ESG: Navigating the Current Headwind

Ecological and Social responsibility has long been a cornerstone of building a reputable brand, fostering strong goodwill among clients, partners, and employees. However, despite a demanding regulatory landscape and persistent market awareness, the momentum behind ESG initiatives appears to be faltering. This fuzziness is leading to a decline in the topic's prominence at Board levels, even though strategic advantages remain within reach. It's time for a revitalized approach.

Organizations face a multitude of challenges in the ESG arena, each with its own unique set of priorities. Nevertheless, the following key issues encapsulate the prevailing sentiment:

• Navigating Regulatory Uncertainty and Fatigue: The European regulatory framework, particularly the CSRD, is currently facing significant headwinds and political debate regarding its feasibility and cost implications for widespread implementation. Potential delays, ambiguities surrounding the double materiality principle, and the lack of defined data support for reporting are creating a climate of uncertainty. Without a clear target, effective planning becomes a significant hurdle.

• Overcoming Low Stakeholder Engagement and Branding Skepticism: Ambitious ecological and social initiatives are struggling to garner consistent stakeholder support. Scientific scrutiny has challenged the evaluation of some environmental efforts, and a series of greenwashing scandals have bred suspicion. Furthermore, the rapidly evolving political and technological landscape makes it difficult to establish credible medium- to long-term objectives that resonate with stakeholders.

• Addressing Reliability and Feasibility of Reporting and Governance: While the concept of double materiality reporting represents sound governance, its practical implementation presents considerable obstacles. A significant portion of the necessary material, factual, and measurable data is currently unavailable and not integrated into existing ERP systems. Rectifying this data gap would necessitate substantial investments in data architecture.

The confluence of these three major challenges complicates the development of a robust business strategy supported by a compelling business case and investment plan. The lack of defined variables creates a significant impediment to progress.

However, these uncertainties should not deter business leaders from moving forward. Strategic management's fundamental role is to establish a framework for taking and managing business risks. This principle remains pertinent to ESG topics, which inherently possess and will continue to generate business value.

Here are key recommendations for developing your ESG strategy:

• Anchor in Your Core Identity: An effective starting point is your fundamental business strategy, which outlines the critical elements for success. Evaluating your specific business's success factors and essential operational components for value creation provides a solid foundation, independent of evolving regulations and shifting stakeholder opinions. Examples include locally sourced production, ethical manufacturing, focused real estate investment, or specialization in health or specific technologies – all translating into tangible, relatively stable, and marketable ESG objectives.

• Prioritize Business Sustainability: A complementary approach involves focusing on the most clearly defined risks to your business's long-term sustainability. Depending on your specific business and strategy, you will have identified key sustainability risks. For instance, if attracting qualified talent in congested urban areas is a recognized risk, implementing robust social and mobility policies yields tangible ESG benefits by mitigating this risk.

• Cultivate Structural Agility: Stakeholder sentiment and opinions can shift rapidly. The recent change in perspective towards defense industries illustrates this volatility. With the pace of such changes accelerating, corporations need contingency plans to navigate turbulent periods or pivot towards new horizons with minimal business disruption.

• Embed Strategy in a Material Governance Framework: A primary recommendation is to position ESG as a central pillar of brand building. To achieve this, ESG objectives and plans must be defined using tangible, measurable, and monitored criteria, with executive committee accountability and board-level reporting.

• Build Your Data Architecture: Both regulatory and governance requirements for ESG necessitate the tracking, monitoring, and measurement of actions and outcomes. Future strategic decisions must be informed by rational data analysis and insights derived from past actions and business drivers. Based on your specific strategy, now is the time to conceptualize and begin implementing data collection strategies and leverage this data effectively.

• Align Regulation with Your Strategy (Not the Other Way Around): The current ambiguity surrounding regulatory frameworks should not prevent you from developing, implementing, and governing a sound sustainability strategy that incorporates ESG principles. Establishing robust governance systems for your own benefit will make adapting to future regulatory requirements a more manageable and cost-effective process.

In conclusion, it is advisable to integrate ESG strategies into your broader sustainability framework, focusing on both strategic and environmental risk reduction and the cultivation of strong corporate and brand goodwill.

Marnik Demets is a senior advisor, specialized in business strategy, digitization and regulatory compliance. Marnik is available to support your board or executives conceptualizing tangible strategies and governance.