In today's rapidly changing world, long-term viability of businesses is pegged on their ability to address traditional challenges such as shifting stakeholder expectations coupled with the emerging challenges posed by climate change and social inequality.
Environment, Social, and Governance (ESG) assessment and reporting responds to this shift and has emerged as a tool for stimulating business success and resilience. Integrating ESG principles into a company's operations is no longer just a moral imperative but a strategic necessity for businesses keen on maintaining sustainable growth and a competitive advantage.
In November 2021, the Nairobi Stock Exchange (NSE) issued a directive encouraging all listed companies to publicly report their ESG performance in addition to the conventional financial performance reporting. Subsequently, the NSE also issued an ESG Disclosures Guidance Manual with the aim of improving and standardizing the process.
By the end of FY 22/23, less than half of the listed entities were in compliance with the new guidelines. Whereas all listed firms are working towards compliance, challenges abound on the path to attainment of this goal.
How then can these entities increase their chances of success?
1. Addressing Existing Misconceptions
Environment, Social, and Governance (ESG) was initially viewed as a novel approach to Corporate Social Responsibility (CSR). However, significant changes in the global operating environment have necessitated a shift from this paradigm.
Viewing ESG from a CSR lens is an antiquated perspective that diminishes chances of success and corporate entities have to address this misconception. This view downplays the business case for ESG reporting, thus reducing the urgency and seriousness with which the exercise ought to be approached. Forward looking entities need to embrace ESG reporting not from an obligatory view but as the key to their competitiveness and long-term survival.
The misconception of ESG reporting as a feel-good activity is partly to blame for the limited and slow adoption rates.
2. Developing In-house ‘Sustainability Champions’
Successful ESG reporting is dependent on the availability of ‘sustainability champions’ at different levels of an organization.
While having leaders that ‘get it’ at the top is important, the key to success lies in a company’s commitment to deliberately and continuously developing sustainability champions from the bottom-up. This ensures that the vision is easily communicated, shared and bought at all levels and not just within the C-Suite.
These champions act as change agents, providing deep insights into potential ways of achieving compliance. They also come in handy during critical assessment and reporting activities such as data collection and management.
Therefore, to increase chances of success, firms should prioritize embedding sustainability champions across their departments.
3. Building Internal Capacity
Companies that are likely to succeed are those that will spend more time and resources preparing for their ESG reporting journey. This includes a focus on training and capacity building.
Once identified, the sustainability champions need to be trained for them to become valuable members of the ESG reporting team. This group has to understand the importance of sustainability reporting, its unique connection to their company’s vision, and why their efforts and input in the process matters.
Ultimately, the champions’ effectiveness is dependent on their knowledge and understanding of the reporting process.
4. Prioritizing Authenticity
Effective sustainability reporting is balanced not perfect.
Companies should focus on honesty and authenticity as opposed to PR-driven endeavours that amount to greenwashing. Successful ESG compliance requires that firms begin by acknowledging their current status, measured against different ESG parameters – no matter how bad that status may be.
Authenticity helps entities set realistic expectations for themselves and their sustainability reporting teams. Besides, authenticity breeds trust.
5. Doubling Down on Culture Change
Successful ESG reporting will not be accomplished ‘by might’ but rather ‘by influence.’
This brings to fore the importance of organisational culture. Firstly, leaders have to lead from the front. They have to promote and drive a culture of sustainability, anchoring it on values and virtues. Secondly, they have to include and actively engage their teams in all ESG initiatives.
Bringing everyone on-board ensures that the responsibility of reporting is shared, thus enhancing collaboration across departments, and with this, increased chances of success.
Ultimately, predicting the future of businesses need not be the stuff of clairvoyants and crystal ball gazing. Whereas financial reporting can give us insights into the current state of a business, in the absence of a more holistic outlook, it will be challenging to truly ascertain its overall health.
Financial reporting can speak to an entity’s past and current state. However, to accurately determine its future, understanding the environmental, social as well as governance contexts in which it finds itself is key.
It is this need to be forward facing and continually relevant that ESG and sustainability reporting speaks to, and the sooner your firm adopts it the better.