How a focus on sustainability and digital can help manage head winds

Sustainability: build trust and value

Many companies recognize the impetus for change in addressing the impact of climate change, not least because consumers and investors are increasingly demanding that businesses look beyond generating profits to focus on environmental, social and governance (ESG) factors to drive corporate sustainability.

Sustainability is increasingly becoming part of a value-based narrative for leading businesses, with the focus being how the company can create value for sustainability as well as how sustainability can create long-term value for the company. A long-term view is inseparable from sustainability considerations. However, when it comes to the trade-off between short-term earnings and long-term value creation, a disconnect between investors and companies may exist.

The 2022 EY Global Corporate Reporting and Institutional Investor Survey indicated that investors are much more likely to favor decisions that lead to sustainable, long-term value creation, even at the expense of short-term earnings. However, finance leaders are much less inclined to make that trade-off. The research found that over three-quarters of investors think companies should make this trade-off, but only around half of the finance leaders are prepared to take this long-term stance.

Investors also felt strongly about not getting the reporting and data-driven insight required to evaluate a company’s growth and risk profile as well as inform investment decision-making. If finance leaders do not share investors’ appetite for prioritizing long-term, sustainable investments, it would be a challenge for disclosures to reflect what investors see as strategic priorities.

These ongoing mismatches between investors’ expectations and sustainability disclosures could potentially create a trust deficit, which boards should be greatly concerned about. How can companies provide a clear narrative on the strategy for growing and protecting long-term, sustainable value?

The board’s responsibility for monitoring and managing material ESG issues is a core principle mandated under the Singapore Exchange sustainability reporting rules. By extension, where climate change is identified as material to the business, disclosures in board statements should include specific actions that the board has taken to consider climate-related risks and opportunities. They should also cover ways in which it oversees the management and monitoring of these factors. Boards must therefore exercise keener leadership oversight and push for greater transparency on companies’ sustainability actions and disclosures.

Some boards have led the way by advocating the appointment of a chief sustainability officer (CSO). The CSO’s remit is to drive the formulation and execution of an organization’s sustainability strategy and establish its level of sustainability maturity. The CSO also helps to determine the ESG areas to prioritize and subsequently embed into the business strategy. In addition, the CSO is responsible for defining a sustainability action plan and overseeing its operationalization by every function. For the CSO role to succeed and have a strong voice at the table, the tone at the top from the board is key. 

Digital investments: build, buy or partner

The pandemic has accelerated the adoption of digital on multiple fronts from both the business and consumer standpoints. More than ever, it is vital that companies make using technology to improve product suites and services as well as manage pricing a top strategic priority. Business leaders know this well. Customer acquisition, retention and experience will be among the top digital priorities over the next two years.
 

To achieve this, the board needs to work with the management to articulate a clear digital vision and roadmap for its digital transformation journey. Crucial actions include selecting the right mix of investment vehicles, measuring returns on digital investments and creating a culture that supports digital transformation.
 

Companies will need to decide whether to build internal capabilities or use inorganic investments. This affects how quickly they can bring products and services to market and deliver returns on digital investments. Inorganic investments offer several advantages, including easier access to capital as well as a faster pathway to access new technologies to fill capability and skill gaps.
 

The board should also challenge the management to consider how the company’s core competence can be enhanced by utilizing ecosystems and whether to participate in an ecosystem as an orchestrator, partner or enabler. Being part of an ecosystem drives benefits to enterprises in multiple ways. It helps accelerate the organization’s digital transformation journey and facilitates effective resource-sharing among businesses and industries as they strive to create an integrated experience for consumers. These open up new revenue streams for business growth.
 

To achieve an optimal mix in their investments, companies should break down silos, synchronize the various investment types as well as align build, buy and partner decisions with their corporate objectives. A successful investment strategy requires alignment at the board level so that there is accountability when directing those investments.
 

Building fit-for-purpose boards

With the heightened focus on sustainability and digital, boards need to rethink their core operating model and whether enough time is dedicated to the sustainability and digital agenda, given the many demands on their time. Diversifying the board composition in terms of skills, experience, outlook and culture is also critical to having the combinative thinking required to rationalize multifaceted business decisions.
 

The board also needs to build its skills in sustainability and digital to ask the management the right questions. Besides including such skills as criteria when assessing new candidates for board appointments, other interventions can also help sharpen boardroom thinking and decision-making. For example, organizations can form advisory groups comprising academics or practitioners with a particular understanding of environmental or digital transformation issues.