Q&A: ESG takes centre stage on the tricky path to ‘good business’

Lynne Baber and Jon Williams, partners in PwC's newly expanded sustainability practice, outline the evolution of ESG and the need for an integrated approach optimising profit and sustainability

How has the way businesses perceive and approach sustainability evolved?

LB: Regulation has undoubtedly impacted stakeholder expectations, but so too has the wider climate change agenda, social movements like Black Lives Matter and #MeToo, and the pandemic. It is their collective impact that has moved sustainability and ESG from the margins to the mainstream of business. Sustainability is no longer something you can have as an adjunct – it’s now firmly embedded within strategy, or it should be at least. If companies don’t take this seriously it could threaten their reputation, share price, access to capital and talent attraction and retention. We talk about it as ‘good business’. Previously, a good business was simply one that made financial sense. But to be a good business today you also need a sense of responsibility and, crucially, the ability to optimise both responsibility and profit.

The big challenge, of course, is how to do that. It’s all about developing a strategy-led mindset rather than a compliance-led mindset. This allows for a broader set of considerations to be in scope, viewed through a ‘no regrets’ lens. For example, those who have to comply with regulations need to think beyond them and those who don’t should nonetheless take a steer from them. The understanding of investors requirements, and the ability to attract and retain talent, is also key. Our PwC 2021 Global Investor survey found that 82% of investors believe that companies should embed ESG directly into their corporate strategy, and 49% said they would sell their investment if a company is not showing enough action to address ESG issues.

Our focus on helping organisations become good businesses is supported by a framework of 10 attributes. This framework is designed to help organisations think broadly but holistically, recognising the value of integrated thinking, which brings together purpose, commercial strategy and ESG strategy.

How is the rise of ESG impacting the financial ecosystem?

JW: I’ve been doing this for over 20 years and for the first 10 years of that it was difficult getting anyone to take ESG seriously. Now everybody is talking about ESG and developing ESG products and services. Banks have to make sure they take ESG into account when lending. Insurers have to think about the climate impact on and of the infrastructure they underwrite. Asset managers need to understand what ESG issues mean for asset values and the development of new products to meet clients’ rising demand for responsible investments.

I worry that the rise of ESG as an asset class is the wrong way of thinking about it. What’s important is the rise of ESG issues and how companies manage, integrate and communicate them to their stakeholders. Materiality is key. Sometimes companies need to be able to confidently say, I’m not addressing these issues because they’re simply not material and I can’t influence them or they don’t impact me. That honesty and focus on what is material will resonate with investors. Once you’ve decided something is material, you need to articulate the impact on, in the simplest form, your earnings and assets, your plan to mitigate that impact and what it means for the value of the company. And as an investor or asset manager, how do I ensure the value that is either at risk or could be created, can be captured?

We want to live in a society that is balanced with nature, decarbonised and fair

COP26 was the year of the target, it seemed. Are the ESG targets we’ve seen publicised by companies achievable?

LB: Companies face a huge challenge in achieving these targets. The importance of global, consistent standards is key. It’s also vital to create the strategy and infrastructure that will successfully support a company’s transition – whether that’s around data, processes, governance or KPIs – away from the current disjointed state of ESG data. These kinds of frameworks are very mature within financial reporting, having had hundreds of years of development. But as non-financial reporting is still at a nascent stage, companies are struggling to understand the baseline they’re working from and what to do to reach their goals. We fundamentally believe it isn’t just about compliance – companies need a more integrated approach where they think holistically about purpose, ESG and commercial strategy. Sustainability shouldn’t be the side track to your business reporting or strategy, it should be part of it, flowing all the way through to your annual report. For this to feel real, be real and to show it is lived and breathed in an organisation, business and sustainability reporting should be integrated and that should be very clearly reflected throughout the business.

What will be the impact on people?

JW: Our Green Jobs Barometer estimates that 400,000 jobs need to be created in the energy sector alone in the UK to meet the requirements of the energy transition. Now, while there is a pool of 270,000 skilled workers in the oil and gas sector, 20% of them are expected to retire soon, leaving a gap of more than 200,000 jobs to meet the demands of net-zero targets.

I remember the miners’ strikes of the 1980s and the impacts it had on whole towns because there wasn’t a proper reskilling strategy to take people out of the coal mining industry and move them into new industries. The ability to reskill and retrain is going to be critical because if we don’t then there will be stranded companies, jobs and economies in parts of the UK and globally. We’ve got 10 years – two business cycles – to limit climate change, and what we don’t mitigate in those 10 years will then have to managed in the future. We need to ensure the people entering the workforce from schools and universities today will have skills relevant for tomorrow, not for yesterday.

Sustainability shouldn’t be the side track to your business reporting or strategy

How is PwC helping companies overcome these barriers?

LB: Everyone talks about sustainability being a journey. We are very clear that any journey worth embarking on needs to have an exciting destination. Bringing all our expertise together in our newly expanded sustainability practice enables us to support clients across every stage of their sustainability journey, from strategy and implementation through to reporting. Our brand is based on trust around reporting. We can help companies build the credibility of their non-financial reporting, including climate reporting. We’re helping them to develop and implement investment strategies for the future, and supporting them through a fair transition, including reskilling and upskilling, while engendering trust and pivoting risk into opportunity. That’s also what we’re focusing on in terms of our own business. We’re developing a strategy-led mindset rather than a compliance-led mindset. PwC has had a market-leading sustainability practice for over 20 years, so it’s almost like the market has caught up in terms of demand. Most recently, we’ve brought our technical expertise together with our pedigree for broader business acumen to create PwC Sustainability and ensure ESG strategy resonates with the C-suite leaders who are now being met with demands to do something in this important space.

What is the future of sustainable business?

JW: I don’t see any other outcome than sustainable business because, frankly, without a sustainable planet and sustainable societies, you don’t have a viable business. We want to live in a society that is balanced with nature, decarbonised and fair. But I don’t for one minute assume that we’ll get there on a nice, clear linear path. We are going to have deviations because the rollout of technologies doesn’t work as quickly, or because governments and priorities change, or because there might be further major economic or geopolitical shocks. Businesses need to be clear with governments about the urgency to do this. PwC can act as the connector between what we hear our corporate clients saying, what we hear our finance-sector clients saying and what we hear governments saying, ensuring we do our piece to drive towards a sustainable outcome. There is no alternative – sustainable business has to become business as usual. It’s good business.

For more information, visit pwc.co.uk/services/risk/insights/good-business-framework.html

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