Businesses must be prepared for an ESG revolution

The year 2021 marks a turning point 

New urgency around ESG is starting a revolution in many companies that is characterized by far-reaching changes in their strategic choices, the management and structure of their organization and the reports about it. This is all interrelated, so that initiatives in one area also necessitate changes in another. Being serious about ESG therefore means that companies cannot limit themselves to a few isolated projects.

ESG has been on the agenda of many Dutch companies for years. The question of how to deal with issues of climate and environment (E), society (S) and good corporate governance (G) arouses a mixture of concern and enthusiasm in many boardrooms. What risks do we run in doing so? How do we measure, manage and report ESG issues now that there are no generally accepted standards yet? There is a long list of possible issues, what should we focus on? 

Enthusiasm often arises on the other side of the ESG medal: where are the opportunities for us to help solve the major problems of our time, and how can we create value with them? And what does that mean for the products and services we offer or the way we do them? 

The force field

Several developments make these questions topical:     
  • A growing group of socially engaged consumers are more likely to let their wallets speak for themselves. Employees, especially younger generations, are increasing pressure internally to meet ESG goals. This encourages companies to reconsider their products and their mission, including their position as employer with regard to diversity and inclusivity.     
  • Shareholders, banks, other capital providers and rating agencies expect more insight into a growing number of non-financial indicators in order to better assess the possible impact of various environmental and social risks.
  • Commitments made by governments to reduce CO2 emissions are being translated into a flurry of new regulations and taxes, the end of which is not yet in sight.
  • Activist shareholders and other stakeholders advocate a net-zero policy and a stronger link between ESG objectives and executive compensation.
In 2021, these forces seem to have reached a tipping point. The corona pandemic has created a new sense of vulnerability and the recent IPCC report, coupled with TV images of heatwaves, wildfires, floods and other extreme weather events, created a new sense of urgency. The EU set an ambitious climate agenda this year with its Green Deal and there were examples of companies taking significant steps in their climate policy, either on their own initiative or forced by court decisions or shareholders. Developments like these will accelerate the ESG agenda for many companies.

The three dimensions of the ESG revolution

Companies will therefore have to be prepared for fundamental changes in almost all aspects of their organization. We divide these aspects into what we call the three dimensions of the ESG revolution: a new look at reporting, strategic reorientations and large-scale business transformations. These dimensions are strongly linked, so that initiatives within one dimension quickly necessitate changes in the other two.
  • A new look at reporting: The most urgent reason for ESG-driven initiatives is often a combination of requirements arising from new regulations, increased risk awareness and the demand from external stakeholders for data and transparency about ESG factors. This requires a new view on external reporting in which formal and more standardized publication of non-financial information replaces more non-binding reports on it. The insights that these new reports provide can be a reason to reorganize internal management, and thus form the prelude to a business transformation.
  • Strategic reorientation: In some cases, thanks to a new way of reporting, companies will conclude that serious progress on a number of non-financial parameters forces them to strategically refocus on how and where they want to be competitive. Conversely, there will be companies that realize that certain strategic choices from the past are no longer tenable or acceptable from an ESG perspective and will therefore set out on a new strategic course; the need to be able to communicate about this with the outside world will then lead to a need for new forms of external reporting.
  • Large-scale business transformation : Companies that have set new strategic goals or that are going to steer on newly defined, non-financial parameters will therefore have to change a lot in their business operations. Given the nature and scope of ESG-related changes, in many cases this leads to major transformations in the way the organization is structured and works. ESG is no longer the domain of a group of specialists, every employee will have to deal with this in his or her work.

ESG agenda ultimately encompasses all three dimensions

ESG means something different for every company. Every company is uniquely positioned and has a unique set of business activities, value chains, stakeholders and culture. In response, each company formulates its own program of change necessary to build new trust and sustainable results for all its stakeholders. But regardless of the starting point for these changes, the resulting ESG agenda will ultimately encompass all three dimensions. Any company that takes ESG seriously will notice that this cannot be limited to a number of clearly defined projects. Taking ESG seriously means unleashing a revolution. Companies need to ask themselves: Are we ready for such an ESG revolution? And if the answer is no: What do we have to do to be ready for that? We will explore these questions in more detail shortly, focusing on each of the three dimensions of the coming ESG revolution.

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