The increase in climate change awareness and necessity to differentiate is compelling companies to transition away from the more traditional ‘business-as-usual’ operations to encompass sustainability along the supply chain as part of their corporate strategy.
What are the main drivers for companies to push the sustainability agenda to play a crucial role across their entire organization?
The role of stakeholders
Who are the main stakeholders that put pressure on companies to invest from a triple bottom line perspective? Societal stakeholders – such as governments, NGOs, stock exchanges – along with shareholders, investors, trading partners and customers are demanding higher transparency on a company’s ESG performance.
Figure 1: Key drivers on the demand of sustainability reporting
Recently, financial institutions including sovereign wealth funds, limited partners, institutional investors and private equity providers have increased the pressure to provide analytical evidence of good sustainability performance as part of the due diligence process, to fulfill ethical investment requirements in the market. This has accelerated improvements in sustainable practices and analytics among companies who require financing and investment.
The number of sustainability reporting instruments issued by stock exchanges has almost doubled from the 23 in 2013 to 44 in 2016 and has been particularly high in emerging markets including Hong Kong, Shanghai, Shenzhen, Singapore, Kuala Lumpur, Sao Paulo and Johannesburg (Carrots & Sticks, 2016). Transparency on sustainability impact throughout the corporate supply chain is becoming paramount. These mandates have led to increases in the reporting of sustainability data globally, similar to annual corporate financial reporting. As an example, in 2012, the Hong Kong Stock Exchange (HKEx) announced that companies could voluntarily provide sustainability reports with best practice recommendations (HKEx, 2012). In 2016 HKEx strengthened reporting requirements from voluntary to a “comply or explain” approach. It means that listed companies will have to state in their annual ESG reports if they have compiled with the provisions set out in the ESG Guide for the financial year. If they have not, they must explain why not and give considered reasons. (HKEx, 2016). Similarly, in June 2016, the Singapore Stock Exchange announced a sustainability-reporting mandate across all listed companies based on ‘comply or explain’ basis. (SGX, 2016)
The role of business drivers
Initially governments, stock exchanges and financial institutions were the main drivers for companies to focus on triple bottom line performance. Is this still the case or is the awareness of sustainability strong enough to drive change from a private sector level?
As a response to withdrawal of Paris Agreement by US President Donald Trump, we have seen vast number of companies openly pursuing ESG agenda across their organisations and supply chains and driving sustainability initiatives independently from government policy. The structural shift in world energy markets towards renewables and away from fossil fuels continues regardless of Mr Trump’s decision. Several US cities reaffirmed their own commitments to reducing their greenhouse gas emissions.
Apart from increasing awareness of climate change, executives understand business benefits of embedding sustainability practices into their companies.
Figure 2: Business Drivers of Sustainability
At the forefront of the changing economic environment, business strategies have been refined, allowing leading businesses and multinationals to embrace practices that focus not only on the financial elements but also the environmental and social aspects. Nowadays, increasing numbers of businesses embed sustainability practices to optimize their operations and generate cost savings. Sustainability saves money through resource efficiencies – reduction of energy, water and waste consumption reduces carbon and costs. However, what’s even more important is that strong sustainability practices support the ability to win new business. We see increasing numbers of corporations moving forward with sustainability initiatives and using them as a key tool to differentiate, keep and win customers. As a result, sustainable businesses are strengthening their valuations making them more attractive to investors.
Business approach to sustainability has evolved significantly in the last decade. The objectives of embedding sustainability have expanded from compliance and stakeholders’ pressure to commercial incentives. Many businesses use it as a key message in their branding to differentiate, enhance reputation and win more business. Moreover, sustainability can be a source of organizational and technological innovations that yield both bottom-line and top-line returns. Smart companies treat sustainability as a new frontier of innovation. Sustainable business models reinforce innovation by entailing the customer value proposition and figuring out how to deliver a new one. There is no doubt that enterprises are becoming a critical advocate of sustainability and future of our planet.
Turnkey Group as a facilitator
As a sustainability platform and services company, Turnkey has broad experience working with the Private Equity sector, supporting their portfolio companies to manage and report ESG indicators across their own business and into their often complex supply chains. Investment partners consider this as an indicator of a well-run business and we have seen increasing demands for ESG and pure sustainability reporting. To facilitate this, we have been supporting private equity portfolio businesses to measure and report on their sustainability KPIs. By setting targets to reduce carbon, the companies also look at reducing operational costs and managing day-to-day business better. A well-managed carbon footprint helps companies to achieve a real view on reducing operational costs and driving future efficiency.