How directors can align ESG strategy and sustainable growth

Natural resources companies have the opportunity to achieve competitive advantage and build sustainable businesses without compromising future generations. We look at the increasing importance of a robust environmental, social and governance (ESG) strategy and how a mature approach can help businesses overcome some of the critical issues facing the sector.

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

The pandemic brought to the fore the need to fully understand the risks and impacts to businesses and for increased resilience and sustainability. Mining companies have now lifted ESG back to the top of their agendas.

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 licence to operate and the welfare of communities and employees.

Sustainability for a competitive edge

Natural resources companies have the opportunity to achieve a competitive advantage and to build sustainable businesses without compromising future generations. There’s an opportunity to show that the sector is part of the solution, not the problem.

A critical part of the energy transition and decarbonisation process are 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 key issues facing the sector is an image problem. The perception of  younger generations is that mining is harmful for the planet and is not a sector in which they want to build a career. In order 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. 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 to 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

In order 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. In order to be effective, measurements and targets should be in place over the short, medium, and long-term period.

Sustainability as 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 limited to sustainability strategy, but rather on how sustainability is embedded into business strategy.

To achieve this shift, ESG cannot be viewed as a ‘nice-to-have’. It must instead be viewed as a key part of business strategy and risk management that has a direct and positive impact on financial performance.

Independent research demonstrates that companies with a strong ESG framework perform better and are more resilient to impacts such as COVID-19. And a robust ESG strategy can help attract the right talent and investors.

While implementing an effective and robust ESG strategy is a journey that can takes years of concerted effort and requires a mature approach to make an impact on performance and investor sentiment, it is ultimately a worthwhile investment.

BDO Australia is a long-standing partner of the AICD.