Environmental, Societal and Governance (ESG) issues are playing an increasing critical role in business strategy and leadership decision-making.
ESG is quite a broad set of issues, from the carbon dioxide footprint to labor practices to corruption… an increasing body of research shows a positive link between ESG performance and financial performance or value creation. (1)
They link together in the sense that the environment, the social factors, and the extent to which you have good governance affect your license to operate as a business within the external world. To what extent do you manage your environmental footprint? To what extent do you enhance diversity? To what extent are you transparent in your contributions to a country? That has an impact on your license to operate in the minds of the stakeholders around you: regulators, governments, and increasingly, NGOs powered by social media. (1)
This is why there has been such high interest in ESG issues, particularly during the past five years. Consumers are now demanding high standards of sustainability and quality of employment from businesses. Regulators and policy makers are more interested in ESG because they need the corporate sector to help them solve social problems such as environmental pollution and workplace diversity. The investor community has also become much more interested. If you take the US as an example, about a quarter of the assets under management, or roughly $12 trillion, are ESG-rated investments. (1)
To what extent does good ESG translate into good financial performance? On that, there have been more than 2,000 academic studies and around 70 percent of them find a positive relationship between ESG scores on the one hand and financial returns on the other, whether measured by equity returns or profitability or valuation multiples. Increasingly, another element is the cost of capital. Evidence is emerging that a better ESG score translates to about a 10 percent lower cost of capital as the risks that affect your business, in terms of its license to operate, are reduced if you have a strong ESG proposition. (1)
But how does ESG link to Shared Services and GBS?
Shared Services and GBS organizations have an important role to play in the ESG agenda – there are 2 clear opportunities:
A. ESG inside GBS
B. Enabling enterprise ESG objectives
A range of use cases are emerging, for example:
A. Inside GBS
- Reduce environment waste – moving from paper based processes to digital processes
- Global process harmonization – driving better governance of organizational assets (tangible and intangible) through consistent policies and process controls
- End to end customer/ supplier/ employee journeys and ESG risk management – e.g., using process mining for end to end visibility of environmental and governance impact; early warning of potential risks/ opportunities across regions/ businesses
- Migrate core service management automation to cloud based solutions (workflow, process mining, RPA, AI) – optimize/ leverage shared computing resources
B. Enabling the enterprise
- Reduce carbon footprint – support migration of legacy on-premise databases and drive adoption of cloud computing (private and public clouds)
- Sustainable sourcing – enforcing enterprise policies for third party vendor risk management; blockchain administration for responsible sourcing of minerals/ resources for the business
- Reporting and analytics – creating trust in ESG data, reporting and analytics as a service, internally for the business and external stakeholders
- Critical skills re-skilling and scale-up at scale – e.g., Digital and Analytics centers of excellence in Shared Services/ GBS locations
- Risk resilience – managing distributed (including remote/ work from home working model) internal business services at scale
- CSR activity in delivery markets – Shared services organizations in certain countries are partnering with local and national agencies to re-skill and prepare talent for next generation digital and analytics skills; partnering with local authorities to deploy cloud based contact tracing workbenches and analytical capabilities to optimize first responder and local authorities response management to Covid-19; creating awareness in partnership with local law enforcement agencies to drive awareness of cyber-security in communities
Clearly ESG will continue to gain more attention in the coming months and years – and should be a key area of attention for GBS leadership and strategy/ planning teams.
References
(1) McKinsey – Why ESG is here to stay podcast transcript, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay
Shared Services Imagineers 