lose. We are paying the price for turning a blind eye to obvious injustices in the world.”

Fiona Harvey Environment correspondent – The Guardian

Read the article here.

Into the Decade of Action

Not on track to meet the 2030 deadline

As we were launching into the UN Decade of Action, it was with the acute awareness that we were not on track to meet the 2030 deadline to transform our world. Progress had been made in some areas: Extreme poverty and child mortality had been reduced by half[1]; access to electricity in the least developed countries had doubled[2]. Economies had bounced back to the levels recorded before the 2008 financial crisis, with increased labour productivity and employment rates[3]. The underlying trend was worrying though. Because social inequalities were widening for more than 70 per cent of the global population[4], exacerbating the risks of divisions and hampering economic and social development. Growth and rising employment were largely carried by low-paid, low quality and low security jobs[5], with more than half the world’s population – 4 billion people – not covered by any social safety net[6]. Worst impacted were women: According to the World Economic Forum’s 2020 Gender Gap Report[7], it would take 257 years to achieve economic gender parity – or ten generations of women.

At the same time, global warming and overconsumption continued to test the limits of the Earth’s natural resources, threatening the health, wellbeing and livelihoods for millions of people. The World Health Organization called out that air pollution alone already caused 7 million deaths annually[8] and global hunger was on the rise again due to climate change[9].  The Intergovernmental Panel on Climate Change (IPCC) issued a special report warning of the implications of global warming beyond 1.5 °C over pre-industrial levels, cautioning that the difference between 2 °C and 1.5 °C could be a matter of life and death for millions of people[10].

COVID-19 exposed the fragile nature of progress towards the SDGs

Then came the COVID-19 pandemic. As the coronavirus is sweeping across the world, the fragile nature of our progress has been exposed. The hard truth is that our failure to create a more socially just world before COVID-19 has significantly worsened the current crisis and will hamper our ability to recover faster as a global community.

The virus has sent shockwaves through the global economy, deteriorating already serious inequalities. The International Monetary Fund (IMF) estimates that the ‘Great Lock-Down’ recession could shrink the global economy by more than 3 per cent[11], and according to the World Bank, the pandemic could push about 49 million people into extreme poverty in 2020[12], reversing two decades of poverty reduction. At the end of the second quarter of 2020, the equivalent of 305 million full time jobs had been lost, with ILO warning that about 1.6 billion people in the informal sector could be at high risk of losing their jobs due to COVID-19[13]. Many of them will be women living at the brink of extreme poverty without any rights or social protection.

As we come together to rebuild our economies from this unprecedented crisis, we must draw from the most important lessons from COVID-19: That the human community is completely interconnected and interdependent; that without solidarity, especially with those most vulnerable among us, we all lose; and that cross-border challenges such as COVID-19 call for a coordinated multilateral response that unites all sectors – public and private – around a shared set of values and principles.

Recovery starts by rebuilding trust in business

The 2020 Edelman Trust Barometer[14] showed that a growing sense of unfairness in the system was driving distrust across institutions. And in May, a special COVID-19 update of the 2020 Edelman Trust Barometer[15] showed that 67 percent of respondents believed that COVID-19 exacerbated these inequalities. However, while trust in institutions grew during the pandemic, wide-held disappointment was voiced in business and its leaders: Half of all people felt that business failed at putting people before profits; and more than 60% felt that business failed at protecting their employees’ financial wellbeing and safeguarding their jobs, as well as helping their smaller suppliers or business costumers stay financially afloat.  Fewer than one in three respondents believed CEOs did a good job in responding to demands on them placed by the pandemic.

Despite the twin health and economic crises, people are, however, strikingly optimistic that long-term, positive change will emerge. More than two-thirds of respondents say they believe the pandemic will result in valuable innovations and improvements in how we work, live, and treat each other, and they are calling for partnerships between Government and business to pave the way forward.

The road to socio-economic recovery is sustainable

Boston Consulting Group recently conducted a survey showing that 92% of mainstream investors, in the COVID-19 crisis, would put companies’ economic recovery before Environmental, Social and Governance (ESG) commitments[16]. But that’s an entirely flawed logic – economic recovery and sustainable development are not opposites. Indeed, companies with higher ESG scores fared financially better during the COVID-19 crisis[17], and will continue to do so as we set out to recover better.

Right now trillions of dollars are being infused into the recovery of some the world’s largest economies and to support developing economies in the face of the COVID-19 pandemic. Simultaneously, business across sectors, sizes and geographies are revisiting their strategies and business plans to recover lost territory and adapt to a new normal. There has never been a better time to jumpstart a worldwide transformation towards a more inclusive and sustainable net-zero economy that will enable us to recover better and more resilient.

Ambitious climate action could unleash an economic upside of $26 trillion and create 65 million climate resilient jobs towards 2030[18]. And according to the International Renewable Energy Agency (IRENA), a decarbonisation path could creative massive socio-economic gains, generating savings of between US$ 50 trillion to US$ 142 trillion by 2050, quadrupling renewable energy jobs to 42 million and add tens of millions more jobs in related sectors, while at the same time producing a 13.5% rise in global welfare indicators such as health and education[19].

The state of progress among UN Global Compact participants

The 2020 UN Global Compact annual survey provides a baseline for how business across all sectors can ramp up efforts towards a new sustainable normal.

While 84% of UNGC business participants take some form of action on the SDGs, goal setting and impact are not ambitious enough: Only 39% of businesses are setting goals that are sufficiently ambitious, science based and aligned with societal needs, and only 46% have aligned the Goals with their core business.

And while 90% of companies have policies covering all of the Ten Principles of the UN Global Compact, only 26% assess their risks against the Principles, and even fewer – 18% – assess their impact. Among the companies that conduct impact assessments, the social areas are trailing behind, with only 18% conducting impact assessments within Human Rights, and 29% within Labour.

Companies have become better at tracking progress from their SDG actions (45% up from 40% in 2019), with a majority of companies covering SDGs targeting health (SDG 3), gender (SDG 5), decent work (SDG 8), responsible consumption (SDG 12), and climate action (SDG 13). Companies have also become better at integrating the SDGs into their operations (57% vs 41% in 2019), with 61% aligning their products and services with the Goals. However, it is also true that the vast majority of businesses maintain a narrow focus on – mainly the positive – impacts of their own operations on the SDGs. Only 31% are actively assessing their negative impacts on the SDGs, and only 13% of companies act through their suppliers, while even fewer – 10% – consider the use of their products as a SDG responsibility.

According to the UNGC annual survey, fewer companies drive advocacy for the Goals – 35% in 2020 vs 53% in 2019, and fewer work through partnerships – 52% in 2020 vs 64% in 2019.

COVID-19 calls for a new normal

Many businesses right now are fighting for their survival, and a looming global recession is forcing companies and governments to think very short-term. It can be tempting to turn the focus inwards and deal with COVID-19 now, while returning to a focus on sustainable development ‘when we can’. But as we set out to recover from COVID-19 the world needs more, not less sustainability.

The COVID-19 pandemic starkly exposed the vulnerability of workers around the world, and the sustainable recovery must necessarily start by business stepping up their ambition to ensure access decent work, living wages and social protection – also in the global supply chain.

The pandemic also called out the interconnectedness of issues across health, social and economic development. In a post-COVID-19 world, business must deal decisively and transparently with those issues that make us all unnecessarily vulnerable to this and future crises, carefully assessing and accounting for every business touch-point across the value chain and in the supply chain, and how it may impact the health of planet and people – positively and negatively. A recent Harvard study, for example, found that long-term exposure to air pollution may significantly increase the risk factor from dying of COVID-19[20]. Efforts to reduce air pollution, is therefore essential to decrease vulnerability in the population to the virus as well as climate change.

Some of the most forward-looking businesses are setting the pace for a new climate ambition. Within the past year, 185 UN Global Compact companies[21] – collectively representing over 5.9 million employees, spanning 36 sectors and with headquarters in 37 countries – have responded to the UN Secretary-General’s call to climate action committing to set science-based targets aligned with a 1.5 °C future. With a combined market capitalization of over US$ 3.8 trillion, and representing annual direct emissions equivalent to the annual total CO2 emissions of France, we are approaching a real tipping point for a net-zero economy.

It is clear that no business, no sector, no nation will be able to exit this crisis on their own. The business voice is critical for a recovery that builds on multilateral cooperation and solidary, and UN Global Compact invites all businesses to join the growing number of corporate activists for a new more sustainable normal. In May 2020, UN Global Compact, together with its partners in the Science Based Targets Initiative (SBTI), mobilized the largest ever UN-backed CEO-led advocacy effort, urging world leaders to build net-zero climate targets into COVID-19 recovery plans and stimulus packages. Behind the statement were more than 160 CEOs of the world’s leading businesses, representing more than US$ 2.4 trillion in market capitalization. Even in the face of economic shock from the coronavirus, their commitment is unwavering.

Now it is time for SDG Ambition

With less than 4,000 days remaining until the 2030 target, business leaders are not content with current progress and are calling for their sectors and peers to step-up and turn commitment into action. As we set out to recover better, now it is time for all companies to raise their SDG Ambition for people, planet and prosperity. Across all the SDGs and at a scale that can create the tipping points for the world we want.

That’s why the UN Global Compact has launched SDG Ambition. Together with our partners and pioneering businesses we are proposing a set of ambitions that all companies should align their goals and targets with, including:

  • Gender balance at all levels of management
  • Greenhouse gas emissions reduction in line with a 1.5° C pathway
  • Net-positive water impact in water-stressed basins and regions
  • Zero deforestation across supply chains
  • Zero waste to landfill and incineration
  • Zero incidence of bribery
  • 100% resource recovery, with all materials and products recovered and recycled or re-used at end of life
  • 100% of employees and contractors earn wages that meet the cost of living

The change we need to see will not happen through incremental improvements and adjustments to ‘business-as-usual’. We need companies to become much more strategic and transformational in how they run their businesses to deliver on the 2030 Agenda. It starts by deepening the integration of the Ten UN Global Compact Principles and the SDGs across strategy, operations and stakeholder engagement. The UN Global Compact has developed an SDG Implementation Framework complemented by tools and resources that guides the integration, including minimum thresholds for target setting across sectors.

Deep integration means that SDG Ambition is an integral part of the company’s purpose, values and governance. Importantly, SDG Ambition is a senior management oversight, anchored at the board and c-suite level. It is embedded in the company’s corporate strategy and business unit strategies, fully integrated into the company’s performance management system, connected to key business processes and existing technology platforms, allowing senior management to monitor progress and make strategic decisions across its operations. It allows the company to be fully transparent about its risks and opportunities, and communicate on progress towards its goals and targets to all of its stakeholders. It allows the company to use the SDGs as a framework for forming alliances with stakeholders to accelerate impact and ensure social license to operate.

Sustainability is leadership

To truly succeed in driving sustainability outcomes, organizations need to focus on making sustainability sustainable. This is so much more than a matter of strategy, policy and process – it is fundamentally about leadership and people. If organizations are a collection of individuals working together on a common purpose, and corporate culture is a manifestation of their shared beliefs and behaviours, then embedding and identifying employees and leaders across the organization who are motivated to drive sustainability and have the skills and experience to do so is the surest path to long-term success.

To lead a transformation of this scale and nature requires a high degree of legitimacy, personal impact and authenticity that all stems from the personal commitment to making the world a better place.

Leaders on boards and in the c-suite have a huge opportunity to make sustainability central to their organization’s culture of leadership. How companies develop and select the leaders of tomorrow will have a lasting impact on our collective progress against sustainability goals.

[1] United Nations Department of Economic and Social Affairs (UNDESA) Special Edition: Progress towards Sustainable Development Goals Report of the Secretary-General, New York 2019

[2] Ibid

[3] Ibid

[4] United Nations Department of Economic and Social Affairs (UNDESA) World Social Report 2020

[5] Organisation for Economic Co-operation and Development (OECD) Compendium of Productivity Indicators 2019

[6] International Labour Organization (ILO) World Social Protection Report 2017-2019: Universal social protection to achieve the Sustainable Development Goals

[7] World Economic Forum Global Gender Gap Report 2020: Mind the 100 Year Gap

[8] World Health Organization (WHO) Public Health, Environmental and Social Determinants of Health, Issue 63, March 2014

[9] Food and Agriculture Organization (FAO

[10] Intergovernmental Panel on Climate Change (IPCC) Global Warming of 1.5 °C – a special report on the impacts of global warming of 1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty, June 2019

[11] The International Monetary Fund (IMF) 2020 World Economic Outlook, April 2020

[12] The World Bank Blogs – The impact of COVID-19 (coronavirus) on global poverty, and why sub-Saharan Africa might be the region hardest hit, April 20, 2020

[13] International Labour Organization (ILO) – press release 29 April 2020: ILO: As job losses escalate, nearly half of global workforce at risk of losing livelihoods

[14] 2020 Edelman Trust Barometer, 19 January 2020

[15] 2020 Edelman Trust Barometer Spring Update: Trust and the COVID-19 Pandemic, 5 May 2020

[16] Financial Times (FT) 7 May 2020 – Investors row back on ethical principles, research shows / Boston Consulting Group (BCG) COVID-19 Investor Pulse Check #4, May 1-May 3, 2020

[17] HSBC – ESG stocks did best in COVID-19 slump, 27 March 2020 https://www.gbm.hsbc.com/insights/global-research/esg-stocks-did-best-in-corona-slump

[18] Global Commission on the Economy and Climate – The New Climate Economy, 2018

[19] International Renewable Energy Agency (IRENA) Global Renewables Outlook: Energy Transformation 2050, April 2020

[20] Harvard T.H. Chan School of Public Health – Air pollution linked with higher COVID-19 death rates, updated article 5 May 2020

[21] UN Global Compact Business Ambition for 1.5 °C – Our only future