Sustainability Related Risks Are Critical Business Metrics, Regardless Of The Anti-ESG Rhetoric

By now, it is no secret that corporate environmental, social and governance (ESG) initiatives have become highly politicized. The latest example comes in the form of a July 30 letter from the Judiciary Committee of the U.S. House of Representatives, which was sent to some 130 institutional investors, asking them to explain the basis for their ESG goals. Suggesting that participation in certain climate initiatives could run afoul of U.S. antitrust law, the letters illustrate the challenges business face today balancing sustainability goals and stakeholder requirements with politically charged rhetoric.

Right now, the news cycle is filled with stories about ESG initiatives failing to win much support in proxy votes, declines in new ESG fund launches and other anecdotal examples which could lead one to believe that the world might be losing interest in sustainability.

It’s not.

ESG Viewed as a Risk Metric

In fact, when you look at the data, you find that sustainability has never been more important to businesses. However, unlike the politicized narrative, which draws on emotionally charged rhetoric, the business case for sustainability is increasingly focused on impacts, risks and opportunities. At the end of the day, businesses exist to create value. Anything that could impede that function is a risk, and those risks need to be managed.

Consider the results of Deloitte’s recent 2024 ESG in M&A Trends Survey as evidence. It finds that more than 70% of the surveyed companies have abandoned potential acquisitions over ESG concerns. Moreover, companies would be willing to pay a premium for acquisition targets with strong ESG credentials.

The facts are clear. In the language of investors and stakeholders, sustainability-related risks are still risks and need to be treated as such.

Even companies that aren’t out there waving the green flag for sustainability or positioning themselves as environmental crusaders are looking at ESG issues as a risk metric when evaluating potential acquisition targets. If they don’t like what they see, they’d rather walk away than tangle with the very real regulatory and reputational risks that could come arise from being affiliated with a company that does not take sustainability seriously.

Regulatory Realities

This is an important point. The political side of ESG – the part that tends to feature terms like “woke capitalism” and “climate cartel”– ebbs and flows with changes in the news cycle. Real business risks, however, the ones that could impair a business’s ability to operate in certain parts of the world or procure goods from certain suppliers – those are already written in stone. The European Union’s (EU) Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive have both introduced stringent sustainability reporting requirements for specified businesses operating in Europe. On a global basis, the sustainability reporting standards developed by the International Financial Reporting Standards Foundation’s (IFRS) International Sustainability Standards Board (ISSB), have introduced climate disclosure requirements for businesses around the globe.

The IFRS, which created these international standards based on the G20’s Task Force on Climate-Related Financial Disclosure (TCFD) structure, and the G20 itself, are hardly bastions of “woke” policies. These reporting standards are hard core financial reporting methodologies that have been developed and adopted following the same protocols used to establish the accounting standards used by the world’s largest businesses. They come with specific guidelines that businesses simply cannot afford to ignore.

Non-compliance with these regulatory reporting requirements can come with heavy penalties too. In France, for example, the penalty for non-compliance with the CSRD transposed legislation could be up to €75,000 with the additional threat of five years imprisonment for the corporate directors who fail to provide essential information for third-party assurance providers or obstruct the auditors’ work. Talk about a business risk that should keep the C-suite up at night!

The Data Will Set You Free

As I’ve reported previously, businesses are now in the phase of implementing sustainability related transformation that football and rugby afficionados affectionally call “the hard yards.” Faced with a very real set of regulatory demands that require stringent standards for sustainability reporting and objective setting, they must also come to grips with the fact that every step they take will be scrutinized by regulators, lawmakers and consumers.

This is where data is becoming indispensable. Beyond the bold pronouncements, lofty ESG targets or mission statements, there is only one thing that will quiet the critics, satisfy the regulators and resonate with consumers and investors: proof that efforts to improve sustainability are resulting in objectively better business outcomes. The companies that can clearly demonstrate the investments they are making related to sustainability and the positive impacts they are having, will be those that ultimately rise above the ESG politics and define the future of business.

It is notable that even in the case of the aforementioned letter to U.S. institutional investors, the members of Congress are asking for hard evidence behind each company’s ESG goals. When ESG is linked to hard-and-fast business and financial risks and objectives, it is much harder to argue against.

The key to making that happen is treating ESG and sustainability related issues as potential business risks, ones that need to be measured, managed and communicated clearly to all stakeholders. While the nomenclature may change depending upon the agenda of the spokesperson, the risks remain the same.