ESG Performance drives Corporate Performance
This article explores the rise of Environmental, Social, and Governance (ESG) factors as a top priority for large companies with the immediate focus on ESG reporting, and the longer-term opportunity for ESG to enhance financial performance. Get insights into what large companies need to succeed on their ESG journey and learn how Wolters Kluwer can support this endeavor.
- The rise of ESG to the top of the corporate agenda
- The immediate focus: ESG reporting, driven by regulatory compliance
- The longer-term opportunity: ESG as a key driver of financial performance
- What companies need to do to succeed on their ESG journeys as the world moves towards double materiality approaches
- How companies can leverage Wolters Kluwer’s unique portfolio of solutions to accelerate their ESG journeys
The rise of ESG to the top of the corporate agenda
Around the world, large companies are facing an unprecedented level of scrutiny on ESG performance.
- 87% of investors think that corporate reporting on sustainability contains greenwashing, and 82% say their clients demand that ESG factors to be taken into account (PwC)
- 64% of consumers choose, switch, avoid, or boycott a brand based on its stance on societal issues, and change buying behavior because of a brand’s response to climate change (Edelman)
- 72% of the global workforce will be made of Millennials and Gen Zs by 2029, who place an even greater importance on ESG concerns versus their predecessors (WEF and Marsh McLennan)
- Regulators are becoming more active in ESG by setting mandatory disclosure requirements and aligning to standards to drive comparability and improve transparency for investors
The growing importance of a company’s ESG performance, driven by investors, consumers, the workforce, and regulators, has heightened the focus of senior executives and put ESG at the top of the Corporate agenda.
The immediate focus: ESG reporting, driven by regulatory compliance
There is a tidal wave of ESG regulations hitting large companies and this trend will only intensify in the coming years. The European Union (EU) is leading the way, focusing on the E, the S, and the G, with a double materiality approach, which means companies will have to consider not only the impact of external factors (e.g., climate change) on their financial value, but also the impact their operations have on the planet and society at large. For years, the EU has required about 11,700 Public Interest Entities (listed companies, banks and insurers) to make ESG disclosures through the Non-Financial Reporting Directive (NFRD). Requirements will be broadened and deepened next year with the Corporate Sustainability Reporting Directive (CSRD) and extend to about 49,000 companies by 2026. In addition, the EU Taxonomy will ask companies to classify key financial metrics based on their environmental sustainability, compelling them to bring sustainability and financial data together.
Other markets such as the U.K. and the U.S. are aligned to the Task Force on Climate-related Financial Disclosures (TCFD) framework, which focuses on a subset of environmental factors and adopts a single materiality approach (the impact of external factors on a company’s value). While the U.K. mandated the TCFD framework for about 1,300 large companies and financial institutions in 2022, the U.S. Securities and Exchange Commission’s (SEC) proposed climate rule is only expected to take effect in the next several years, affecting about 4,000 companies.
The longer-term opportunity: ESG as a key driver of corporate performance
While ESG data collection and reporting is the first step of a company’s ESG journey, it does not by itself lead to financial improvement. According to McKinsey, studies show that strong ESG performance is positively correlated with higher equity returns and reduction in downside risk. Similarly, NYU Stern Center for Sustainable Business’s analysis of over 1,000 studies published since 2015 shows that strong corporate management of ESG is linked to improved Return on Equity (ROE), Return on Assets (ROA), stock price, operational efficiency and risk management. This makes a clear case for why moving beyond ESG reporting and into risk management and performance improvement can drive superior returns for companies. Examples of how ESG risk management and performance improvement can lead to better financial performance include:
- Greenhouse gas (GHG) emissions: Prioritize assets to decarbonize based on emissions intensity (focus on highest emitting operations) and potential for business disruption (contribution to company revenue)
- Physical climate risk: Evaluate the impact of climate-related risks on location decisions (e.g., assets in areas prone to extreme weather events like hurricanes and floods)
- Transition risks: Consider risks to business strategy as part of the transition to a low-carbon economy in business strategy (e.g., quantify impact of rising energy costs and carbon taxes on carbon-intense industries)
- Green products: Design greener products and invest in reducing the footprint of existing portfolio to increase revenue (70%+ consumers will pay more for green products, all things equal - McKinsey)
- Operational risk: Establish strong operational risk management programs that minimize incidents and promote a healthier workforce, thus reducing operations downtime and increasing productivity
- DEIB benefits: Focus on Diversity, Equity, Inclusion and Belonging to create higher job satisfaction, worker productivity, and a greater ability to attract the best talent
- Governance programs: Develop strong programs to reduce regulatory and legal interventions to help ensure ethical behavior, effective decision-making, and compliance with laws and regulations
What companies need to do to succeed on their ESG journeys as the world moves towards double materiality approaches
1. Realize quickly that ESG is a team sport that requires several corporate functions to work together to collect and report data, identify and manage risks, and improve performance. While in the past, these matters were mostly handled by the EHS or CSR functions, rising ESG requirements are putting the topic on the C-suite agenda and bringing together functions such as Sustainability (& EHS), Finance, Risk, and Compliance, among others.
2. Understand that the success of a company's ESG program hinges on a holistic view of investor-grade data, bringing disparate data sources such as environmental and financial data together through strong data collection and data management capabilities. As companies report under a variety of mandatory and voluntary frameworks, leveraging a single source of truth is key to ensuring consistency and building trust in their ESG program (thus avoiding the risk of greenwashing).
3. Design strong processes and invest in enabling software that will help break down siloes and get multiple corporate stakeholders to collaborate in an organized manner. With increasing assurance requirements, ensuring traceability and auditability of processes and data is critical to avoid legal and reputational risk (including greenwashing allegations).
4. Move beyond reporting and into risk and performance management, so that ESG efforts are not an annual ‘check-the-box’ disclosure exercise, but truly drive financial and operational value. This can be done by deriving insights from data and software, identifying key risks and opportunities, quantifying potential impact, and setting targets grounded in a realistic action plan.
How companies can leverage Wolters Kluwer’s unique portfolio of solutions to accelerate their ESG journeys
The ESG software market is highly fragmented with hundreds of niche solutions addressing small parts of the value chain in a siloed approach, and mostly by small companies at greater financial risk. Wolters Kluwer is uniquely positioned to serve the needs of large companies through a more holistic and future-proof approach leveraging its world-class specialized solutions:
Enablon is an Environmental, Health & Safety (EHS), and Operational Risk Management (ORM) platform, with deep environmental and carbon management capabilities that enable the ESG journeys of companies in sectors including asset-intensive industries, manufacturing, food & beverages, utilities and banks, supporting the EHS, Sustainability, Operations, and Risk functions. It is considered a global leader in EHS and Enterprise Carbon Management software by leading industry analysts such as Verdantix. Read more about Enablon ESG.
CCH Tagetik is a Corporate Performance Management platform serving the Finance function of large companies, helping to streamline financial workflows, drive integrated business planning, and address regulatory reporting, including through an ESG Reporting module.
OneSumX is an integrated platform supporting banks with finance, risk, and regulatory reporting requirements that are constantly evolving, especially with banking authorities in major economies (e.g., MAS and EBA) issuing new ESG requirements and incorporating climate risk into stress tests, which includes OneSumX for ESG.
TeamMate is an audit management platform that helps corporate internal audit departments and public-sector auditor general organizations manage automation of audit workflows, collaboration, and audit-driven analytics. With the rise in assurance requirements, auditability of ESG data and programs will become a key to success, and TeamMate helps internal auditors better understand evolving ESG initiatives, reporting requirements, and how to identify associated risks.
Providing transparency into ESG practices is no longer an option, but a necessity for large companies to remain competitive and relevant in today’s business landscape. By moving beyond compliance and focusing on ESG risk management and performance improvement, companies can unlock significant value for all their stakeholders, and ensure long-term success.
Wolters Kluwer’s solutions serve key corporate stakeholders in ESG, including Finance, EHS, Sustainability, Risk and Compliance, Operations, and Audit functions, helping connect the key people, processes and technology required to accelerate ESG performance, and deliver deep impact when it matters most.