PERSPECTIVES

Businesses need to close the gap between ESG sentiment and activity

2022-07-29


In recent Economist Impact research commissioned by Cognizant, senior leaders clearly see the link between environmental/social responsibility and being future-ready. Now it’s time to put plans into action.

Modern business is at an inflection point. Executives now have an unprecedented mandate to move beyond the traditional metrics of business success, to results tied to environmental, social and corporate governance (ESG) issues. Liberated from a singular focus on financial results, executives must now focus business investments, energy and reporting into driving positive change.

Yet, according to recent Economist Impact research supported by Cognizant, while business leaders recognize the importance of ESG and the sea change in opinion from a wide range of stakeholders, a gulf is emerging between sentiment and tangible action (to learn more, see our report, Ready for Anything: What it Means to be a Modern Business).

The ESG imperative is clear

If one thing is certain, executive sentiment for the importance of ESG is riding high. Nine out of 10 respondents agreed that environmental sustainability is an integral part of being a future-ready business, and a similar proportion recognizes the importance of both social responsibility and workforce diversity and inclusion (see Figure 1).

How important are the following to being a modern business today?

Respondents were asked to rate each topic on its importance to being a modern business. (Percentage of respondents advising a topic is either somewhat or very important)

Response base: 2,000 senior leaders

Source: Economist Impact Survey 2022

Figure 1

 

The findings underscore a critical shift among stakeholders as investors, employees and customers increasingly agree ESG is essential to doing good business. The regulatory environment, which so often trails behind consumer/citizen pressure, now has teeth as global policy makers address climate change and incentivize positive actions around social issues, such as greater diversity and inclusion in the workforce. For example, the EU has launched a raft of legislation, impending carbon taxes and employee reporting requirements that are now driving new corporate behaviors.

Unsurprisingly, of all the ESG-related issues in the study, regulatory compliance received the most attention from respondents, with 95% citing adherence to government regulations as a top marker of a modern business. While there are many reasons for paying attention to ESG, senior leaders are highly conscious of the risks of non-compliance and the financial punishments that could result.

Positive action trails positive sentiment

Despite the acknowledgment of ESG and its importance, however, little is being done to turn the positive sentiment into tangible action. For example, when it comes to environmental sustainability, of the eight activities respondents could choose from in the survey, only one of these measures is in place for over half of the firms surveyed: implementing specific, measurable internal targets (see Figure 2). 

In which of the following ways does your company promote environmental sustainability?

Respondents were asked which actions their organization was taking to promote environmental sustainability. (Percentage of respondents selecting each measure)

Response base: 2,000 senior leaders

Source: Economist Impact Survey 2022

Figure 2

 

Of course, setting targets is just the start of an ESG initiative, and should be followed by both operationalization and a plan to remediate any areas of weakness. But Figure 2 illustrates the sentiment-to-activity gap writ large—a much smaller proportion of respondents are building plans to address the sustainability gaps they discover. And just over one-third have put dedicated staff, resources and structures in place to accelerate sustainability by, for instance, analyzing its strategic context, mitigating risk or discerning opportunities for how sustainability principles could drive value creation.

Crucially, embedding ESG into day-to-day activities requires a change in attitude and work practices. The issue is, ESG is typically viewed as a separate or parallel priority to business-as-usual, according to Cognizant’s read of the survey findings.

Instead, ESG should be made a core tenet of the business strategy, with a common purpose and culture flowing around it. Currently, only 47% of respondents are incorporating environmental sustainability into their corporate strategy, and this percentage drops to 35% when it comes to social responsibility (see Figure 3).

When it comes to respondents’ social impact initiatives, we see an even more muted response than with environmental sustainability. Again, the most common activity is the creation of internal targets, but the follow-up activities such as professional development and training, and creating dedicated teams, trail off significantly.

In which of the following ways does your company promote social impact?

Respondents were asked which actions their organization was taking to promote the company’s social impact. (Percentage of respondents selecting each measure)

Response base: 2,000 senior leaders

Source: Economist Impact Survey 2022

Figure 3

 

From challenge to opportunity

The challenge ahead is vast, but the critical mass of stakeholder opinion and accelerating sentiment surrounding ESG means companies can drive meaningful action. Some industries at the sharp end of environmental regulation will see entire value chains and operating models transform.

For example, manufacturers will leverage technology to better measure, forecast and reduce material use to reduce waste generation and carbon emissions. Or they might adopt blockchain to boost transparency, traceability and coordination across a supply chain.

What’s clear is soon, ESG strategy will move from a conversation about compliance to one about innovation as companies strive to become the type of business consumers want to do business with.

Steps toward meaningful action

There is no one silver bullet to getting ESG right, but the only wrong thing to do is to do nothing, especially while claiming otherwise. A culture of measurement, transparency and integration of ESG into the corporate strategy is the first step to ensuring a future-ready state. To shift the focus from ESG compliance to ESG opportunity, we recommend the following:

  • Measure your current impact. You can’t control what you can’t measure, but there are robust tools, technologies and methodologies that can be integrated into business workflows to build a rich data set on key ESG markers. For example, human capital management (HCM) technology already collects masses of data about your current and potential workforce. This can be fed it into dashboards to underpin a holistic approach.
  • Find the right level of transparency. If it can’t be seen, then it can’t be changed. Data tied to the sustainability of a particular process or the organisation’s gender pay gap should be available to both employees and the market. Granular information can be shared on the company intranet so that employees can drill down and see the impact they make individually, while more periodic public reporting can help to build trust with consumers.
  • Ensure a holistic view by building ESG into the core of your strategy. ESG encompasses three important, deep and sometimes difficult topics. It may be easy to over-index on one of them and then claim that ESG has been “done.” Tesla was recently removed from the S&P 500 ESG Index because—despite its stellar sustainability credentials—issues with its work culture and social responsibility have been negative enough to counter these. As broad as it is, ensure each aspect is measured and challenged by an empowered workforce.
  • Don’t create silos—ESG is a company-wide opportunity. Businesses often spend considerable time and resources setting up task forces and teams to tackle business challenges. While squads of experts dedicated to a particular challenge work in some cases, a different approach is needed for something as sweeping as ESG. The goal must be to mainstream the importance of ESG activities across the entire business, so all stakeholders recognize the true value of their contributions.
  • Measure your success differently. Short-term financial ROI metrics do not account for rising climate consciousness, diversity expectations or risk of doing nothing. Sustainability and diversity are longer term issues, and their impacts need assessing in a longer timeframe. Value is less easy to measure—though no less important—when it comes to remaining insurable, avoiding regulatory fines, ensuring supply chains are not disrupted by an environmental disaster or maintaining a positive brand perception among future customers and employees.

To learn more, read our report on “How to be fit for the future”, or contact us.

The views and opinions expressed in this report are those of Cognizant and do not necessarily reflect the view and policies of Economist Impact. Data presented is from an Economist Impact executive survey, commissioned by Cognizant, conducted in early 2022.