Procurement implications for environmental, social and governance

Procurement implications for environmental, social and governance (ESG)

Charlotte Wales Blog, Private Equity, Procurement

With limited direct impact on the commercial bottom line, environmental, social and governance is still viewed as a concern only for organisations struggling with public perception and looking to build their ethical or green credentials. The reality, however, is that all organisations must now consider the long-term ramifications of ignoring these corporate health assessments, where both unnecessary or unmeasured risk can affect the valuation of an organisation and, conversely, clean ESG delivery can greatly improve market position.

The profile of ESG has risen since the 2006 credit collapse when there was a failure to accurately assess hidden risk in company accounts. A deep ESG review across the full supply base would have driven risks to the surface, making them more tangible and addressable. Governance developed and applied must be personalised to an organisation, taking into account regional and cultural levers and influences. In environments without robust and historic control over corruption, misappropriation and incentivisation, social behaviour should not be dismissed nor underestimated.

In many countries and regions, where international business may flourish but western regulation and ideology has no precedence, behaviour deemed corrupt is a standard and casual part of the process of doing business. For that reason, governance cannot be forced, nor embedded overnight without running the risk of driving such behaviours under the radar, making them more difficult to counter and control. In a modern international business environment, governance must be as much about education and gaining a deep understanding of local influences and levers as it is about anti-corruption and legislation.

Tangible implementation and management

As with any business process, lack of careful and frequent curation can transform a valuable activity into a lengthy box ticking exercise. ESG is no different. Add to this the history of CSR and sustainability activities and achievements within an organisation and it can become an uphill struggle to engage both internal and external stakeholders.

The key to transforming the reputation of this essential health check is determining a relatable element, which in turn means you need to do your homework first. To lead successful engagement in this area requires far more than an understanding of the jargon and trends but a deep understanding of the business, sector and culture within which you operate. Only once you truly understand the limitations, opportunities and environment in which you are trying to engage, can you really reach your audience and build a tangible process that they recognise as relevant and strategic. Your stakeholders must see the importance of the activity to truly engage internally and throughout all levels of the business.

Effective ESG implementation and management must be able to illustrate to the organisation the consequences of inaction in a way that sufficiently sets off alarm bells and drives a sense of urgency to not only initiate the activity but also to maintain the process and refine it going forward.

On-going activity

ESG should not be perceived as a static activity but a living process. As such, ensuring that a genuine effort is made to regularly reassess ESG activity is key to the success of an organisation. Improving existing initiatives and mitigating inherent risks takes work and time, and without a tangible vision of the potentially dire consequences of inaction, ESG activity will be demoted to an administrative, tactical task rather than truly reflecting the strategic possibilities. Also key to the clear delivery of a strong ESG vision is the ability to appropriately gauge associated benefits and risks.

It is essential that those leading the implementation and management of ESG within an organisation have a comprehensive understanding at various levels – local, regional and international – of the environment, sector, industry and cultural implications. A lack of understanding leads to inefficient use of resource and ultimately disengagement, either through targeting inappropriate or unachievable goals or through creating an endless list of possibilities, which becomes far too cumbersome, creating an impossible list of requirements for update, management, maintenance, as well as a paralysing inability to drive through genuine responsible ESG management activity.

Understanding the language and process around ESG is only half the battle. Those seeking to measure the benefits of effective ESG implementation, whether fund managers, or business executives must also understand and be able to reiterate in a tangible way the operational impact both of failure to address ESG activity within the business, but also the positive impact of tangible delivery.

This article by Charlotte Wales was first published in PEI’s book Value Creation Through Responsible Investment.