The importance of sustainability is growing on Boards’ agendas. At the same time, the entire field of Environmental, Social and Governance (ESG) continues to expand. The focus on environmental and climate issues has expanded to cover social responsibility and corporate governance.
Heikki Ilkka, Chairman of the Board of EY Finland, has noticed that sustainability issues have been on the rise for several years. Ilkka is Managing Partner for EY’s Assurance business in the Nordic countries. He has been an Authorized Public Accountant for almost 20 years and served as the lead audit partner of nine Finnish listed companies. In addition, Ilkka has worked for three years as CFO of a large financial institution.
“For example, the growth rate of ESG investments has been particularly strong over the past 3-5 years,” he says.
At the same time, sustainability regulations have tightened. This means, for example, that a company’s climate actions need to be reported more comprehensively, as well as planned out and implemented with a long-term view. However, rules and regulations are not the only reason why ESG issues now matter more than ever.
“ESG issues have risen to the core of investor relations management. Their importance to investors and analysts is beginning to be on equal footing with regular financial reporting, so listed companies, for example, cannot ignore their significance,” Ilkka points out.
Sustainability impacts financing decisions
Therefore, a publicly listed company has a keen interest in sustainability issues – but privately owned companies have also taken note of the trend.
“When making their financing decisions, banks are now considering how the ESG issues are being managed by the client company that is applying for financing. Banking regulations are influencing this trend. This way, it can be said that sustainability affects everyone.”
According to Ilkka, the speed and impact of the ongoing change has been surprising:
“In the past, politicians were expected to set the framework within which, for example, climate action would be taken. Now we see companies making moves well ahead of the politicians. The markets have spoken: sustainable operations are deemed good for business, and, as such, required across the board.”
Sustainable strategies emerging
How, then, should a company’s Board approach sustainability issues? According to Ilkka, it is worthwhile for the Board to start with defining what the company’s ultimate purpose is.
“Once this purpose is clearly articulated, a strategy, which also addresses sustainability issues, is to be defined. Of course, when implementing the strategy, ESG targets and indicators are needed to monitor the implementation,” Ilkka points out.
In the Board’s ESG work, checking all the regulatory boxes is obviously the starting point for everything. For example, if sustainability reporting is not in order, you simply need to allocate enough resources to make it work.
“The next level is to think a little more deeply about the business environment in which the company operates now and in the future: what risks, for example, are brought about by climate change and what opportunities may open up,” Ilkka reflects.
Seeking sustainable success
It is clear from the EY EMEIA Board Barometer 2022 that boards do recognize the need to focus on sustainability. The overwhelming majority of the Barometer participants (93%) think that the sustainability of their organization’s business model is a relevant concern, while 86% emphasize the importance of long-term value creation and measurement. Eighty-one percent prioritize operational and strategic ESG integration.
The Board must, therefore, ensure that sustainability becomes a core part of the company’s strategy and business model. Ilkka points out that sustainability is a critical success factor when it comes to long-term value creation for stakeholders.
“Sustainability also provides an opportunity to create new business to meet the changing needs of consumers. Companies can no longer afford to act irresponsibly,” he says.
Even if no “formal” sanctioning mechanism exists for a certain ESG breach, there will be consequences, one way or another. In the age of social media, it is certain that a company that has failed to act responsibly will experience a major public backlash.
“In addition, investors are always monitoring corporate responsibility. Damage to one’s reputation can be quite severe.”
Building Board’s ESG muscle
In addition to the Board, the company’s Audit Committee also plays an important role in developing a sustainable governance model. The Audit Committee is typically responsible, for example, the organization’s processes and controls for publishing relevant ESG information. Ilkka points out that some companies also have a separate Sustainability Committee in addition to the Board of Directors and the Audit Committee.
“Stora Enso, for example, has its own Sustainability and Ethics Committee.”
No matter who is responsible for sustainability, one thing is clear: ESG experts are now in high demand from corporates.
“It makes sense to have ESG experts on boards – or, alternatively, existing Board members need to be prepared to learn these things.”
