Today's financial system supports most Governments through the taxes from jobs and associated income; and this results in Governments, amongst many other roles, being able to be the foundation for education and healthcare.
We are all aware, however, that it has also formed the basis for several issues facing the world, three of the most pressing being: income inequalities, climate change and negative environmental impacts. Whilst these have been by-products of our system, it is this system that has the power to address and resolve them.
So, the question arises as to how we return to a financial system that serves society effectively and how long should this take?
The answer to this question points directly to behavioural change and this is rarely achieved without some form of incentivisation.
A classic example of this is the remarkable work done by Discovery Health, through their Vitality programme. By managing the risk exposure of their client base, they have entrenched their business resilience and at the same time, improved the health of their clients. We can only imagine if there was an application of this premise for the financial markets.
The ESG aspects of a business have usually been considered as separate and secondary to the financial performance.
This has been particularly prevalent within financial markets, which are generally focused on short-term results. Moreover, businesses are currently only legally beholden to their shareholders, not society. In the interest of short-term performance measurement, companies often decide to make the short-term profit decision at the expense of negative environmental and social impacts.
Good corporate citizenry, however, does exist and always has. Many companies are either purpose driven or have excellent leadership with an interest in more than just their own short-term wealth. Matters have become more interesting in recent years with financial performance data being tracked for those companies with high levels of ESG awareness.
The business case is emerging that active ESG management is directly linked to superior financial performance. We now have the ingredients for an incentivisation strategy that demonstrates purpose and profit aren’t mutually exclusive.
ESG indicators are varied and numerous. The key to any successful strategy is prioritisation and this is going to vary from business to business. It is vital that businesses understand how their activities can potentially negatively and severely impact the environment and people. It is those issues which are likely to correlate as the most important and it is these which need to be tracked and measured.
A company that is more committed to the sustainability journey and that has embedded ESG into its wider business strategy will be more efficient and more resilient to change. The 2020 message is clear; directors and investors need to pay attention to ESG to properly fulfil their fiduciary duties.
The evidence is overwhelming and the demand for change in society is deafening. Not only has the availability of ESG based capital become more attractive, but it is also probably the single most transformative power of our time.
Mazars has developed a unique online Environmental Social & Governance (ESG) health check specifically aimed at Privately Owned Businesses. The online tool has been designed to help and support businesses start an enlightening ESG journey which will provide an entry point to ESG awareness and how addressing such issues will deliver value to organisations. It will help them understand the imperatives of ESG engagement and measurement which leads to value creation and behavioural change.