The next economic and industrial revolution is underway – and sustainability is at its core. Conor Holland, of KPMG Ireland’s sustainable futures team, outlines what the sustainable revolution means for business today.
The next industrial revolution is just beginning. A new economy is emerging, driven by profound changes in technology and the increasing pressures associated with climate change and changing societal expectations. COVID-19 has accelerated changes in how we live and work – with enhanced digital integration, and a greater focus on resilience of company operations. Indeed, the context in which organisations now operate has been transformed by climate change, biodiversity loss, and increasing focus on companies’ role in addressing broader societal challenges such as diversity, equity and inclusion. Consequently, the role of business in contributing to solving these issues is more important than ever and as a result, environmental, social and governance (ESG) matters have become a top priority on Board and executive agendas. Companies are increasingly recognising that they operate as part of an ecosystem whose boundaries are permeable and interconnected with various stakeholders.
These stakeholders want to be associated with organisations that have a strong sense of purpose and contribute to societal wellness and the common good. An organisation’s purpose must be reinforced by its strategy and culture. If organisations don’t exhibit a strong purpose of what they are doing to respond to the challenges of our time, they risk being unable to attract and retain talent.
As a result, for companies to succeed in the long-term, they must demonstrate how sustainable their operating models are, how they create long-term value for society, and how they make their company resilient for the future. Moreover, investors and other stakeholders are increasingly demanding this information in order to meet their own requirements and expectations. To continue to thrive, companies need to ensure they maintain their social licence to operate through greater commitment to long-term, sustainable value creation, that embraces the wider demands of society, and our planet.
Businesses must start to consider the implications of transitioning to a low carbon economy.
Prepare for a low carbon economy
The 2021 Intergovernmental Panel on Climate Change (IPCC) special report on the impacts of climate change provided an unequivocal message – without immediate and urgent action to respond to the climate crisis, we are facing potentially catastrophic impacts on agriculture, coastlines, critical ecosystems, and human poverty. Businesses must therefore start to consider the implications of transitioning to a low carbon economy and what this means for their business models, products, operations and financial performance. This message was underscored during COP26 where it was clear that the institutional investment world is starting to exercise significant influence through investment policy - and are starting to demand increased climate focus from investee companies – including private companies as much as public companies.
Crucially, a transition to a low-carbon and climate-resilient economy will involve significant financial opportunities, as businesses leverage new renewable energy technologies to displace carbon-intensive processes and identify many other significant areas of growth and disruptive innovation across all industries. Indeed, low carbon and resource efficient solutions are already emerging across traditional industries, presenting new investment opportunities in areas such as healthy food systems, transport, water infrastructure and waste management. Ultimately for businesses, “going green” is not just a matter of “saving the planet”; it is about pursuing economic growth and development that is strategic, resilient, and sustainable.
Integrating ESG factors into strategy & culture
Organisations should interact with all their stakeholders, including clients, employees and their communities to understand the context in which they operate. Few organisations today are not affected by the demands for more inclusive capitalism, and to demonstrate that their business informs their strategy and governance with reference to the commercial, social and environmental context in which they operate. This means creating a strategy that integrates shareholder and stakeholder value and aligning managerial incentives with the company’s core purpose. Strategic priorities and internal investment decisions should support key drivers of sustainable, long-term value creation and should focus on culture, talent development and branding.
To ensure businesses continue to maximise value creation, management and directors need to reformulate how they measure success. To be fully effective, ESG factors must be integrated and internalised into governance, strategy, operations, performance management and ultimately reported and assured. Indeed, how companies manage and communicate their ESG impacts has never been more important, particularly as stakeholders seek to better understand how businesses are addressing many different issues. Organisations should therefore consider how robust their ESG reporting framework is. Does it currently enable disclosure of quantitative and qualitative information in a way that best communicates the company’s long-term ESG related ambition, while equally ensuring they provide relevant and reliable information to their stakeholders?
The sustainability revolution should be viewed as a welcome opportunity and a call to action.
Reporting & assurance
Indeed, in response to the growing stakeholder demand for ESG information, many organisations have already started preparing for future sustainability disclosures by identifying the metrics most material to their sector, strategy and stakeholders, and developing the associated infrastructure to facilitate reporting on those metrics. Moreover, as companies report and disclose more ESG information, they should expect a sharpened focus on the accuracy and reliability of their disclosures and metrics. With mandatory ESG assurance on the way for most large EU companies, management should ensure that they develop appropriate processes and controls, similar to financial reporting, and consider undertaking ESG reporting readiness assessments to ensure they are in a position to comply with the new regulatory obligations.
The sustainability revolution should be viewed as a welcome opportunity and a call to action. The associated opportunities do not come at the expense of profits, but instead, can form the basis for identifying new business initiatives.
We are on the cusp of a radical transformation in the way we live and work, where businesses are expected to measure, manage, and report a holistic view of enterprise value, measured by a broad base of capitals (financial, human, intellectual, social and natural). Those corporations that align their goals to the long-term goals of society are the most likely to create long-term sustainable value, while driving positive outcomes for business, the economy, society, and the planet. This is the sustainability revolution.