What executives need to do to align ESG with strategy

by Allan Feinberg , Managing Director, Remuneration & Reward Services

The Western Australian economy is often described as ‘boom or bust’, however, the problem with this moniker is that it implies that a period of success is always followed by a decline. A long-term sustainable business model is ultimately the foundation for long-term growth, despite fluctuations in the market. So what can executives and non-executive directors do to create sustainable growth?

While many businesses are putting greater emphasis on Environmental, Social and Governance (ESG), there needs to be a shift towards looking holistically at the sustainability of a business to help smooth out the lumpiness created by a traditional mining-based economy.

Take for example the journey of IGO. The board took a decision over five years ago to be deliberate on aligning strategy and ESG. The decision to be “proactively green” meant that ESG was fully integrated within the business strategy. This was outwardly communicated to staff, community and shareholders through the company purpose of making a difference and belief in a green energy future.

The alignment of ESG within the strategy, not as a separate strategy gained IGO the reputation of the ESG company to go to. This alignment resonated with shareholders and was recognised in the 2021 S&P Global Sustainability Yearbook which identifies the top 15% high performing sustainable companies. This achievement is all the more impressive as IGO is one of only 12 miners recognised.

However, this was not an overnight success story. It took almost six years of concerted effort. The strategy alone was not sufficient. It needed substance to make an impact on performance and influence people wanting to invest.

This is not just about sustainability strategy, but how do we get sustainability into strategy? Particularly when markets expect a return every year. But does ESG need to come at a cost to shareholder returns?

In fact, a robust ESG strategy can help attract the right investors. We need to stop viewing ESG as a ‘nice to have’, it should be part of business strategy and risk management and can have a direct impact on financials. This is backed by independent research which has demonstrated that companies with a strong ESG framework perform better and are more resilient to impacts such as COVID-19.

But investors want reassurance that ESG is in place and are scrutinising policies and using ESG rating agencies to help them make decisions on where to invest.

ESG strategy is a journey, which takes years of concerted effort and requires substance to make an impact on performance and investor sentiment

In order to start to effect change boards need to think about how ESG is embedded into strategy and communicate this to staff, community and investors. However the fundamental problem may be that ESG isn't well represented on boards, in many cases, it is just the G element that prevails.

So how do you companies entice ownership of ESG issues in company governance and amongst directors, execs and employees?  Employee engagement is key. Young employees want to see the company doing the right thing and to feel proud. A transparent and inclusive ESG policy can also help attract and retain the right talent.

Businesses also need to implement long term incentives schemes to align executives with shareholder return, encourage ethical behaviour and assist retention. Incentives that are challenging will drive behaviour - importantly it’s not just what you do, but how you do it.

While society demands and expects change, these are systemic problems that can't be changed overnight so where should you start?

Actions for executives

• Carry out a climate risk assessment for your business
• Incorporate ESG into strategy and business decisions
• Be transparent - publish ESG policies
• Engage with, and report back to activists, investors, staff and community
• Align pay with performance to reward the value created and alignment with strategy
• Start implementing long term incentives to retain executives

For more information about the contents of this article, please contact Danny Olsen at  Danny.Olsen@bdo.com.au