How ESG leads to better governance

Muhammed Omar, country manager, Africa, ServiceNow.

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"New global realities are testing the leadership of organisations on issues as diverse as inequality, globalised trade, social tensions, climate change, population growth, ecological overshoot, geopolitical tensions, radical transparency and rapid technological and scientific advancement."

This paragraph, from the introduction of the King IV report – a respected guide for modern corporate governance – succinctly captures today's organisations' growing number of non-financial risks. It indirectly motivates why environmental, social and governance (ESG) frameworks are becoming popular and often essential among competitive and sustainable businesses.

Once minimised as window dressing for corporate social investment, ESG has become a powerful way to manage and measure governance performance in an organisation. Its function is growing even more during the current difficult economic environment, says Muhammed Omar, ServiceNow's Africa Country Manager: "Having an effective ESG strategy, which drives better governance and innovation by people, helps organisations to navigate through the economic climate that we are starting to find ourselves in. Some even see it as a competitive edge. ESG creates a virtuous cycle between governance and performance. Companies are realising that a good ESG programme in effect both starts with and reinforces good governance."

But while the gospel of ESG is gaining followers, creating and measuring effective ESG programmes is not easy. It begins with a company’s board and executive committee agreeing to the organisation’s purpose, aligning with the SDGs (sustainable development goals) to determine how ESG will be used as a competitive differentiator. This involves building trust with the company’s key stakeholders, such as employees, investors, partners, clients and regulators. This trust can be manifested by effective management and reporting on ESG programmes to ascertain progress and areas where attention is required. Fortunately, productive ESG is within reach through the unifying qualities of digital platforms.

ESG is already embedded in most businesses, usually through the demands from investors, customers, partners and legal authorities. While a company might not be mandated to incorporate ESG practices into their operations, ESG frameworks are the most direct way to demonstrate a company's strategic synergy with sustainability and ethics.

Yet getting there takes more than intent, says Omar: "It's easy to say that we're going to be streamlining our supply chain management to reduce the amount of time it takes to deliver raw materials from point A to B. But has that actually delivered value to the key ESG metrics that you've set yourself up to achieve?"

For all its added value, ESG can add more stress to a company's capacity. Data must be collected from different sources, collated and matched to KPIs. Data silos often work against this and the demands of ESG can paradoxically lead to even more silos as different groups protect their resources (and sanity) against ESG reporting demands. ESG is also complex, often requiring third-party data and capturing a wide range of information, and it places a significant reporting burden on organisations.

The demands of ESG can lead to a passive, box-ticking response that offers little feedback to the business. This trap is well-known in the governance world: without feedback, governance can become a white elephant that might appease stakeholders but does nothing for strategy or competitiveness.

"ESG, especially the governance side, becomes very onerous, manual and time-consuming, and almost unmanageable to some degree," says Omar. "If you don't have the governance in place to be able to collect the right data, report that data and so on, you never know whether your initiative is actually achieving the goals that you set out."

Yet, if we look at these demands from another perspective, there is a clear remedy: digital platforms. The best modern platforms have the scale, reach and automation to manage complex frameworks such as ESG.

"The right platforms have a comprehensive, integrated risk management capability that can deliver operational resilience covering areas such as audit, risk, controls, compliance, business continuity, etcetera. They offer the foundational components from a governance and risk perspective, embedded into the organisation’s digital processes and workflows. The best platforms do many things for the business, including managing ESG requirements."

Best-of-breed platforms ship with reputable ESG frameworks and workflows, providing the tools to help employees easily develop more ESG tools. Such platforms integrate with internal and external data sources, funnelling these into a common data standard for easy analysis and reporting. They also automate reporting and alerts, ensuring that ESG plays a visible role among different groups in the company.

Much of this can start with governance. The platform's reach across the business means it can encourage all forms of governance, including financial oversight and ethical conduct. Platforms with deep ESG capabilities create a virtuous cycle: governance leads to better ESG, and better ESG leads to better governance, all while engaging employees by bringing the information to them.

"ESG allows you to focus and then extrapolate into other areas of the business. Digital platforms allow you to pull everything together without turning the whole exercise into lots of wasted hours and mental effort. They help organisations orchestrate and automate a lot of the controls and mechanisms required across industries to collect data, manage it and deliver it effectively."

ESG, particularly governance, can give companies stability, resilience and even a competitive edge. Those advantages are in short supply when times are tough, so it's not surprising that more businesses are taking ESG seriously. Their first best step is to focus on governance and use the power of a digital business platform: simplifying the effort and time it takes to achieve the outcomes and the goals from a reporting and management perspective.