The world now has about 1.8 billion people of Generation Y who are also known as millennials. They constitute 23% of the global population and are powerful in terms of labour and purchasing power. In the near future, Generation Z which is the world’s largest demographic, with 2.2 billion people accounting for 26% of the human population, will be the important force that drives the world and business.
The world of business has shifted from “baby boom” people to the “youth boom”, so business operators are trying to be responsive to the rapidly changing behaviors of Generation Y and Generation Z. This is why digital transformation is an urgent mission of business organizations. Business operators are also facing fiercer competition because business activities are being restored after the COVID-19 pandemic. Under the circumstance, environmental, social and governance problems are severer and business organizations must deal with ESG issues seriously to ensure their secure and sustainable growth.
A report from Morningstar U.S. Sustainability Leaders Index in 2021 showed that returns at companies with excellent ESG scores rose by as much as 33.3% year-on-year and were impressively 8% higher than the average returns of businesses in the United States. The report went along with a survey by Deutsche Bank which revealed that companies with very high ESG scores outperformed peers in both medium (5 years) and long (5-10 years) terms when it comes to growth.
The changes of strategies, administration, processes and the management of human and technology resources are the key to the sustainable survival, roles and presence of businesses in the future.
What is ESG strategy?
Environmental concern, social sustainability and corporate governance are the three pillars of sustainability which is the heart of today’s business. They are related directly to the 17 Sustainable Development Goals of the United Nations. ESG policies are among the factors that influence worldwide investors’ decisions and are the key elements of strategies for sustainable business value.
What should business organizations do to draw up their ESG strategy? The formulation of business strategies and business models in the digital world of O2O2O (online to offline to online) seamlessness requires the comprehensive consideration of ESG factors, especially the value chains of business, to identify and prioritize the positive and negative factors that concern business operations and stakeholders. Organizations with strong ESG propositions can make real business impacts as follows.
1.) Shareholder value creation
- When business attracts investors, its value rises. Many funds invest in the business organizations that effectively implement ESG policies. Such businesses are thus likely to produce higher returns than those without ESG policies.
2.) Social value creation
- Communities get opportunities from corporate social responsibility activities. CSR activities create not only social benefits but also employees’ pride and satisfaction that boost their efficiency.
- Equality in employment regardless of races, genders and social statuses attract capable employees and increase their performances. The culture of openness leads to the new ideas and innovations that create business value and social benefits.
3.) Financial performance improvement
- Environmentally friendly products and services increase revenue because consumers are now willing to pay more for such products and services.
- Businesses cut costs because they save energy.
Three key factors for successful ESG transformation
Many organizations have made a good start as their sustainability reports show their serious implementation of ESG policies. However, when it comes to strategies, Bluebik thinks that ESG can deliver greater results if organizations include it in their key strategies and change the mindsets and work of their executives and employees (people), the nature of work (process) and technologies and systems (technology) to be able to adapt to changes in the future (future proofing).
1.) Executives and employees
ESG transformation should be top-down approaches to create connection between business objectives and strategies (business objective driven). Top executives draw up ESG agenda and seriously support the implementation of relevant plans. By such approaches, the utilization of resources, planning, operations, follow-ups and improvement can be integrated. Top executives’ ESG agenda can be communicated to lower executives and employees at the operational level so that they share common directions of work. The results of ESG-oriented performances can be used as a key performance indicator of individuals.
ESG transformation should begin with setting the frameworks which cover objectives, goals, indicators, operational guidelines and evaluation methods. By this means, ESG transformation processes are relevant to key strategies and meet the needs of all shareholders and stakeholders.
Conflict between shareholder value creation and stakeholder value creation is inevitable in ESG transformation. For example, the maximum profits of shareholders may go against high returns for capable employees. Balance is very necessary. Value creation through the implementation of ESG plans should be measurable when they undergo quantitative evaluation. This will show the outcomes of ESG transformation in different dimensions.
Technology selection is as important as personnel and processes. When it comes to the selection and improvement of technologies, those responsible should consider impacts on the environment, society and governance. Sustainable technology should be applied in the three following areas.
- Internal operations
With proper tools, hardware or solutions, organizations can maximize outputs while minimizing their consumption of resources. For example, cloud-based architecture allows organizations to reduce their resource usage in real time and have internal departments share resources. Therefore, it consumes less energy than on-premise architecture does.
- Business operations
Sustainable technology helps organizations boost their energy efficiency, reduce pollution and introduce fair employment. For example, automation can reduce time-consuming and repetitive tasks. In addition, advanced analytics and AI can be applied to create models to minimize carbon footprints while efficiency remains intact.
- The introduction of products and services to customers
Sustainable technology leads to the product and service designs that satisfy the customers who support conservation. Customers want the products that are environmentally friendly, were made from quality materials and are affordable. With sustainable technology, businesses can cut production costs while the quality of materials is not compromised.
Although ESG is not new, it has attracted the attention of businesses worldwide for only a few years. From now on, there will be serious efforts to push for ESG policies at organizational and national levels as consumers are more determined to pay for environmentally friendly products and ESG policies are important factors in investors’ decisions. Therefore, it’s time for businesses to give and take because humans become aware of negative impacts on themselves and want to help improve the world.