Future-seeking leaders understand that people, risk and capital issues are interconnected across the three factors of ESG (environmental, social, governance) and treat them accordingly to support purpose and drive performance.
In light of global challenges ranging from hurricanes and fires to pandemics and isolation to discrimination and scandals, leaders receive pressure from numerous stakeholders to seek meaningful advancement relative to ESG goals across climate, human capital and governance. For example:
· Investors: The top 500 global asset managers place a premium on the sustainability nexus that links purpose, diversity, equity and inclusion (DEI) and ESG principles
· Customers: Eight out of 10 global consumers expect CEOs to lead on societal issues
· Employees: 58% of employees consider a company’s social and environmental commitments when deciding where to work; and, employees are three times more likely to stay at a purpose-driven organisation, and they are 1.4 times more engaged at work.
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During the past several years, boards and senior leadership teams also have heightened their focus on human capital value and risk metrics to better measure – and illustrate – how they are connecting all three factors of ESG:
· Environmental: Leading companies drive meaningful climate action by hiring and developing people with different skill sets and capabilities, re-organizing key functions and processes, building new metrics into incentive programs and incorporating climate issues into corporate governance. Strong climate and ESG commitments are instrumental in attracting, motivating and retaining employees and customers, as are people offerings that support climate efforts, including employee benefits and career programs.
· Social: Leading companies ensure the social factor of ESG operates in concert with environmental and governance factors in areas relating to social determinants of health and wealth, DEI and wellbeing. Future-seeking leaders take action to inspire, motivate, engage and upskill their employees in line with ESG goals. Combined with the greater emphasis on ESG strategy, these efforts also bring about a shift in employer brand and culture, total rewards, employee engagement, and skills and work initiatives. Companies that embrace their climate and governance strategies and meaningfully embed them into their culture, programs and employee experience achieve greater levels of employee engagement and performance.
· Governance: Sustained change across environmental and social factors brings a strong and inter-related need for new and effective governance. For example, including actions to support environmental goals (such as mitigating climate change) or social goals (such as wellbeing) in the employee value proposition contributes to a purpose-driven employee experience and creates meaningful work. The same is true for leadership priorities related to climate goals and aligning incentive awards. A strong governing structure, including connections to executive incentive plans, enables oversight of business ethics and transparency and reinforces trust in leadership. Such structures include metrics related to whistle-blower policies, unethical behaviour tied to monetary losses or climate impact, dismissal and incentives against excessive risk taking.
Example: Wellbeing is a key element of interconnectivity between ESG metrics across people, risk and capital. While considered a social factor of ESG, wellbeing both impacts and is impacted by environmental and governance factors. Wellbeing comprises physical, emotional, financial and social elements and represents a strong contributing factor to achieving climate goals in alignment with business ethics, values and employee actions. Physical, emotional and financial wellbeing are at the same time driven by climate factors, such as the health and monetary impacts of climate change, including severe weather events, extreme heat, air pollution, changing ecologies, proliferation of allergens, water and food security – all of which are increasingly likely to impact workforces. This, in turn, reinforces the need for strong governance as employees with poor emotional or financial wellbeing may be more inclined to take risks and ignore governance protocols.
Future-seeking leaders understand that a holistic model such as the one put forth by the World Economic Forum International Business Council in September 2020 to monitor interdependent ESG factors yields benefits across stakeholders, including boards, investors, chief risk officers, and HR and finance leaders. The Human Capital Value & Risk framework shared in the September 2021 World Economic Forum Agenda addresses the risks and value derived from human capital across ESG factors through integrated themes such as wellbeing, DEI, employee experience and operational excellence. It organizes metrics such as workforce profile, pay, benefits, careers, hiring, retention, productivity, wellbeing and culture, and is used by future-seeking leaders in conjunction with a variety of human capital valuation methodologies.
Leaders understand there are solid business reasons why attention to ESG is on the rise. They seize the opportunity to create significant value through action both to drive performance and to reduce potential costs and risks of inaction. They have learned that organizations proactively managing these risks have a better time recovering and navigating through the types of disruptive challenges that are increasingly prevalent in the current environment.