What Directors need to do to align ESG with strategy and sustainable growth

Before the emergence of COVID-19, ESG was a focus of natural resources companies. When the pandemic hit, the initial reaction was to address the immediate needs for health and safety of staff and operations. However, companies have since refocused on long term ESG and sustainability strategy.

It is important to note that there are different aspects of sustainability; the first is climate change and the energy transition from fossil fuels to more renewable energy. The second concerns the social license to operate and the welfare of communities and employees. The pandemic brought to the forefront the need to fully understand risks and impacts to businesses, and for increased resilience and sustainability. Mining companies have now lifted ESG back to the top of their agendas.

Sustainability for a competitive edge

Natural resources companies have the opportunity to achieve a competitive advantage and build sustainable businesses without compromising future generations. At some point in the future, every business will need to be sustainable. However, until we reach that target, those that have addressed sustainability issues will have an advantage.

The opportunity for natural resources companies is to understand that the sector is part of the solution, not the problem. A critical part of the energy transition and decarbonisation process is the minerals needed to build solar panels, wind turbines and other new energy assets such as energy storage solutions. The energy transition can’t occur without mining companies providing these resources.

Natural resources companies tend to be asset intensive and have a greater need and opportunity to increase the sustainability of their assets through longer life cycles. This can be achieved through the adoption of technology for predictive asset maintenance and optimisation which can also bring the benefit of efficiency savings.

The benefits of mature ESG policies

While the task may seem huge, there are opportunities for businesses to capitalise on ESG factors to attract investors and new talent.

One of the issues that the industry suffers from is an image problem. The perception from younger generations is that mining is bad for the planet and not a sector they want to build a career in. To counter this and attract new employees, mining and oil and gas companies need to convey clearly the important role they play in building a sustainable future for the planet.

The other benefit of a mature approach to ESG is to attract further investment. Mining and oil and gas companies are reliant on equity investment from sources such as pension and investment funds. Increasingly investors want reassurance that companies have a mature approach to ESG, and funds are scrutinising policies and using ESG rating agencies to help them make decisions on where to invest.

A mature approach to ESG will help drive investment from funds that are looking for opportunities to invest in companies that have robust ESG credentials. This prerequisite is becoming increasingly important for mining and oil and gas companies to attract the funds to operate and fund infrastructure projects.

Linking incentives to sustainability

To achieve ESG targets, companies should implement long term incentive schemes to align sustainability targets to executive KPIs, bonuses and shares.

Specifically, Directors need to understand what sustainability issues they have and ensure that director and executive remuneration, and incentive schemes, are aligned to those particular elements and targets. To be effective, measurements and targets should be in place over the short, medium, and long-term period.

Sustainability - a strategy for growth

Ultimately, ESG should not be viewed as a standalone strategy, but rather as part of the broader picture. The conversation should not be on just sustainability strategy, but rather how do we get sustainability embedded into business strategy?

A robust ESG strategy can help attract the right talent and investors. To achieve a shift in sustainability we need to stop viewing ESG as a ‘nice to have’, it should be part of business strategy and risk management which can have a direct and positive impact on financial performance.

This is backed by independent research, which has demonstrated that companies with a strong ESG framework perform better and are more resilient to impacts such as COVID-19.

ESG strategy is a journey, which takes years of concerted effort and requires substance to make an impact on performance and investor sentiment, but is a worthwhile investment.

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Article originally published on AICD: https://aicd.companydirectors.com.au/membership/membership-update/how-directors-can-align-esg-strategy-and-sustainable-growth